Learning the Hard Way Just How Much Voting Rights Can Be Worth

Published: February 20, 2004


TRUDBERT MERKEL spoke with admiration, and resentment, this week as he told of a big investment mistake. "I think Procter & Gamble is very smart," said Mr. Merkel, one of Germany's leading fund managers. But he quickly added that even if P.& G. had acted legally, what it had done was not right or fair.


The German investment world has been thoroughly shaken by P.& G.'s success in taking control of Wella, the big German hair care company, and effectively integrating it into P.& G., even though the American company acquired little more than 80 percent of the outstanding shares in a tender offer that closed last June.

Dissident shareholders, frustrated that P.& G. paid far less for some shares than it did for others, have begun a series of challenges, the latest this week. But so far it appears that P.& G. has succeeded in treating owners of nonvoting shares in a discriminatory fashion, something German investors thought could not happen.

That is shaking up the market in Germany, where preference shares - which carry no votes but are in other ways superior to ordinary shares because they are often required to have higher dividends - were usually considered better investments than ordinary shares. Unlike American preferred shares, preference shares are common stock that would share equally with ordinary shares in a corporate liquidation.

"You look at the Wella annual reports,'' said Mr. Merkel, a portfolio manager with Deka Investment, Germany's second-largest fund manager. Noting that the reports emphasized the preference shares, he said that "the capital markets had the impression it was the right vehicle to invest in."

The voting shares were also publicly traded, but most of them were held by the founding family. The preference shares traded at a substantially higher price, reflecting both the superior dividend and the added liquidity because so many more preference shares were available for trading.

Then along came P.& G., having studied the takeover law that took effect in Germany in 2002. It was widely advertised as barring an acquirer from paying more to some shareholders than others. But that rule did not apply to different classes of shares. So P.& G. was within its rights to offer 92.25 euros for ordinary shares but only 65 euros for preference shares. Preference shares, which in 2001 traded at an average premium of 8.4 percent to ordinary shares, were to be purchased at a 29.5 percent discount to the price paid for the ordinary ones.

When the dust settled, P.& G. had just more than 80 percent of the total shares, but most preference shares had not been tendered, including 600,000 owned by Deka.

P.& G. says it is getting the synergies it wanted without a formal merger, and it has signed deals - negotiated, it says, in an arms-length manner - to market Wella products. Dissidents warn of "asset stripping,'' but P.& G. says it is acting in Wella's best interests.

Big questions now are whether Wella will lower the dividend on preference shares, something that could hurt owners, and whether P.& G. might consider offering more than 65 euros in a new bid this summer, when it would not have to compensate those who sold earlier.

Whatever happens to Wella, the German market has been changed. Investors in companies in which most of the tradable shares are preference shares have been migrating to the voting shares. At Hugo Boss, the clothing maker, the preference share price premium has vanished. At Fresenius, a health care company, a substantial premium has turned into a large discount.

German investors learned that voting rights can be crucial. For many, it was an expensive lesson.