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The recent attempted hostile acquisition of Thyssen AG by Krupp AGhas once again brought to the fore the operation of the German corporategovernance system and the role of the banks. The banks have been seen to

Journal of Banking & Finance be instrumental in orchestrating and organising the raid. To some, mostnotably German steel workers and particular politicians, the banks haveabused the social values of the German governance system. To others, theyhave let shareholders down in failing to push through the bid to the bitterend.
Hostile takeovers in Germany are an important subject of study for tworeasons. Firstly, there are not many of them: only three in the whole of thepost Second World War period. Secondly, although they are the earthquakesof German corporate governance and should not therefore be regardedas examples of normal practice, they do allow us to observe theoperation of German corporate governance and the behaviour of bankswith an unusual measure of clarity. In addition, they provide an interestinglaboratory on how a virtually unregulated takeover market a€ects shareholderreturns.
In particular, we want to use the hostile bids to examine two questions:®rstly, do banks exercise substantial control during these turbulent periodsand, secondly, if they do, in whose interests do they act. There is continuingdiscussion amongst both academics and policy makers about the power ofGerman banks. In principle, concentration of control through proxy votesshould encourage more active corporate governance by German banks than by UK and US ®nancial institutions which hold much smaller stakes and largehighly diversi®ed portfolios of shares. Since banksÕ own shareholdings are ingeneral modest, where conˉicts arise between shareholder interests and incumbentmanagement, banks may attach less signi®cance to their custodianfunctions than to the margin and fee income which they derive from commercialand investment banking. Banks may also feel they have obligations toother stakeholders such as employees and managers.We ®nd that banks do exert signicant inˉuence over the outcomes ofbids, their power in large part deriving from their chairmanship of supervisoryboards, and the proxy votes which they cast on behalf of individualshareholders. The latter may be especially important where there are restrictionson voting rights: these limit the votes that large blockholders cancast but not those of banks acting as custodians of small shareholders. We and that returns to shareholders who do not sell their shares to acquirors arevery low and even negative in two of the bids. These low bid premia may beexplained by banksÕ concern with interests other than those of shareholders;alternatively, they may result from the virtual absence of takeover regulationin Germany.
We begin by describing the methodology and data used in the study in
Section 2. The three cases of hostile acquisitions are discussed in Sections 3±5.Section 6 analyses the returns to shareholders of the target ®rms, the role oftakeover regulation, and the power of the banks. Finally, we derive some conclusions in Section 7.
1386 J. Franks, C. Mayer / Journ
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