[A-List] Germany: Die Neue Mitte

[Keaney Michael]

Right on cue, the FT applauds developments in Germany...


Taking a write-off
Holzmann's inability to secure another bail-out suggests German politicians and banks are increasingly reluctant to rally round against market forces, say Tony Barber and Tony Major
Financial Times: March 22 2002

One snowy night in November 1999, Gerhard Schröder flew to the Frankfurt headquarters of Philipp Holzmann, Germany's second-largest construction group, and announced he had saved the company from bankruptcy. As crowds of workers chanted his name, the German chancellor, then just over a year in office, told them that he was "putting something under your Christmas tree" - namely, a bail-out, co-ordinated with commercial banks, to the tune of more than E2bn ($2.3bn).

Two years and five months later, Holzmann is filing for bankruptcy - but this time Mr Schröder is keeping himself out of sight. Although political expediency could eventually dictate closer government involvement, no bail-out seems likely this time.

Yet the real significance of Holzmann's latest troubles lies less in the government's attitude than in the response of the banks. In 1999, they went along with Mr Schröder's rescue of a company that had just disclosed potential losses of almost E1.2bn from bad property deals. Two years earlier, the banks - led by Deutsche Bank, Holzmann's main shareholder - had organised a similar rescue for Holzmann. This time, at least for the time being, the banks are saying no.

The Holzmann saga is a clear sign of the mounting pressure on corporate Germany to respond more to market forces than to the self-protective habits of old. Modernisation is coming in fits and starts. There are even examples of backward steps. But the overall progress is undeniable.

Only last month, the government announced voluntary guidelines for publicly listed companies that are intended to answer the criticism, often levelled by foreign investors and shareholders, that German businesses lack transparency. Gerhard Cromme, chairman of the supervisory board of Thyssen-Krupp, the Dusseldorf-based steel company, who helped draft the guidelines, says he expects the vast majority of companies to abide by them.

Among the code's provisions are a recommendation that company executives should publish their salaries, bonuses and options, and a proposal to cut the number of supervisory board posts an executive can hold. There are also provisions to prevent Enron-style conflicts of interest between management and auditors.

To some, the voluntary nature of the guidelines and the absence of sanctions suggest the change is more shadow than substance. Still, companies that do not adopt the rules have to explain their refusal to shareholders at annual meetings. Moreover, as has been pointed out by Herta Daubler-Gmelin, Germany's justice minister, "the capital markets will give their verdict" on companies that ignore them. In other words, failure to increase transparency will result in a lower share price.

ThyssenKrupp took a lead last December by declaring that it would disclose the salaries of its eight directors in its report for the current business year, ending in September. Hubertus Erlen, chairman of Schering, the Berlin-based drugs company, was quick to follow suit, announcing this month that his earnings last year amounted to E2.65m.

True, other companies, including software group SAP, carmaker BMW and Siemens, the high-technology and industrial conglomerate, have expressed doubts. Nevertheless, all three companies already earn high marks from most investors for their corporate governance.

A more valid criticism of the new path being charted by corporate Germany may concern the country's new takeover law. In 1999 German politicians, businessmen and trade unionists combined forces to scupper a European Union directive that had been 12 years in the making.

Under a domestic law that took effect in January, German companies are now allowed to take defensive measures against a takeover solely with the approval of their supervisory boards, or upper tier of management. The blow to shareholders' rights seems obvious. However, the fine detail suggests that this is not simply a case of "Fortress Germany" building new barriers against the market.

Capital increases or share buy-backs still require the approval of shareholders. If a shareholders' meeting gives management the right to buy back shares to reward employees, the management is barred from using this measure for blocking a takeover. This limits the use of "poison pill" defences.

The law has no provisions for multiple voting rights or golden shares. There is one glaring exception, the carmaker Volkswagen, based in the state of Lower Saxony, where Mr Schroder was once prime minister and sat on the company's supervisory board. No shareholder is allowed to accumulate a stake in Volkswagen larger than the 20 per cent owned by Lower Saxony.

Volkswagen demonstrates how corporate modernisation sometimes still goes hand in hand with backstage political influence. But a recent study by Deutsche Bank concludes: "Overall, we see positive effects from the takeover law on the restructuring process in Germany". With merger and acquisition activity being spurred by the abolition of capital gains tax on the sale of corporate cross-shareholdings, the new law provides a reliable legal framework that reduces risks for acquirers and raises transparency for shareholders and employees, Deutsche says.

None of this impresses Guy Wyser-Pratte, the US investor who was outraged last week by events at Babcock Borsig, a struggling engineering group. The company's management took him and other shareholders by surprise when it said it was selling its "crown jewel", a big stake in submarine-maker HDW, to One Equity Partners, a unit of Chicago-based Bank One.

The move caused a collapse in Babcock's share price. In Mr Wyser-Pratte's view, it represented a classic case of prominent German companies - in this case, Preussag, the travel group - using their shareholder stakes and influence behind the scenes to ride roughshod over other shareholders' rights. "Friends, Germany needs clarity and transparency in its capital markets," Mr Wyser-Pratte told Babcock's general meeting last Tuesday. Many ordinary German shareholders cheered him on.

In the case of Kirch, the highly indebted Bavarian-based media group, the jury is still out. As Kirch's creditors, Germany's main banks hope to put together a plan that would keep the company afloat, slimmed down and with a new investor.

Much public comment has centred on the theory that the banks, backed by politicians including Mr Schroder and Edmund Stoiber, his Bavarian centre-right challenger in next September's elections, would go to any lengths to prevent a foreign businessman from getting his hands on Kirch.

This may turn out to be true. But the striking feature of the negotiations so far has been the absence of overt political influence and the desire of the banks to reach a deal that makes commercial sense.

This, too, has been the hallmark of the Holzmann crisis. Deutsche, with its 19.6 per cent stake, has been keen to help the company. But other creditors, notably Commerzbank, Dresdner Bank and HVB Group, have rejected Deutsche's proposals. "Banks have to be tougher. Margins are very tight and many German companies are facing difficulties in this economic downturn," says an executive at one German bank involved in the Holzmann talks. "This is a commercial decision. We will have to take a write-off, but we are doing what every other bank in any other country would do."

In like fashion, Mr Schröder may have to "take a write-off". His flamboyant intervention in 1999 may now damage him in September's election. Large parts of corporate Germany, however, will not wait to draw their own conclusions: that the more business decisions can be taken for solely commercial reasons, the better for them and for Germany's standing in world markets.

Full article at:
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3FY5OZ2ZC&live=true

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney at mbs.fi