Krupp-Hoesch/Thyssen merger intensifies debate on future of German stakeholder capitalism

In mid-March 1997, the German steel producer Krupp-Hoesch announced plans for a hostile takeover of its main competitor, Thyssen. After spontaneous protests by employees fearing job losses, and extensive critical reactions from the public, both groups started talks about a possible merger. They finally agreed to merge their steel production in a new joint corporation which was established on 1 April 1997. In a joint agreement with the IG Metall trade union, both companies agreed to carry out the planned reduction of the workforce at the new steel company without redundancies. However, the announcement of a hostile takeover in Germany is still rather exceptional and led to broad debate on the role of the banks in the German economy. In particular, unions were very much afraid that Germany could follow the "Anglo-Saxon" model of "shareholder capitalism".

Workers' protest follows announcement

Just one week after the German social partners and Government found a compromise on the future development of the German mining industry (DE9703104F) the Ruhr region (one of Germany's oldest industrial areas) was again the focus of social conflict. On 18 March 1997 the second-largest German steel producer, Krupp-Hoesch, announced plans for a hostile takeover of its main competitor, Thyssen. Krupp-Hoesch made an offer to the Thyssen shareholders to buy their shares for DEM 435 each, which was about 25% higher than the current quotation on the German stock exchange. The president of Krupp-Hoesch, Gerhard Cromme, stated that the acquisition of Thyssen would create a lot of synergy effects, and could help to improve the international competitiveness of the German steel industry.

The announcement of Krupp's takeover plans received some very harsh critisism from the German public, and caused substantial political pressure on the company. Workers at Krupp-Hoesch and Thyssen spontaneously launched joint protests against the move, pointing to what happened when Krupp took over Hoesch in 1991. Since then, Krupp-Hoesch has reduced the combined workforce by more than 12,000 employees, and workers expected further dismissals if Thyssen were taken over. The metalworkers' union, IG Metall, gave full support to the workers' protests and stated that it would not accept the takeover deal, backed with the threat of further industrial action.

Resistance also came from Thyssen management, which said that Krupp's takeover announcement could not be accepted and that it would do everything possible to avoid it. Finally, there has been much criticism from German politicians and media, proclaiming that hostile takeovers do not fit in with the German model of "stakeholder capitalism".

In this tense atmosphere, the regional government of North Rhine-Westphalia took the initiative and brought together managers from Krupp-Hoesch and Thyssen. After an initial meeting, Krupp declared that it would shelve its takeover plans, and both companies then started talks over a merger of the two companies. Only one week later, both companies announced that they would merge their steel production. From 1 April 1997 they have created a new steel company with 23,700 employees, which will become the largest steel producer in Europe (see table below).

The 10 largest steel-producing companies in Europe
Company Steel production (in million tonnes), 1995
1 British Steel 15.7
2 Usinor Sacilor 15.5
3 Riva 14.4
4 Arbed 11.5
5 Thyssen 10.4
6 Krupp-Hoesch 7.5
7 Cockerill Sambre 6.3
8 Hoogovens 6.1
9 Ispat 6.1
10 CSI 5.2
. Source: Handelsblatt, 20 March 1997 .

Joint agreement on the development of employment at the new company

The merger of Krupp's and Thyssen's steel production obviously will obviously lead to a far-reaching restructuring of the company, with serious effects on the employment situation. The new company's current restructuring plans foresee, for example, shifting a large part of steel production from Dortmund to Duisburg and concentrating it in the steel plants there. Overall, the company plans to reduce its workforce by nearly 8,000 employees by 2002.

However, on 27 March 1997 Krupp-Hoesch and Thyssen on the one the hand, and IG Metall on the other, signed a joint agreement in which both companies declared that there will be no redundancies during the period of restructuring of the new steel company. In a first concept for human resource planning, the company pointed out that the reduction of its workforce will mainly be organised through early retirement, voluntary departures with compensation for job loss, and transfers to other non-steel production parts of the two companies. In addition, both companies agreed to create 1,300 new jobs in the region of Dortmund, which will lose most jobs as a result of the merger. If, during the next few years, the company sees a need to revise its human resource planning, it has already been agreed to set up a joint committee comprising managers from both companies, the works councils, IG Metall, the North Rhine-Westphalia government, and representatives of the affected cities, which would than develop new strategies to avoid further dismissals.

The debate on the future of German stakeholder capitalism

In contrast to "Anglo-Saxon" models of capitalism, the German model has always been viewed as "stakeholder" capitalism, whereby the influence of the private shareholders is rather limited and companies have to consider the interests of the different stakeholders (the workers, regional and national political institutions and so on). There are two main institutions in Germany which have secured the stakeholder system so far: the strong co-determination right of works councils and trade unions; and the crucial position of German banks in the ownership and operational structure of German capital. The main German banks still have a major influence on most of the large German companies through their own shares or - even more importantly - through the shares they hold in deposit. As a result, representatives from the major banks are very often members of the supervisory boards of big German companies. For example, the largest German bank, Deutsche Bank, holds shares in German companies with a total value of DEM 27.1 billion, while the 12 representatives on the executive board of Deutsche Bank are at the same time members of more than 70 supervisory boards of major German companies.

The very close connection between banking and industrial capital had been seen as a guarantee that hostile takeovers in Germany were almost impossible. In light of this, Krupp's attempt at a hostile takeover of Thyssen could be regarded as a new development, in particular because the takeover plan was prepared by an international consortium of banks including the two major German banks, Deutsche Bank and Dresdner Bank. As a result of the globalisation of financial markets. it seems that German banks are likely to become more and more involved in the international investment banking business, and therefore will have to change their traditional role in German capitalism.

However, the Krupp-Thyssen case led to a broad debate among the German public on shareholder capitalism and the structural power of banking. For instance, the Minister of Labour, Norbert Blüm, declared that hostile takeovers are not part of the "language of a social market economy but of the language of the Wild West". On 25 March, IG Metall organised a demonstration of more than 30,000 workers in front of the headquarters of the Deutsche Bank in Frankfurt demanding a legal restriction on the influence of German banks, such as a new law which would limit the banking shares of a single company to a maximum of 5%.

Commentary

The case of the merger of Krupp-Hoesch and Thyssen is of importance for two reasons. The first is that German "corporatism" still works, in particular when it has to find socially acceptable ways of managing structural change in traditionally highly-politicised sectors of the economy. After the compromise in the mining industry, the case of Krupp and Thyssen could be seen as another example.

The second importance of the Krupp/Thyssen story is that there are clear signs of changes in the German financial system. There is a growing concern, in particular among trade unions, that German banks will orient themselves more and more towards what the president of IG Metall, Klaus Zwickel, recently called "casino capitalism". The parallel increase of unemployment and of share quotations in Germany seems to support these suspicions. However, it is still an open question as to whether Germany really will follow the path to a more shareholder-oriented economy. If so, it could be expected that this would have a major impact on German industrial relations. (Thorsten Schulten, Institute for Economics and Social Science (WSI))

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