Business in Germany | Locusts in lederhosen | Economist.com

Business in Germany | Locusts in lederhosen | Economist.com

Locusts in lederhosen

Oct 18th 2007 | FRANKFURT
From The Economist print edition


German bosses are learning from private equity

TWO years ago Germany was gripped by a fierce debate over whether aggressive private-equity investors—dubbed “locusts” by a politician—were good or bad for the country. An activist fund from London blocked Deutsche Börse's bid for the London Stock Exchange and caused the departure of its chief executive, Werner Seifert, and its chairman. Mr Seifert wrote a vitriolic book, “Invasion of the Locusts”, catching the mood of the time. Since then, however, German bosses have learned from the locusts. They are making their own raids and using private-equity techniques to ginger up German companies.

Next week the European Court of Justice is expected to order the German government to abolish the Volkswagen law of 1960. This limits the voting rights of any single VW shareholder to 20%, protecting Germany's biggest carmaker from being taken over. Lifting this cap will allow Porsche, which already owns 31% of the shares, to win control.

Wendelin Wiedeking, chief executive of Porsche, began building a stake in VW two years ago. He plans to put the two carmakers under the same holding company, called Porsche Automobil Holding. In doing so, he would dilute the power of VW's workforce. Co-determination, the practice of giving workers a big say in the management of German firms, is probably the oddest feature of the country for foreign investors. Only three members of the merged company's 12-strong supervisory board would represent VW workers, compared with ten out of 20 at VW now.

Mr Wiedeking's strategy is the most obviously locust-like among German executives, but there are other examples. Eckhard Cordes, a former executive at DaimlerChrysler, a car firm, is riding roughshod into Metro, a retail group. He has the backing of the company's biggest shareholders—and these are not scary private-equity firms but two wealthy German families. Thomas Middelhoff, chief executive of Arcandor, another retailer, executed a private-equityish restructuring two years ago, loading the firm with debt then flogging assets to pay it off. Now he is in the mood to buy bits of other retail companies. Last year Manfred Wennemer, chief executive of Continental, a car-parts supplier, successfully repelled some potential private-equity buyers but seems to have learned a thing or two from them. This year his firm took on a pile of debt to buy Siemens VDO, an auto-electronics firm, for €11.4 billion ($16.2 billion).

More change is on its way. Nine of the 30 biggest listed German companies which make up the DAX stockmarket index have recently changed their chief executive or will do so soon. The new bosses are expected to shake things up. At Siemens, a giant engineering company, Peter Löscher will streamline the conglomerate's nine divisions into three. At BMW, Norbert Reithofer is expected to start a new brand of car to add to the group's BMWs, Minis and Rolls-Royces. At RWE, a power company, Jürgen Grossmann is likely to make use of the acquisition expertise he gained buying a division of Klöckner, a steelmaker, in 1993.

A new corporate structure, the Societas Europaea (SE), which has been adopted by Porsche Automobil Holding, could help German companies break further away from co-determination. Big firms must now have not only a management board but also a supervisory board of 20 members, half of them workers' representatives. Changing to SE status allows firms to negotiate a cut in workers' representation or even to do away with a supervisory board altogether. Allianz, a big insurer, was the first big company to move to the new structure, followed by Fresenius Medical Care. BASF, a chemicals company, plans to make the change next year.

In two years the names in the DAX could look very different, and not just because the initials AG (for Aktiengesellschaft) are replaced by SE. A big sell-out to foreign locusts is far less likely now, because German companies have learned to do the job themselves.





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