Industrial Gases Linde Looks For Its Identity With Praxair Merger

Markets are pleased with Linde’s plans to merge with Praxair, but many within the company are worried about just how the group will change. As negotiations begin this week, many at Linde fear their roles will be undermined.
Many wonder if Munich-based Linde will keep its German identity after Praxair merger.

The company formed from the merger of Germany’s Linde and America’s Praxair will be called Linde, but that is not enough to reassure many Germans that a national icon will not be lost.

There are people at Linde headquarters in downtown Munich who fear that the nameplate is a consolation prize, to compensate for the fact that the company’s DNA will be changed.

"Of course, Linde will lose some of its independence," said an insider, adding that this will also weaken Germany as a location for business.

The new holding company will be headquartered in another European country, and the Chief Executive Steve Angel has already said he intends to run group from the headquarters of his current company, Praxair, in Danbury, Connecticut.

Just before Christmas, the Linde supervisory board unanimously endorsed merger negotiations. Handelsblatt has learned that the detailed negotiations over a contract for a merger of equals, known as a business combination agreement, began this week.

Wolfgang Reitzle, head of the Linde supervisory board, is the driving force behind the merger. He has long envisioned an alliance with Praxair, and wanted to create a world-class gas company, one that is more valuable than BMW Group, where he once worked.

An earlier attempted merger fell through. If this attempt fails it is hard to see Mr. Reitzle can remain chairman.

Some employees, especially in middle management, are worried about losing power – the new Linde chief executive Aldo Belloni, who came out of retirement to steer the merger through, is under a great deal of pressure to get as much as possible out of the deal.

Many fear Americans could gain the upper hand after a transition period, especially in light of the potential clash of corporate cultures. Mr. Belloni told Handelsblatt he wanted to make sure “a balance is retained."

After the first failed merger attempt, the Americans have actually made some significant concessions to the Germans. Sources told Handelsblatt that the so-called term sheet, which will serve as the basis for the merger, states that Munich will be given the status of a dual headquarters, on equal footing with Praxair headquarters. Three of the six operational board members under Mr. Angel will come from the German side, with the others presumably coming from Praxair.

 

We are concerned that American management methods will encounter strong resistance in a German company like Linde. Jeremy Redenius, analyst, Bernstein

Head of European operations Bernd Eulitz and Christian Bruch, who runs the engineering division, will likely become board members in the new group and will be based in Munich. A third board member for the Linde side will be Sanjiv Lamba, who runs the gas business in Asia, is based in Singapore and has a strong connection to Munich. The term sheet also describes in detail what the German right of nomination will look like if, for example, Mr. Reitzle leaves the company. He will serve as chairman of the merged company. According to the document, equal representation would also be ensured if Mr. Angel became his successor.

Mr. Eulitz's responsibilities could grow. According to industry sources, there is a good chance that Praxair's European business, currently run from its office in Italy, will migrate across the Alps to Munich. This would lend additional stature to the Linde headquarters. And according to the current agreements, the new group is expected to remain listed on the DAX, Germany's blue-chip index, despite its initial listing in the United States. The guarantees for German employees promised by Linde are also expected to be included in the merger agreement. There are hardly any other cases in which a U.S. company has been so accommodating to a merger partner, said an insider.

But not all critics feel reassured. Praxair Chief Executive Officer Stephen Angel and Chief Financial Officer Matthew White, who hold the two most important positions, will be based in the United States. This is a deliberate choice. Multiples, that is, corporate valuations relative to profits, are higher in the United States. If the new Linde is viewed as more of an American company, it will be advantageous in terms of its valuation.

Besides, everyone knows that guarantees always have a limited shelf life. One industry source acknowledged that parity in management cannot be sustained forever.

"The better one will prevail in four to five years," he said. There are also concerns that both Linde and Praxair will be preoccupied with integration, to the advantage of rivals like Air Liquide.

Not everything is going smoothly in the United States, either. Mr. Angel is under enormous pressure and will hardly be willing to make any additional concessions. Some analysts have their doubts about the merger and note that the valuation ratio is less favorable for Praxair. And skeptics in the United States point to substantial cultural differences, which have led to the failure of other transatlantic mergers, as well.

Jeremy Redenius, an analyst at the American investment research group Bernstein wrote an open letter to Mr. Angel, urging him not to merge with Linde. One of his main arguments: "We are concerned that American management methods will encounter strong resistance in a German company like Linde." European labor unions could increase the cost of necessary efficiency measures.

On the whole, capital markets have a positive view of the merger. Linde's share price has risen since talk of a merger has re-emerged.

The plans call for a 50:50 valuation, even though Linde currently has a somewhat lower market valuation of 48 percent. In other words, the Americans are paying something of a takeover premium. Analysts also point to planned synergies of $1 billion (€940 million) a year, but experience suggests these targets are not always met.

There is pressure to consolidate in the sector. France’s Air Liquide has set the pace with its takeover of U.S. competitor Airgas. Growth rates have declined in the industry and a rapid upturn is not in sight.

"Consolidation will happen, and it is best to be involved in shaping it," said a source close to the negotiations. The market leader is always in a better position. It will not have to participate in every price war and has an easier time of recruiting the best employees.

Some question the logic that bigger is necessarily better. "Linde can also survive on its own," said an insider, noting that the company is big enough today to be one of the top world players, and that it has a stable business model and is far from being a case for restructuring. Praxair, the insider added, is highly yield-driven and has pulled out of regions and areas where margins are somewhat weaker. In contrast, Linde is much more diversified with its engineering division and pharmaceutical gases.

For this reason, the insider noted, it is unfair to simply compare margins and conclude that Praxair is better managed, because it simply has a different focus.

It is also disputable whether Linde truly has a genuinely German DNA anymore. People familiar with the company argue that Carl von Linde emphasized internationalism long ago, in the early 20th century. He established a subsidiary in the United States, which eventually became Praxair. Linde management has also been very international for a long time, and it is one of the few DAX companies with so many foreign senior executives. The company became even more international through major acquisitions, such as the purchase of British company BOC. The operational business, on the other hand, has always been regional, said a Linde manager. "Nothing changes for the local Linde employees."

The employee representatives on the supervisory board approved the merger negotiations in December. Before that, they had negotiated a group works agreement in the event of a merger. Under the agreement, the job cuts in Germany that were originally planned independently of merger plans will be "significantly reduced." In addition, terminations for operational reasons have been ruled out until the end of 2021. The commitment to a collective wage agreement will remain in place after a merger. Jürgen Wechsler, the head of the Bavarian branch of the IG Metall metalworkers' union, stressed that the supervisory board's decision could not be equated with the approval of a merger. The interests of employees must be preserved "as a key success factor," he said, adding that IG Metall would continue to monitor the upcoming process "with a critical eye."

Mr. Belloni is currently the unifying figure for both skeptics and supporters of the deal. Although he was vague when addressing some questions at an employee gathering before Christmas, it is apparent that the mood within the company has improved since the management dispute ended. Mr. Belloni, an Italian, had long served as a member of the Linde executive board and is viewed as one of the most distinguished experts in the gas industry. Even skeptics are confident that he can effectively represent Linde's interests in the negotiations, partly because, at 67, he is no longer pursuing his own career interests. "Everyone believes him when he says that he is promoting the interests of the company."

On the other hand, some are disappointed in Mr. Reitzle, said an insider. Many believe that the so-called merger of equals is essentially a takeover by the Americans. Even a close associate conceded that Mr. Reitzle has become vulnerable, give the chaos and internal disputes of recent months, the departures of top executives and the failed initial merger attempt. However, the associate added, Mr. Reitzle himself is not responsible for most of the problems. For instance, the power struggle between former CEO Wolfgang Büchele and his chief financial officer, Georg Denoke, had been raging for some time when Mr. Reitzle returned from the two-year cooling off phase in May. The supervisory board eventually dismissed Mr. Denoke, who was seen as an obstacle to the merger. Mr. Büchele, who had expedited the merger, also left prematurely.

Opinions differ sharply on Mr. Reitzle, who, as CEO, transformed the company from a small, mom-and-pop operation into a purebred world market leader in the gas industry. Some are quietly saying that the possible choice of London as a site for the holding company suits Mr. Reitzle's purposes. Besides, they add, he could play a more active role as chairman and earn more than the supervisory board chairman of a German corporation. On the other hand, sources close to the company point out that Mr. Reitzle would certainly not be earning several million as chairman, as salaries of that magnitude are also uncommon in Great Britain.

According to an associate, Mr. Reitzle has always been driven by the desire to create a world-class corporation. "He is doing the right thing, because he is applying industry logic." But he still has a few hurdles to clear. And as experience has shown that with large mergers, it usually takes a few years before anyone can tell whether those extravagant promises have been kept.

 

Axel Höpner is head of the Handelsblatt office in Munich, focusing on the state of Bavaria's companies, including Allianz and Siemens. Thomas Jahn is Handelsblatt's New York bureau chief. To contact the authors: [email protected] and [email protected]