Live by the Sword, Die by the Sword

Furthermore, it could be argued that leveraging itself and courting the stockmarkets in order to achieve its ambitious goals has been a double-edged sword – and in July Conti’s management felt the sting of its own blade. In the last few years Continental has been on something of corporate shopping trip. The biggest single purchase by some way was the acquisition of Siemens, announced in July 2007. This move was perhaps the biggest step towards Conti’s vision of a “new Continental,” which would produce cutting edge tyre to brake automotive technology. The long and the short of it is that some market observers now believe that taking out the 13.5 billion euro loan needed for the Siemens purchase may have overstretched the Conti to the point of vulnerability.

They say this (coupled with raw material price increases and slowing automotive demand) led to premium tyre makers being hit by faltering share prices, which in turn left Conti open to exactly the kind of manoeuvre that Schaeffler appears to be pulling off. Analysts at Morgan Stanley made this point in a recent financial profile of Continental, which described the tyre and automotive supplier as “the most levered company under our coverage” with net debt equal to greater than 80 per cent of the company’s market value. The show’s not over till the fat lady sings… At the time of going to press – three weeks into the takeover bid – the situation bears all the hallmarks of the kind of Wagenerian epic that originates from the part of Germany Schaeffler comes from. Many analysts have drawn parallels between Schaeffler’s approach and the creeping takeover employed by Porsche in its bid for VW. This process is taking longer than a slow motion performance of Wagner’s infamously long Ring cycle and is already being counted in years.

The best guess so far concerning how long it will take for the Conti/Schaeffler saga to reach its climax is two years, with German radio coverage suggesting Schaeffler will wait until the lion’s share of the loan arrangement Conti racked up to finance the Siemens VDO acquisition expires. This would also mean Schaeffler would have to re-negotiate conditions before the loans expire, and in the current credit crunch market conditions would not get such a good deal. Every decent opera has a twist in the tale. And in this month’s detailed coverage of the Continental takeover situation Tyres & Accessories asks if – just as the strength of Continental’s vision and strategy may actually have led to its vulnerability – the stalking strategy Schaeffler has employed so successfully this far could be its undoing. After all, as the good book says: if you live by the sword you die by the sword.