Schaeffler Group (Germany; parent of INA and FAG Bearings, taking over Continental AG) has made several moves and announced a number of developments related to its strained financial situation, and contentious €12 billion takeover of Continental AG.

The highly leveraged takeover of Continental has sapped Schaeffler's legendary financial strength just as the global economy took its worst dive, particularly impacting Continental's and Schaeffler's core automotive business. Continental's sales had been running at approximately €25 billion, while Schaeffler's had been in the neighborhood of €9 billion.

As a result, Schaeffler has found itself in difficult situations all around, dealing with impatient banks, servicing a high debt load, and fighting Continental management over control issues. On top of that, it faces a continuous PR crisis, high-level resignations, factional infighting, and an unprecedented level of public scrutiny.


Schaeffler's CFO, Thomas Hetmann, has left the company due to, "differing opinions regarding the assessment of the concept for the future of the Schaeffler Group." His departure was widely reported as encouraged by the company's banks, but simultaneously criticized as for appearing to make him a scapegoat for Schaeffler's financial situation. Schaeffler, however, refuted the bank pressure, saying: "Management changes are decided inside the company, not by banks."

Mary Jo Gresens, Schaeffler's CFO from 1999 through 2006, had initially been picked to step in as interim CFO, but Klaus Rosenfeld was quickly named to the post. Ms. Gresens was CFO during INA's contentious takeover of FAG.

Mr. Rosenfeld comes from Dresdner Bank, where he handled Finance, Compliance, and Corporate Investments.


Leading up to Mr. Hetmann's departure, Schaeffler's owners, Maria-Elisabeth and son Georg Schaeffler, were compelled to offer a plainly worded statement to address widely reported concerns about Schaeffler, its future, and the Continental acquisition.

Among the points made in their statement were:

(1) The "strategic alliance" still makes sense, because it combines Continental's electronics and Schaeffler's mechanicals. Beyond that, combining the two creates has been received well by automakers and it will help the company be a bigger part of the "automobile of the future."

(2) Addressing the idea that Schaeffler saw Continental because its shares were beaten down by the automotive market slump and deeply in debt after the VDO acquisition, they said: "We are not 'gamblers' who have speculated and lost. Our alliance with Continental has nothing at all to do with stock exchange speculation. We are no short term oriented financial investors, but rather entrepreneurs with long-term goals and concepts. We have brought Schaeffler and Continental together in order to create a new global supplier."

Appealing to national sentiment, they said: "This is also in the interest of Germany as an industrial location, its innovative strength and competitiveness, its jobs and apprenticeships." And later: "The objective is to secure the future of both companies by bringing together two German technology leaders who can play a major part in top global competition."

As one analyst pointed out to eBearing, however: "The point lost here is of course market valuation made Conti a target; Schaeffler never could have gone after a healthy, well-valued Conti, could they?"

(3) The breadth and depth of the global economic decline caught everyone off guard, even though some decline was expected and being experienced. Additionally, the collapse of Lehman changed financial markets and caused 90% of Conti's shares to be offered to Schaeffler.

Schaeffler currently owns the maximum agreed 49.9% of Continental's shares directly. The other 40.3% tendered to Schaeffler is held by two private banks, B. Metzler and Sal. Oppenheim.

(4) The freeze-up in financial and capital markets has caused problems for Schaeffler, to the point it is "seeking a joint and responsible solution together with the banks, with potential investors and with the help of politicians."

For an idea how deep the problems now run, the next statements are key: "Of course we are not simply looking for hand-outs. Since the wealth of the owners is firmly bound up in the company, the Schaeffler Family is prepared to divest itself of part of this wealth and pay its debts with the proceeds. Due to the difficult economic environment and the burden caused by the public discussion we have not yet succeeded in finding investors in spite of actively searching."

(5) But while the company expects to find investors when the economic situation has recovered, it "requires support for a limited period of time." Seeking government bailout financing is a big step, which Schaeffler says, "is about securing interim financial aid in a special exceptional situation for a company that is sound at the core. The Schaeffler Group will present a viable concept to the federal government and the states."

(6) Then follows another plea for, "more matter-of-fact public discussions," and arguing that the Schaeffler family is not seeking more wealth. Instead, "this transaction is about securing the technological basis of two German world market leaders in the long term -- to the benefit of both companies and their employees, about 80,000 of whom are based in Germany."


Shortly after that release, Schaeffler and IG Metall Trade Union reached agreement for their relationship going forward. Essentially, IG Metall will stand behind Schaeffler in critical support for the Continental acquisition and funding needs going forward. In return, Schaeffler gave major concessions.

First, IG Metall used its considerable clout to negotiate a presence on the board of the combined Schaeffler/Continental. This is a key concession for Schaeffler, which has not involved the union or workers at that level.

But, as IG Metall made clear, the union will not express support to the government for Schaeffler bailout funding without this and other concessions. The company has promised, but not yet presented, its plan for the business and its use of state aid.

In turn, the union will officially support Schaeffler's unprecedented equity sale, to raise badly needed funding, but said it must see the Schaeffler family retain its controlling stake.

In a parallel news conference, Georg Schaeffler said there has been some interest from outside investors for an equity stake, but that the situation remains serious. Maria-Elisabeth Schaeffler said the company needs approximately €5 to 6 billion but is, "not facing an insolvency scenario."