Gas Pains: What the Proposed Linde-Praxair Merger tells us about the German Social Market Economy Today

05/19/2017 03:01 pm ET

At first glance, a merger between the German and American industrial gas companies, Linde and Praxair, seems natural. After all, the two companies are long lost siblings. Carl von Linde founded the firm that bears his name in Bavaria in 1897. Ten years later, the growing enterprise established a subsidiary in Cleveland, Ohio, called the Linde Air Products Company. In 1917, shortly after the United States entered the First World War, a newly formed conglomerate called the Union Carbide and Carbon Corporation acquired Linde’s American holdings. From 1917 to 1992, Union Carbide called its air products unit the Linde Division and even used Linde’s iconic logo with a swooping italic “L.” In 1992, Union Carbide spun off its Linde Division. It became the independent company called Praxair.

Declining demand for steel in recent years has intensified pressure to consolidate in the industrial gas sector. Linde and Praxair are potentially good merger partners because Linde’s strengths are in Europe and Asia, whereas Praxair is concentrated in the Americas. Despite the obvious benefits, the road to get there has been a rocky one for Linde. Initial discussions between Linde and Praxair started soon after Wolfgang Reitzle (69) became chair of the supervisory board (Aufsichtsrat) in May 2016. He chaired Linde’s managing board (Vorstand) from 2003 to 2014. Talks broke down in September 2016 due to objections regarding corporate governance by Linde’s employees and Linde finance director Georg Denoke. In the aftermath, Linde managing board chair (MBC, Vorstandsvorsitzender) Wolfgang Büchele sought to reduce the workforce by 4,000, which provoked stiff resistance from Linde’s two unions, the chemical workers union, IG BCE, and the metal workers union, IG Metall. In December 2016, Linde’s supervisory board took several steps to get the merger back on track. Büchele and Denoke both stepped down, which ended the divide on the management committee regarding the merger. Aldo Belloni, a long-time member of Linde’s managing board who had retired in 2014, came out of retirement at age 65 to serve as the new MBC in a caretaker role. A few days later, Linde management announced several sweeteners for the company’s unions and works councils. Linde instituted a firing freeze through the end of 2021, committed to remain in sectorwide collective bargaining agreements and promised to keep open the company’s Dresden facility.

Merger talks resumed in early 2017. The contours of the new company quickly began to take shape. The combined firm would be called Linde. It would be incorporated in Ireland, but managed out of Praxair’s Connecticut headquarters by Praxair chief executive officer Steve Angel. Wolfgang Reitzle would become the chair of the board that, unlike Linde today, would have no seats for employee representatives.

Strong resistance to the merger materialized in two camps. Employee representatives denounced the merger as a threat to German codetermination rights. In April 2017, one thousand Linde employees protested outside of the company’s headquarters in Munich. The employees’ views matter because a majority of the supervisory board must approve a merger for it to proceed. Linde currently comes under the 1976 Codetermination Act, which means that half the seats on the supervisory board are reserved for employee representatives. In the case of a tie vote, the supervisory board chair casts a second vote to break the tie, but norms of postwar social partnership and fear of disrupting Germany’s famously harmonious plant-level employee relations have meant that in practice, the second vote has been rarely used. This case is different. Linde supervisory board chair Wolfgang Reitzle said that he would cast the tie-breaking vote to approve the merger, if need be. Reitzle’s statement inflamed Linde’s employee representatives. Many accused Reitzle of supporting the merger for personal gain. As board chair of the new company, Reitzle’s salary would be several multiples larger than his current pay of $500,000 a year. Personal history may also account for Reitzle’s willingness to break the taboo. At BMW in the 1990s and Siemens in the 2000s, IG Metall officials blocked Reitzle’s advancement because they found him arrogant. Linde MBC Aldo Belloni, in contrast, has been reluctant to roil employees. When asked if shareholder side of the supervisory board would force through a merger against the wishes of the employee representatives, Belloni answered, “No, that would be bad.” Nonetheless, it is Reitzle and not Belloni who chairs the supervisory board, which is the body that makes the decision on the merger.

Opposition to the merger also arose in a less likely corner. Agitated shareholders denounced it at Linde’s raucous May 10 annual shareholders meeting. They slammed Reitzle for failing to explain adequately why the merger was necessary, asserted that the one-to-one share exchange was unfair to Linde shareholders because Linde had a higher market capitalization, echoed the employee representatives’ view that Reitzle was pushing through the merger for personal gain, were concerned that an American would be running the new company and that it would be neither incorporated nor managed in Germany, and argued that the shareholders should get to vote whether to proceed with the merger. Critical German shareholders hold a weak position, however. German-based individuals and institutions own only eight percent of Linde’s shares. A majority of the shareholders are institutional investors in the United Kingdom and the United States. The arguments about preserving Linde as a German company had little resonance with them.

The Linde-Praxair merger is likely proceed this June as planned. Reversing course at this point would trigger a precipitous fall in Linde’s share price, which would leave the company vulnerable to a hostile takeover under far less generous conditions. Some worry that if Reitzle casts the deciding vote in favor of the merger against the wishes of the German employee representatives, employee relations with at Linde would be so poisoned that it would irreparably damage the firm. Works councilors and union officials worry that a Linde-Praxair merger pushed through in this way would set a dangerous precedent that could undermine board-level codetermination in Germany.

Institutional investors, on the other hand, worry about a different outcome. They are concerned that Linde management will make huge concessions to the firm’s unions and works councils to preserve labor peace and secure a unanimous vote of the supervisory board in favor of the merger. These concessions would wipe out the “capital-market logic” underlying the merger. Regardless of the outcome, the Linde-Praxair merger bears watching for what it tells us about the German social market economy and German labor relations today.

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