All the economic indicators are showing that Germany is booming again. Even the Germans are starting to believe that the recovery is for real.
Yet this is probably the worst macroeconomic scenario for any German chief executive wanting to cut labour costs. And this is the challenge facing René Obermann at Deutsche Telekom.
The German telecoms incumbent has been crippled by costs. This is both a genetic problem and one of its own making. Genetic, because it has been tied too closely to the government’s hip with its mass of highly paid – many would say overpaid – civil servants. Worse, the government continues to be the group’s biggest shareholder, and, as such, would like to see an improvement in the dismal performance of the company’s shares, but is reluctant to endorse too radical a restructuring of its bloated German cost base.
The company also has itself to blame. In better times, previous managements preferred to avoid addressing this all too obvious issue even when embarking on a big international acquisition binge in the late 1990s. The day of reckoning has finally come and Mr Obermann, the new chief executive, is trying to push through a cost-cutting programme that will probably not settle the problem altogether. But it could at least buy the company a couple of years to put together a further round of restructuring to resolve its domestic cost handicap.
Much will depend on union attitudes. So far, the powerful Verdi services and telecoms labour confederation is threatening a national strike if the group goes ahead with its plans to transfer some 50,000 German call centre employees to a new company where they will be paid 40-50 per cent less than at Deutsche Telekom. The move is designed to avoid job cuts and align these workers with the lower pay employees at competing German telecom companies receive.
Deutsche Telekom has a good argument. Why should the Verdi union oppose the salary cuts at Deutsche Telekom while endorsing the lower pay at competing companies? The union also risks another dilemma. If it does call a real strike – not the current well-orchestrated token protests that are part of the normal negotiating ritual in German labour relations – it would not only be a rare event but a disaster for Deutsche Telekom’s management and Mr Obermann.
This is unlikely to be in the union’s interest. A strike would probably force the company to issue yet another profit warning. After already issuing a warning in February, Mr Obermann would not be expected to survive a second. The government would then have to appoint a new management that would inevitably have to take a far more radical line to prevent the company sinking even lower.
Under the circumstances, the union is ultimately expected to reach a compromise with Mr Obermann. He deserves it for taking on the worst job in German industry.
Hostile takeovers in banking are rare. They are even less common in insurance, and all but unknown among reinsurers. So when one does suddenly occur in the normally gentlemanly world of reinsurance, it is hardly surprising that it should turn into a personal, below-the-belt affair.
All the more so when it involves two unloved companies that have only recently rebounded from a period of intense financial difficulties. Scor opened hostilities last month when the French reinsurer launched an unsolicited bid for its Swiss rival Converium. The French company had accumulated a 32.9 per cent stake, including buying a big Converium stake held by Swiss raider Martin Ebner.
That was a bad start, especially since Converium’s management thought Mr Ebner was an ally, considering the way he had earlier praised the group’s recovery. But while the two opposing camps probably consider that consolidation is the way forward for their businesses, the Swiss company’s management and board have been doing everything they can to frustrate the French and a bid they consider undervalues their group – one minute resisting, one moment looking for a white knight and the next saying they would prefer to remain independent.
The French are becoming increasingly frustrated since they believe – with their 32.9 per cent stake – they are in a strong position and it will only be a matter of time before they secure their Swiss prize. They also suspect the Swiss board has everything to gain from its delaying tactics because of the extra compensation board members will earn from the additional work in connection with the takeover offer. The longer this lasts, the more they will get.
Converium’s board and management do not want the French bid. That said, did board members really need to be granted extra compensation? They can claim this is not uncommon in Switzerland and that they are having to work longer hours. But when you take on a directorship, one of your main tasks is to look after the interests of all your shareholders in any situation – especially a takeover.
Just as international investors are piling into India, the industrialists of the sub-continent are heading in the opposite direction.
Indian outbound deals this year reached $10.1bn as of last Friday, about four times higher than a year earlier, according to Thomson Financial – and this was before the announcement of the latest mega-deal, Essar Global’s C$1.8bn (US$1.6bn) offer for Canada’s Algoma Steel.
The deal means Essar Global, which controls India’s fourth largest steel maker, Essar Steel, has beaten rivals, such as Tata Steel and Jindal Steel, in the race to become the first Indian steelmaker to directly enter North America. Like its rivals, Essar is ramping up domestic output, with plans to double its capacity to 8.5m tonnes per annum by 2009. The Algoma deal will add another 2.4m tonnes.
A fully integrated producer with access to its own supplies of raw materials, such as iron ore, Essar will be hoping to use Algoma to channel much of its new Indian production to producers such as General Motors and Ford in North America.
By moving offshore, Essar will also be diversifying its India exposure.
But questions remain over the financing. At about 7 times earnings before interest, taxation, depreciation and amortisation, Essar is getting Algoma for less than the nine times ebitda Tata Steel paid for Anglo-Dutch producer Corus.
But Essar Steel’s debt/equity is a high 5.7 times. Even more than Tata, Essar will be hoping the steel price cycle remains buoyant.
Sir Fred joins the fray
Sir Fred Goodwin is ready to throw off his chastity belt and join Fortis and Santander in ravishing ABN Amro. As recently as a year ago, the prospect of Royal Bank of Scotland’s chief executive joining a complex consortium bid for a continental European rival would have worried investors.
But on the – admittedly early – evidence of morning trading on Monday, shareholders are unconcerned. There are three reasons for their sang-froid. One is relief. Far from trying to gobble up the whole of ABN, RBS is taking aim only at the Dutch company’s investment banking and US retail operations.
A second, more positive, reason for bidding up RBS stock is that the savings that Sir Fred should be able to squeeze from that combination are greater than those available to most rivals, including Barclays, which remains ABN’s preferred partner. Combining LaSalle, ABN’s US retail bank, with Charter One, the Scottish bank’s American network, is the sort of transaction that used to be meat and drink to Sir Fred before he took his vow of abstinence.
The RBS gambit is also tactically shrewd. ABN Amro was already under pressure to dismember itself. If the Barclays deal falls through, RBS has staked a claim to the investment banking and US retail divisions, even if the other members of the consortium are unable to complete their bits of the bargain (Fortis’s attempt to take on ABN’s Dutch retail operations may be problematic, for instance).
Of course, there are risks. Chief among them is that Sir Fred, his appetite encouraged by his near-two-year fast, will overpay. ABN’s share price was also up sharply on Monday morning. Panmure Gordon warned in a note that a price-to-tangible book multiple of near five times echoed the dilutive price paid for Charter One, and could jeopardise RBS’s improving returns. email@example.com