An alien concept is taking root in Germany – a concept that may benefit IR practitioners and investors but also signal the death knell of a long-established indigenous species.
The alien invasion we speak of is the switch by some companies from bearer shares to registered shares. The early signs of this shift may mark the beginning of a wholesale change in the nature of German share ownership, but it is clearly not a switch that many companies want to rush into.
Once upon a time insurance companies were the only kind of German corporate that maintained a share register. This was partly because they already had records of ownership going back to the days when they were mutually owned and found maintaining an accurate record of investors extremely beneficial for a number of reasons.
Other companies have always used bearer shares – a highly liquid form of stock that is easy to exchange but that makes it difficult for German companies and their investor relations officers to know precisely who their shareholders are at any given time.
Daimler Benz’s merger with Chrysler in 1998 and their decision to create the world’s first truly global share, marked the start of this recent alien incursion onto German soil.
Following the footsteps
The company wanted a stock that could be traded on an equal footing in Europe, the US and the rest of the world. This meant dispensing with its German bearer shares.
Other companies like Siemens have since followed DaimlerChrylser down the registered route and figures from Deutsche Borse indicate that 5 percent of all publicly-quoted companies are now using registered shares. It’s likely that a further 14 companies will make the switch this year.
The growing momentum appears to have much to do with reductions in cost and time associated with share settlement and registration. Before the introduction of the Cascade-RS electronic settlement system the manual settlement of registered shares could take up to six weeks. Now settlement and registration are carried out in parallel, taking no more than a day.
Deutsche Borse says the electronic registration process makes the decision to switch much easier. A company does not have to print a full range of certificates and those companies that have gained agreement from shareholders to dematerialise their stock can dispense with the need to exchange any paper certificates.
Reluctant onlookers
Despite the lower costs and greater efficiencies offered by new electronic administration processes, some companies appear unmoved by the lure of the registered share concept.
Alexander Rosar, investor relations manager at international chemicals and healthcare company Bayer, says his company has no immediate plans to switch to registered shares. The reasons are very simple.
Firstly there’s the question of cost. ‘Such a registered share program would involve additional costs of several million euros as a one-off cost. There would also be big fees on an annual basis – the exact amount to be based on trading conditions throughout each year,’ he explains.
Another consideration is Bayer’s corporate objectives for its overseas listing. The company does not feel the need for a full listing in New York instead of its level 2 ADR program. The additional costs do not justify such a switch.
There are also questions surrounding the share registration systems currently available. ‘We think it may take another year or two before they improve but once they are more efficient and streamlined we may have a different view,’ he adds.
There is certainly quite a difference of opinion about which of the current systems is best. For instance, a new system has just been launched by Allianz Group and Munich Re in conjunction with Dresdner Bank and a leading software provider, CSC Ploenzke. Its emergence serves as further evidence that there is still an ongoing debate about which system of share ownership is best.
The new system offers listed companies tailored services including share register management, support for investor relations and easier capital increases. Its developers say this is the only system in the market which offers companies standard software under license to carry out their own share management.
Cost consideration
Of course for companies switching from bearer shares there is an associated cost attached to using the new system as there is with other systems on offer. Each custodian bank charges about DM12-15 to switch one investor’s holding from bearer to registered status. These costs could therefore be significant if there are a lot of custodians to deal with.
For some companies it’s not the cost, but the workload, which has been the main deterrent. At the leading bank and mortgage provider Hypovereinsbank, no switch was made while the merger of its antecedents was being completed. However plans are now being made to make the switch next year.
Stefan Ermisch, investor relations manager, says there was too much to do during the merger to change the share structure as well. ‘When it does happen, the main reason for making the switch will be for the greater visibility of our shareholder base that it gives us. However, we don’t assume that we will get a 100 percent better view of all investors just by making the switch.’
The cost will not be that great in relative terms – perhaps a couple of million Deutschmarks. Cost is therefore a side issue says Ermisch. One of the bank’s reasons for switching to registered shares next year is to make it comparable with sector giants like Deutsche Bank which recently announced plans to merge with Dresdner.
Deutsche Bank’s deputy head of investor relations, Wolfgang Schnorr, says the bank is still dealing with the ramifications of having to keep a register up to date, since making the switch last August.
‘There were two major reasons why we did it: to have a better, faster and more direct communication between the company and its investors; and to have shares that met US requirements for listing,’ he explains. ‘We knew most of the institutional big guys already because they were our major target group for investor relations. What we didn’t have in the past were names and addresses of our individual private shareholders.’
Information advantage
There are some very basic benefits to be enjoyed by having this information in such an accurate format. When Deutsche Bank issued its interim report last September it was sent directly to all shareholders – for the first time using names and addresses listed on the new share register.
Previously only shareholders who were also the bank’s customers would receive it directly – the rest were reached via an investor’s bank.
‘We also added in a questionnaire – a survey that asked all our shareholders some key questions. We wanted to know their expectations about the information they need from us, how they want to get it and what their main interest in the annual general meeting is. We also asked them why they are investing in Deutsche Bank,’ Schnorr explains. The healthy 18 percent response rate to this survey tells its own story about the value of having a share register.
All too soon
And yet for recently floated companies like integrated copper producer Norddeustche Affinerie, now is clearly not the time to switch.
As head of public relations Wolfgang Wietbrok explains, ‘We don’t want to exclude the possibility of seeking listings in the States in the future, but we are not a company that can be compared with Siemens or others which are thinking about the possibility of going to America.’
Greater opportunities to get in contact with all shareholders may persuade the company to change its stance in future, but at the moment the copper producer appears happy with the level of information it has. Much of it was obtained in response to advertising and to shareholders volunteering their contact information.
‘Quarterly information is sent direct to these investors and we also stage regular meetings here in Hamburg to which shareholders are invited,’ he adds.
Despite being an expert in logistics and tourism – and therefore an obvious candidate for maintaining people data – Preussag is another company that is still fence-sitting on this issue.
IR manager Bjorn Beroleit admits that the company has many private shareholders and a switch would benefit them and the company. However no official decision has yet been made.
‘We know there is a quite a cost involved but we think it makes sense,’ he says. ‘And yet we also know that we may still not see all our actual shareholders because their names may be registered under a company acting on their behalf. To a certain extent registered shares may help but they don’t necessarily give 100 percent clarity.
‘However, from an investor relations perspective we are sure it would make the daily work a bit easier. Certainly, if it becomes a standard and more and more German companies are doing it, we may decide to make the move.’
Beroleit thinks registered shares are clearly more attractive to those companies with an international focus – companies like DaimlerChrysler.
Merger of equals
The car giant’s head of investor relations, Ralf Brammer, explains that the new combined company needed a stock that reflected the fact it was created from a merger of equals. The objective was also for DaimlerChrysler to be ‘a premium company’. The premium type of security was therefore chosen. The company also wanted to guarantee that every shareholder – no matter where they are – should have the same kind of global security.
But these clear corporate goals didn’t make the switch from bearer shares popular with all German shareholders. The litmus test for Brammer is how advantageous registered shares are for institutions. The answer is: very.
A lot of these advantages have to do with the global nature of DaimlerChrysler’s registered shares. Under the new structure, cross-border settlements are made easier and arbitrage costs are drastically reduced.
‘Another advantage is that when companies are facing any hostile takeovers the share register and the registered share can serve as an early warning system. You really get to know who is selling and who is buying your stock. You also know where your shareholders are located,’ he adds.
Daimler Benz did consider introducing a global share before the merger with Chrysler, he says, but it would not have been introduced so dramatically and rapidly.
And, after many months of experience, Brammer now concedes that maintaining the share register comes at a high cost. But he points out: ‘The costs are now incurred by one department – the one that is maintaining the share register. We now know – very transparently – how much it costs to communicate with shareholders. In former times, some of these costs showed up in other people’s budgets – the legal department, the treasury. Overall I think we have cut costs by at least 20 percent as a result of having the global share.’
The right fit
Advocates of a switch to registered shares would no doubt echo these sentiments – even if they are choosing a regional version. However, the vast majority of quoted German companies still use bearer shares. Unless a company is seeking a listing in a major market overseas, the increased visibility of shareholders may be outweighed by the cost and workload incurred – both in switching and in ongoing shareholder maintenance. Still, as US-style M&A activity sweeps the continent, that visibility may pay off for more companies and their IROs.
While registered shares may be tailor-made for some German companies, only time will tell whether or not they become an essential item of clothing or only a special garment designed for the chosen few.
