`Cracks Are Opening In Fortress Germany'

In Germany, a corporate raider is still as rare as a Porsche in the slow lane. But a surprise victory on Mar. 13 by small shareholders at Hannover-based tiremaker Continental may change all that. It clears the way for an unprecedented $1.2 billion hostile takeover by Pirelli, Conti's big Italian competitor. The victory also may set the stage for more mergers across Europe.

Pirelli is only one of many European corporations keen on increasing their clout in Germany by purchasing publicly traded companies. But tough antitakeover measures and webs of interlocking shareholdings among corporations and banks have made for slim pickings. Now, "cracks are opening in fortress Germany," says lawyer Nicolaus-Jurgen Weickart. With the European Community also moving to strengthen small shareholders' rights, "a lot of raiders will start buying into fragile companies," adds Maurice Tchenio, a partner with the MMG Patricof venture capital group.

HIDDEN RICHES. At Conti, angry stockholders rejected a provision that restricts voting power to 5% no matter how many shares are owned. The vote should allow Pirelli, which owns 35% of the tiremaker, to push representatives onto Conti's board and perhaps install new management as early as June. The day after the vote, Conti's shares jumped 7%. Brokers say that signals that other undervalued companies may be vulnerable to takeover pressure if shareholders rebel.

Steelmaker Hoesch, for one, has been rudderless since CEO Detlev Rohwedder left to run the privatization agency for eastern Germany. Mannesmann, an engineering group, and drugmaker Schering are also high on brokers' lists. In these and other companies across Europe, raiders could unlock hidden values by dipping into overfunded pension plans and selling real estate and other assets.

Other moves afoot across Europe may ease the way toward tapping into hidden values in Germany and elsewhere. European bourses are planning to wire themselves into an electronic network. This will allow investors to build up large stakes in cheap companies without alerting local brokers that a raid is under way. And proposed EC rule changes could limit companies' ability to buy back shares to keep them out of unfriendly hands, or bar most takeover defenses that run counter to the principle of one share, one vote. Besides Germany, such defenses are used in France, Belgium, Luxembourg, and the Netherlands. Many analysts say they depress stock prices by blocking shareholders from pressuring laggard managements.

Some EC member states may try to defang the proposed new corporate rules. Afraid of asset-strippers, they will try to fortify big employers and keep control over recently privatized companies. But they will be fighting a trend toward more open, U. S.-style financial markets. Reflecting this, embattled Philips CEO Jan Timmer, under pressure from American and European stockholders to boost the Dutch electronics giant's poor earnings, has proposed giving them a greater say in company affairs. Bundesbank President Karl Otto Pohl wants similar changes in Germany.

POWER PLAY. Conti's shareholders certainly agree. The fight over the tiremaker dates back to mid-1990, when Pirelli began accumulating shares. But even with restrictions on shareholder rights, Conti wasn't taking any chances. In a classic German power play, Deutsche Bank, which owns 5% of Conti and controls additional interests as a trustee for other investors, enraged small shareholders by strong-arming BMW, Daimler Benz, and Volkswagen into buying 2% of Conti apiece. Deutsche Bank had also hoped to corral two big insurers into joining its pro-management group. That would have given it control of 32% of the company, probably enough to block any dissidents. But the insurers pulled out at the last minute, leaving Deutsche unable to defend Conti CEO Horst Urban.

"Continental will remain independent," insists Urban. But most others are betting on Pirelli. With German managers gearing up for the biggest challenge ever to their iron-fisted rule, it's no wonder that Conti's shareholders have set alarm bells ringing in corporate suites across Europe.

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