Schaeffler Group AG (Germany; privately-held parent of LuK, INA and FAG Bearings) has announced victory in its controversial takeover of troubled Continental AG (Germany), a company three times its size, and which would create the world's second-largest auto parts supplier after Bosch.

article: Schaeffler moves to acquire Continental
[ with details about the companies and operations ]
Continental manufactures electronics systems, mechanical components and tires for the global auto and truck industry. It has sales of approximately €26 billion and 160,000 employees worldwide. Schaeffler expects sales of €10 billion and has 66,000 employees worldwide.

In addition to bearings and clutches, Schaeffler also manufactures transmission components, chassis components, industrial equipment and aircraft components.

Similar to their moves in acquiring FAG Kugelfischer when it was in a weakened state, the takeover of Continental happens as the company struggles in a slumping world auto market and with debt from the ill-timed recent acquisition of VDO.

Schaeffler offered €70.12 (USD $109) per share, valuing Continental at €11.35 billion (USD $18 billion), which Continental initially described as "inadequate" but later said was "desirable." €70.12 is a 30% premium over Conti's July 11 closing price and the absolute minimum required under Germany's financial regulations. The formal offer indicates total debt would be in the area of €31 billion, and that Schaeffler would finance most of the acquisition via additional debt placed with a syndicate of banks worldwide.

Auto and truck manufacturer customers of both Schaeffler and Continental said they would not have a problem with the acquisition, as long as it did not weaken either one or both of the companies. VW is the largest customer of both and has spoken out in support of the acquisition.

Initially, Schaeffler had acquired 36% of Continental's shares on the open market, primarily by cash-settled share swaps arranged by Merrill Lynch; only 8% were acquired directly by Schaeffler. Continental has been very vocal in criticizing Schaeffler's "creeping takeover" strategy, which leaves all of the share purchases in the dark until the acquiring company comes forward and displays an already overwhelming ownership position in the target. Under German securities laws, Schaeffler would have had to disclose its takeover intentions and made an offer for all remaining Continental shares much earlier if it had not employed the swap arrangements.

Continental took its arguments against Schaeffler's methods to Germany's Financial Supervisory Authority, which nevertheless in late July gave its approval for the acquisition to go forward.

Continental fought against the acquisition by trying to illuminate its future prospects, although it said the global tire market, accounting for 25% of sales, would be softer than expected.

Schaeffler then arranged a global syndicate of banks to back the massive loan program. Led by Royal Bank of Scotland and Bayerische Hypo-und-Vereinsbank, it includes Commerzbank. Dresdner Kleinwort, Landesbank Baden-Wurttemberg, UBS, and up to 16 other banks.

In a late attempt to fend off Schaeffler's bid, Continental went looking for a "white knight" to acquire it in a friendly takeover. But after approaching hedge funds and other tire manufacturers, it was unable to secure any serious interest. Then management decided that an acquisition might make Continental unaffordable for Schaeffler, but that direction proved unsuccessful. A final effort was made to tie up all the largest banks and limit Schaeffler's access to capital, but again that was unsuccessful.

By mid-August, Schaeffler decided to try to end the stalemate by increasing its offer from €70.12 per share to €75 per share. Continental's board immediately rejected the higher offer but did decide to continue negotiating.

Agreement Reached

Conti finally accepted Schaeffler's offer, with the following conditions:

• Schaeffler will buy more than 49.99% of Conti until 2012
• Conti will remain publicly traded
• Offer remains at €75 per share
• Schaeffler will pay up to €522 million to cover any financial impact on Conti
• Conti's Hanover headquarters will remain in place
• Conti's relative debt will not increase without consent
• Both companies will seek to develop synergistic strategic projects
• Conti has the authority to raise Schaeffler's ownership limit
• Conti CEO, Manfred Wennemer, leaves the company
• Conti shareholders have until September 16 to tender their shares
• Former German Chancellor Gerhard Schroder is authorized to enforce the contract

In a statement, Conti said it "expects smooth cooperation" and will "examine the possibilities for strategic cooperation projects."

Schaeffler said it is a, "constructive solution that is in the interest of both companies."

Merrill Lynch will close out its swap transactions in cash with Schaeffler, up to the maximum. Banks in the consortium holding excess Conti shares will be able to sell them in five years but will need Schaeffler's approval to sell them for less than €75.

Karl-Thomas Neumann was named CEO of Continental, replacing Mr. Wennemer. Mr. Neumann was the company's chief technology officer, in charge of transmission, chassis and safety operations, and is the most familiar with Conti operations important to Schaeffler.

A new position, Deputy Chief Executive, has been created and Alan Hippe will take that position. He was the favorite of many to become CEO.

Shortly after the agreement was announced, Continental issued another profit warning, with results hurt more than expected by slower than expected auto and truck sales across Europe and North America, exacerbated by higher raw materials costs. EBIT projections were lowered to 8.5% for 2008, from 9.3%.

Continental's tire business then announced it will lay off approximately 120 workers from the large truck tire manufacturing plant in Hannover, Germany. Worldwide, the tire division employs nearly 8,000 workers.