Vonovia: Did ETF investors let the real estate merger collapse?

NAfter the failed takeover attempt, the shareholders of Deutsche Wohnen expect another offer from competitor Vonovia. In any case, the shares of the Dax group from Berlin rose on Monday by a good 2.4 percent to just under the 52 euros that Vonovia had offered for the shares. The largest private landlord in Germany officially confirmed on Monday that his attempt to buy had failed. As of the reporting date on Thursday night, Vonovia had 47.62 percent of the share capital. To achieve the goal of 50 percent, the Bochum-based Dax group was missing around 8 million of the total of 343 million shares in circulation. “This means that the closing condition has finally been canceled,” said the mandatory notification. The shares of Deutsche Wohnen would therefore be booked back.

Vonovia’s share price lost more than 3 percent on Monday. Analysts expect the industry leader to pay more for its possible third takeover attempt – a first failed in 2016. “It is clear that a new and higher offer would have to be submitted for this,” wrote Berenberg analyst Kai Klose in a comment. He raised the price target for Deutsche Wohnen to 55 from 52 euros and recommended buying the share. Vonovia itself still leaves several options open: In addition to a renewed public offer, there is also the possibility of selling Deutsche Wohnen shares or acquiring additional papers, said Vonovia boss Rolf Buch. With a current stake of 18.4 percent, Vonovia is the largest shareholder in Deutsche Wohnen.

ETFs and hedge funds as reasons for failure

The real estate company continues to blame the failure of the takeover on the conditions on the financial market: According to Vonovia, 30 percent of Deutsche Wohnen’s securities are in the hands of hedge funds, and a good fifth are held by the index funds known primarily under the acronym ETF. Buch accused them of having speculated too much by offering only part of their shares. “Many knew that they had to carry the deal over the threshold, but at the same time wanted to keep as much as possible in hand because they hoped that there would be a better offer later,” said the Vonovia boss of the Reuters news agency. In return, representatives of hedge funds criticized Vonovia for lulling them into certainty that the required 50 percent would be achieved anyway. The fact that this did not happen is also due to the fact that the index funds could not have tendered their shares until the deal had gone through.

This draws attention to the growing market power of passive investors in the financial markets. Investing in ETFs is easy and cheap. Instead of entrusting their money to an active fund manager or selecting promising stocks themselves, more and more investors are putting their savings into passive index funds that simply replicate a securities index such as the Dax or the Dow Jones. This has allowed the ETF market to grow rapidly for years: at the end of 2020, the equivalent of 6.5 trillion euros was in such funds around the world, with almost 600 billion euros added in the first half of this year alone.

Blackrock second largest shareholder

As a result, the providers of such index funds are now among the most important shareholders in almost all large companies, and the market leader Blackrock with its ETF brand Ishares is even the largest single shareholder in several Dax companies. In the case of Deutsche Wohnen, Blackrock is, according to the company, the second largest single shareholder after Vonovia with 7.9 percent. The wealth manager State Street with its ETF brand SPDR comes in at 3 percent.

On Monday, however, both ETF providers pointed out at the request of the FAZ that, due to the regulations of index funds, they could not offer their shares in the course of a takeover offer. “We can only buy or sell stocks if a takeover has an impact on the composition of the index,” said a Blackrock spokeswoman. Sophia Wurm from State Street’s ETF sales department said: “We basically have to follow the index, so we cannot offer the shares if it is not even foreseeable whether the transaction will take place.”

Vanguard voted against

Vanguard, the world’s second largest asset manager, under whose umbrella ETFs were once invented, has a different attitude. “Vanguard’s stewardship team evaluates merger and acquisition activities that are subject to shareholder voting on a case-by-case basis,” a company spokesman said Monday. The asset manager uses several criteria to check whether a takeover creates long-term value and usually supports such transactions. Blackrock also has a so-called stewardship team, which, however, focuses on addressing strategic issues within the company, especially with a view to sustainability issues.

In Germany, the debate about the power and impotence of ETF providers was heated up in 2017. At that time, financial investors tried to take over the drug manufacturer Stada, but also failed because of the large number of passive investors. At that time, 12 percent of Stada shares were in passive index funds. At that time, too, it was said that the ETF providers could not offer their shares during the takeover phase.

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