A seemingly sensible merger was left hanging in the balance by quirky German takeover rules. The $1.8 billion tie-up of US cash dispenser Diebold and German rival Wincor Nixdorf would create a global leader in automated teller machines with a well-balanced geographic footprint and annual cost savings of $160 million. The 35 per cent premium, paid 80 per cent in cash and 20 per cent in shares, has been backed by Wincor's board.
What should have been relatively straightforward was anything but. It took two days from the bid deadline to find out that acceptances had only just crept over the 75 per cent acceptance level required. True, the premium by March 23 had fallen to 27 per cent, factoring in share and exchange rate moves. But the bigger problem is Germany's weird takeover law.
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Buyers in Germany need the approval of at least 75 per cent of the target's shareholders to get effective control over another company. If a deal gets over this threshold and goes through, remaining small shareholders enjoy generous legal protections. They can sue for higher compensation, get attractive guaranteed dividends in a squeeze-out and may secure lucrative back-end deals.
These safeguards create incentives for wily investors to buy into the company, reject the deal and then enjoy the financial benefits offered to hold-outs. But this strategy only works as long as the deal is actually happening and not too many investors try to hold out. This caused Vodafone headaches in its purchase of Kabel Deutschland in 2013 and almost brought down the acquisition of German drug wholesaler Celesio by US peer McKesson, which eventually closed in 2014. In Wincor's case, most recently 30 per cent of outstanding Wincor shares were held by hedge funds, according to a person with knowledge of the situation.
The German tax code creates another wrinkle. Part cash, part share deals are unattractive for retail investors residing in Germany - the tax authorities treat the cash component like a dividend and insist on a 26.4 per cent withholding tax. Up to 12 per cent of Wincor's shareholders were affected by that.
Even though the Wincor deal eventually limped over the acceptance threshold, this kind of drama has a negative effect on Germany's equity markets. International bidders will think twice before tabling fair and coherent offers, and inefficient corporate structures will persist. That isn't in shareholders' interest, whatever their size.
