Giants of the Dax under attack
German companies are ripe for a shake-up, says Matthew Lynn. That’s good news for investors.
German companies are ripe for a shake-up. That's good news for investors.
Almost every month sees another of the giants of the Dax Germany's blue-chip stock index come under attack. The latest is the chemicals conglomerate Bayer activist investor Elliott has bought a significant stake in the business.
A famously pugnacious hedge fund, Elliott is well known in the markets for taking big stakes in companies and then fighting hard to shake them up. Elliott hasn't yet said what it would like Bayer to do, but there is speculation it will press for a split between its consumer and healthcare business.
Bayer is far from alone. Deutsche Bank's shares have fallen by more than 80% since the financial crisis and it has been forced to retreat from investment banking, where it had hoped to be a global player. With its market value down to just €15bn, it may well become a target the American hedge fund Hudson Executive Capital has already amassed a significant stake.
Likewise, Daimler has struggled to keep up with the rapid rate of change in the car industry. China's ambitious manufacturer Geely has started building a position that may well lead to a full-scale takeover bid. Steelmaker ThyssenKrupp, too, has finally agreed to break itself in two after coming under sustained pressure from shareholders led by Cevian Capital.
This is not just happening in Germany, of course. Activist investors are playing a bigger and bigger role in most developed markets. But in Germany, there are two deeper trends at work that make the country one of the most tempting targets in the world for activist funds.
First, it is cheap. Germany may well be one of the stronger economies in Europe, even if it hasn't performed nearly as well as it is sometimes believed to have done. But the Dax has woefully underperformed. It is down more than 20% since the start of this year and is now in bear-market territory. That is significantly worse than most major European markets. Why?
The German economy has been slowing down even more sharply than most, with output shrinking in the latest quarter. It may well be in recession if the next three months don't see an improvement and the threat of a trade war is hitting it harder than most because it relies so heavily on exports. The result? Germany is a lot cheaper than many rivals although of course the UK is at bargain basement levels as well and that makes it easier for activist funds to start building up stakes.
Second, Germany's cosy business establishment, with its supervisory boards and friendly banks, has shielded its management for decades, and that means there are lots of firms with confused strategies and complacent managements. In Britain or the US, most of the obvious targets have already been taken out. Even more significantly, most chief executives are acutely aware of the need to keep driving up the share price, and don't especially need to be pressured into driving the business hard to improve profitability. They do it anyway.
But that hasn't been true in Germany. It has lots of huge companies with successful divisions that have built up formidable positions in the market. But they haven't had the same drive for maximum profits as companies elsewhere, and that leaves plenty of scope to improve performance. Many of them have divisions that started out quite small, but have grown into significant units that could easily be spun out. A few more have been caught out by changes in the market, or by nimbler rivals, and need to sharpen their performance to remain competitive. The net result? There are lots of targets for activists to go after.
Corporate Germany is ripe for a shake-up. The hedge funds have started to catch on to how many targets there are, and as one or two successes are chalked up no doubt others will be encouraged to try the same trick. How much money could be made? At least 30% or more on every company that gets targeted. If the trend catches on, the Dax could be turned from one of the worst-performing markets to one of the best and investors who get in on that early should do well.