Lessons from an Interminable Takeover
A lot of tears have been shed since September 5, 2005, the day that Salvador Gabarró, president of Spain’s Gas Natural, announced that he had sunk his teeth into Endesa, and that the entire company would be his within nine months. His words showed excessive optimism, given how events unfolded. They were also a provocation. Above all, they signified the launch of a bitter battle to take over the jewel in the crown of the Spanish and Latin America electricity sector. The deal can be described by the famous expression, “All is fair in love and war.”
Every possible weapon has been utilized in the battle to acquire Endesa. Legal decisions, negotiations, government intervention, and appeals to nationalism and to Spanish and European pride. There have been legal moves, reprimands from The European Union in Brussels, denunciations in front of the SEC, accusations of espionage and privileged information. To top things off, there have social and political tensions that are hard to justify in a free market.
All these ingredients combine to make this a case study for business schools. From the leadership roles of its protagonists, to the consequences of governmental intervention, several professors analyze, for readers of Universia-Knowledge@Wharton, the chief lessons of this controversial takeover war.
First Lesson: The Damage Caused by Interventionism
To begin, it’s worth reviewing the key facts. On September 5, 2005, Gas Natural launched a hostile offer for Endesa. It offered 21.30 euros per share, which represented a premium of 14.8% above the current market price. However, that price was widely criticized from the outset. Before long, there were warnings in political circles. The socialist government of Spain, allied with nationalist parties in Catalonia (the region in which Gas Natural originated) backed the deal. The chief party of the opposition, the PP, took a position against it, making such declarations as this statement by the president of the Comunidad de Madrid [the local government in the Madrid region]. “They are taking the headquarters out of Spain!” She meant to say that they were taking the headquarters out of Madrid because Barcelona is in Spain, despite the presence of certain nationalistic groups.
As this regional battle unfolded, Manuel Pizarro, president of Endesa, negotiated a friendly takeover offer from Germany’s E.On, on February 21, 2006. The government of Spain took little time to respond with a decree aimed at blocking the German offer. Two months later, the European Commission put its cards on the table by opening legal proceedings against Spain’s controversial decree. Far from throwing in the towel, the Spanish government headed by Jose Luis Rodríguez Zapatero, conceded powers that were hitherto unimaginable to the CNE, which regulates Spain’s energy sector. The CNE then took advantage of those powers to impose some unfair conditions on E.On. However, the European Commission counter-attacked, forcing Spain to eliminate those conditions.
Ultimately, E.On managed to proceed with its takeover, and Gas Natural withdrew its bid. The German company presented its definitive offer on February 2, 2007, valued at 38.75 euros per share. The offer came only two days after Gas Natural withdrew. Was the Catalonian company the victim in this case or the executioner?
“I believe that the politicization of the deal on the part of various national and local powers wound up thwarting the aspirations of Gas Natural. However, looking at the results, it could serve as a vaccine against future deals, in such a way that the politicians know where their territory ends, and where the marketplace begins,” notes Juan Mascareñas, professor at the Complutense University of Madrid. When Gas Natural announced its withdrawal, the company explained its decision by noting that it had “been immersed in a political, social and legal controversy that is irrational and prolonged.” Gas Natural also announced that it would demand damages and penalties from Endesa for having thwarted its takeover. And it accused Manuel Pizarro and the Endesa managerial board of failing to comply with its obligations to play a passive role.
“This spectacle demonstrates that the market is not free,” says Manuel Romera, director of the finance department of the Instituto de Empresa business school. “There is less competition and more interventionism than there should be,” said Romera. In his opinion, “The results would have been different without government intervention. The entire process would have been easier. The best thing would be an equilibrium between the freedom of the marketplace and governmental power” acting as an arbiter that guarantees respect for the rules of the game, “but such an equilibrium does not exist,” he adds.
According to Juan Antonio Maroto, a professor at the Complutense University in Madrid, “It may be too harsh to say that the politicians have been the instigators, but from that point on, there were political arguments” giving more attention and scope to companies based in Catalonia, and greater support for the theory of ‘”national champions.’ The politicians used that reasoning to deal with a takeover that really all about business. The worst problems with the deal stemmed from hostility and strategic disagreements” involving synergy between sources of energy, production and distribution “that were based on short-term reasoning about then-current decisions,” such as restrictions in some sources of supply that were later shown to be temporary.
Maroto agrees with Romera that the government’s role must be restricted to acting as an arbiter, “acting in public and with a logic that obeys the marketplace. And the results should be subject to political approval. This process should never be based on suggestions of acts taken against private interests. Clearly, there has been only weak support for public intervention [by the government] in [Spain’s] economic affairs,” concludes Maroto.
Second Lesson: Europe Failed to Meet the Challenge
The role played by the European Commission has also been a target of critics. Romera says, “Brussels has not been as independent as it has claimed. It did not want to analyze Gas Natural’s offer, but it did want to do that for E.On’s offer, when both offers were actually competitive.” Romera is referring to one of the early chapters in this story. “When the only offer on the table was from the Catalonian company [Gas Natural], Pizarro [of Endesa] attempted to make that offer subject to European Community scrutiny, alleging that one third of Endesa’s revenues came from foreign operations, so Brussels had to make the decision,” recalls Romera.
“I am afraid that Brussels only avoids the sort of interventionism that the member-countries want it to avoid. Each cross-border deal, as well as the entire sector it is in, continues to be a world apart for Brussels, where the lobbies that are affected [by the deal] intervene to determine” the results, notes Maroto.
Mascareñas has a more positive view of the Commission’s role. “I believe that Brussels has done what it had to do, although I also believe that they must get deeply involved in mergers and acquisitions in companies of those member-countries that have more weight in the EU. Taking this idea to its limit, I believe that Brussels should ultimately be the only controller of these kinds of activities in the EU. At the end of the day, each member-state will gradually become a sort of province within one large country [Europe]. But for me, I am afraid that this process will still take a lot of time.”
The first obstacle to giving Brussels this supreme role is the fact that the population of Europe lacks an emotional attachment to Europe as a whole. Romera notes, “With this deal, it has been confirmed that we do not see the Germans as we see ourselves, but as Germans. In this takeover, there have been too many participants who have a nationalistic approach, whether they are Spanish or German.”
Wharton professor Mauro Guillén believes that is a major mistake. “The role of Spain in Europe will wind up benefiting from trans-border mergers in at least two ways. First, these mergers make it possible for the leading Spanish multinational corporations to expand their presence, as well as their prospects for remaining viable competitors. Second, they help Spain to overcome the difficulties involved in being a country that has vital cultural and economic interests in two parts of the world, Europe and Latin America, which often contradict each other. If a half dozen major Spanish companies make takeovers or merge with some of their European counterparts, it would be easier for Spain to make its interests in those two regions of the world more compatible” with each other, he says.
Third Lesson: Pizarro, an Example of Leadership
The fierce battle turned into an assault on Endesa, with a series of tricks and traps for winning the battle. It provided important lessons in leadership, involving such figures as Manuel Pizarro, president of Endesa; Antonio Brufau, ex-president of Gas Natural and the brains behind the deal; Salvador Gabarró, the leading warrior of the gas company [Gas Natural]; Wulf Bernotat, president of E.On, and José Manuel Entrecanales.
Entrecanales, president of Acciona, a Spanish infrastructure company, was the last player to enter the stage. Last September 25, Entrecanales announced that he had bought 10% of Endesa. His goal was to continue to acquire shares in order to create the central core of the company’s ownership along with Caja Madrid, which owns 10% of the electricity company. This would guarantee that the company retains its Spanish character. However, this move did not turn out to be as important as it seemed at the time. Until now, at least, the chief plotters in the game have been Pizarro, Bernotat and Brufau.
“Without doubt, the most important figure has been Pizarro,” says Romera. “He has been a monster, an extraordinary executive. What skills he has at analysis, development and structure! He made himself seem like the victim, but he wound up being everyone’s executioner. He took advantage of the rivalry that had existed between the other players to confront them and raise the price of the company’s shares. In contrast, Brufau comes out with his reputation weakened. He drew up his plan believing that he was dealing with someone who was malleable. He made a naive mistake because he was really confronting a lion. His deal was logical, and he was very efficient in his planning, but he underestimated Pizarro.”
Maroto has a very similar view. “The pig-headedness of the Aragonese (the region that Pizarro comes from) builds character. Using that base, Pizarro has shown the truthfulness of a phrase used by Camilo José Cela” (the Spanish winner of the Nobel Prize for literature): “In this country, he who resists is the winner.” “Entrecanales gave people the image of a more or less white knight that approached the castle without knowing truly if he wants to save the princess or even if he wants to engage in battle. It seemed to me that Brufau and Gabarró were always confused about what they were doing, so they continued to do move ahead despite the results that they were getting. And Bernotat, the ogre, the true white knight, also winds up as a philanthropist because he found a successful way out of all this foolishness.”
Romera has little admiration for Bernotat. “He showed a very limited intelligence. If you offer 25 euros per share and then 35 euros because the market demands it, that means that you could pay 45 euros if the share price rises to that level…” This sort of reasoning gives all of the power to Pizarro, since he has yet to make an announcement about the German takeover offer. Will his recommendation be to sell, or will he ask for more money? “There are still some cards that remain to be played,” says Romera. “Pizarro still has an ace up his sleeve: How to manage Acciona, Caja Madrid, AXA…. As a result, I believe that Pizarro will only approve the takeover if the Germans commit themselves to keep him as president. I don’t believe that E.On is capable of laying down a strategic plan unless Pizarro manages it.”
Mascareñas agrees that Pizarro provides an example of sound leadership. “Each one of the protagonists has played his role, and has his own interests, whether or not they confess what they are. But I believe that the most outstanding figure is Pizarro because, from the first moment, he understood how he needed to play the game. In addition, I believe that, whatever happens next, he has won; he has managed, thanks to the defense organized by Endesa, to have share prices rise to levels that were truly unimaginable before the takeover offer. The people of Gas Natural should derive some lessons from what has happened because this in the second time they have been involved in a very similar takeover effort. The other case involved Iberdrola, a few years ago.”
Fourth Lesson: Takeover Wars and Company Value
Although the heroic effort by Pizarro managed to make the value of Endesa shares shoot up, many give Gas Natural the credit for having awakened the price of the electric utility. When the company arrived on the scene, Endesa’s share price was 18 euros, and the Catalonians [Gas Natural] offered an additional premium of 14.8%.
“Every takeover is a disciplinary mechanism of the market that punishes those management teams that have made money for themselves but not for their shareholders,” stresses Maroto. “It is obvious that this value exists in Endesa, given its current share price. But it is just as obvious that the shareholders, before the takeover, were not participants in this [value]. Was the management team looking out for its own goals -- negotiating power; their value in the market for executives; a free hand and liquidity in the event of possible acquisitions -- or were they looking out for the interests of shareholders? Pizarro’s achievement is that no one talks about this disparity of goals now. As for its shareholders, if Pizarro continues to manage the company, can they be sure that the share price will reflect the [true] value of their company, or will they have to await new takeover offers to find out?”
“Let’s look at the facts,” replies Mascareñas. “It is obvious that the battle for control of Endesa l[created] the huge spike in its share price. It also seems logical to think that the market did not value the electricity company [Endesa] as much before the takeover offer as it did after it. Were the managers of Endesa incapable of communicating its true value to the market? That is possible. Perhaps they didn’t have a person who could focus on that so that the market looks at Endesa and realized its potential? That is also possible (and this wouldn’t be the first case). It could also be the case that the market would have thought that Endesa was untouchable. In such a case, the highest value that it could obtain, if it was successfully integrated into another utility company, was not reflected in its price. Even that belief collapsed when the offer from Gas Natural appeared, with governmental support included. The company goes from being untouchable to being buyable.”
Roma provides another lesson of the battle: “Once again, it demonstrates that in Spain, hotel takeover offers do not work out.”
Guillén believes that things need to change. In order for Spain to expand and to have true “national champions,” Spain needs to leave the door open to companies from other countries. “Naturally, the government and the population of Spain (and the country’s own companies) should be prepared to accept the need, in some cases, to turn their backs on national control of some companies, either in part or in totality. It is unlikely that every Spanish company that exists today will wind up having a global presence without any of them becoming part of European entities,” as in the case of Endesa. The best way for large Spanish companies to expand around the world,” Guillén adds, “is to do so as European companies or as components of European companies that may be controlled and managed not just by Spaniards.”