Contents
Listed companies are subject to disclosure thresholds. Anyone who holds a certain share of the stock must make it public. These rules are meant to prevent anyone from creeping up on a company unnoticed. The case of Schaeffler and Continental, an example of Salami Tactics in finance, shows how you can still build up a strong position step by step and what risks this involves.
A small family group and a big supplier
Situation
The Schaeffler Group, based in Herzogenaurach, Germany, makes rolling bearings and auto parts. At the time, it is owned by Maria-Elisabeth Schaeffler and her son Georg F. W. Schaeffler. In 2008, the company is little known to the public. Continental, based in Hanover, is a listed group and considerably larger than Schaeffler.
Link to the principle
An open takeover bid by the smaller company for the larger one would have provoked resistance early, from Continental’s executive board and on the capital market. Salami tactics therefore start earlier: they build up the position before anyone can react.
Building up in secret
Situation
Schaeffler does not buy the Continental shares itself. Banks acquire them, and Schaeffler enters into financial contracts with them, such as swaps and options, that are tied to the share price. According to the German business magazine Unternehmeredition, by July 2008 Schaeffler had access to about 36% of Continental this way. Because Schaeffler did not formally hold the shares, this did not have to be disclosed beforehand.
Link to the principle
Each individual step stayed below the threshold that would have triggered a public reaction. Only once the position was complete did it become visible. By then, the biggest slice had already been cut.
Resistance comes too late
Situation
Continental’s executive board under Manfred Wennemer fights the takeover fiercely. Continental considers the approach unlawful. On August 21, 2008, the German financial regulator BaFin concludes that Schaeffler did not violate the disclosure rules in force at the time. In August, the two sides agree on an investor agreement: for four years, Schaeffler is to hold no more than 49.99%. Former German Chancellor Gerhard Schröder oversees the commitments. Manfred Wennemer resigns at the end of August.
Link to the principle
If you react only after the slices have been cut, you can still negotiate the terms but can no longer prevent the outcome. In the same month, lawmakers tighten the disclosure rules with the Risk Limitation Act (Risikobegrenzungsgesetz). That, too, is typical: what helps against salami tactics is a rule that captures the sum of the steps.
The slice that gets too big
Situation
Schaeffler has raised its offer to €75 per share, and the acceptance period runs until mid-September. Then, in September 2008, the bank Lehman Brothers collapses. Continental’s share price plunges to about €20. Many shareholders accept the offer, and in the end Schaeffler has to take over about 90% of the shares at the full price. Afterward, the group carries debts of almost €11 billion, plus more than €10 billion in Continental’s existing debt.
Link to the principle
Salami tactics had achieved the goal. But they had tied Schaeffler to an offer that could no longer be withdrawn. If you proceed slice by slice, you also have to allow for the situation around you changing.
The long road back
Situation
In the following years, Schaeffler sells off part of its Continental stake and pays down debt. In 2010, the business is more profitable than ever before. In June 2011, the family still holds just over 60% of Continental.
Link to the principle
The case shows both sides. Salami tactics can overcome a superior force. But they offer no protection from the consequences if, in the end, the whole is bigger than you can carry.
Key takeaways
Key lessons
- Small steps below every threshold can add up to a big position.
- If you want to defend yourself, pay attention to the sum, not to the individual step.
- Rules that only examine individual steps invite salami tactics.
- Plan for the possibility that you end up with more on your plate than you expected.
- A goal reached is not yet a good outcome.
Summary
In 2008, through financial contracts with banks, Schaeffler quietly built up access to about 36% of Continental. When the position became visible, Continental could only negotiate the terms. The takeover succeeded, but the financial crisis forced Schaeffler to buy almost all the shares at the full price. The case shows both the power of salami tactics and their risk.
