Hedge funds need new M&A playbook in Berlin

Merger arbitrageurs once found it easy to force bidders for German companies to pay a full price for a takeover target. But acquirers are adopting a new playbook to keep meddlesome hedge funds at bay. For the German corporate sector, it’s a pyrrhic victory.
The key battle in German M&A used to be over securing a 75% holding — the level that would guarantee pushing through a shareholder resolution on so-called domination and profit-and-loss-transfer agreements. These are the accords that give the majority shareholder direction over strategy and access to the corporation’s cash flow.
In the low-rate environment that followed the financial crisis, hedge funds realised what a great deal these domination agreements were for shareholders who stayed invested in the acquisitions: Minority stockholders get a minimum dividend and a set buyout price for their shares. Seeking to optimise their exposure to this opportunity, hedge funds would buy into a takeover target but decline to sell their full holdings into the bidder’s initial offer.
This, combined with the rise of passive funds, has made getting a high level of shareholder acceptances for German deals much harder over the last decade. Some bidders have responded by settling for a mid-60% acceptance threshold, which would potentially still give them enough of a holding to pass a shareholder resolution given turnout is always incomplete.
Yet it’s not clear this works. In 2017, private-equity suitors launched two bids for healthcare firm Stada Arzneimittel AG, lowering the acceptance threshold twice and hiking the offer price. They still had to pay a big sweetener to buy off hedge-fund holdout Elliott Management Corp.
Now we appear to be in a new evolutionary phase. Recent German deals have seen bidders foreswear their ambition for a domination agreement, at least for a few years. To add credibility to this commitment, Taiwan’s GlobalWafers Co. cut an initial 65% acceptance hurdle to 50% in its bid for German silicon wafer maker Siltronic AG. After a statement from GlobalWafers that it wouldn’t make a repeat offer if the deal failed, acceptances hit 70%.
Likewise, Vonovia SE removed its acceptance condition entirely in its bid for rival property firm Deutsche Wohnen SE.

—Bloomberg