BUSINESSWEEK ONLINE : FEBRUARY 21, 2000 ISSUE
INTERNATIONAL -- EUROPEAN COVER STORY Commentary: Auf Wiedersehen, Germany Inc. (int'l edition) In the end, Mannesmann went quietly. No big bank used its financial clout to repel Vodafone AirTouch PLC's hostile takeover. No politician or labor boss intervened. Germany Inc., the protective net of cross-shareholdings and government regulations that has long shielded the country from the cruel tide of globalization, is dead. Vodafone Chief Executive Chris Gent merely laid flowers on its grave by taking over Mannesmann. Now, executives and investment bankers are dancing on it. Mannesmann's demise will spur an unprecedented merger-and-acquisition binge, they say. Any German company with a subpar market capitalization or return on equity--and there are dozens of them--is suddenly vulnerable. And it's not just companies from abroad that will do the acquiring. Many domestic companies are preparing to hit the takeover trail, too. If Germany makes the right moves, including speeding up deregulation, it could once again become the driving force of the European economy. ''Vodafone's victory is the catalyst that could transform the economy,'' says Rudiger von Rosen, head of the German Share Institute in Frankfurt. ''It's a watershed event.'' EURO FACTOR. Gent's triumph is all the more significant because Germany has never before witnessed a successful hostile takeover. Until the beginning of last year, it would have been unthinkable for any bidder, let alone a foreign one, to snare Germany's largest company (in terms of stock-market capitalization) against the wishes of its management. Politicians, union leaders, and shareholders would instinctively have rushed to the victim's defense. But the introduction of the single currency in January, 1999, coupled with rampant globalization and widespread privatization, has changed all that. ''We ditched Rhineland capitalism the day we ditched the deutschemark,'' says the chief investment officer of a major German institutional investor. ''German companies now have to compete in Europe's huge, single capital market.'' Even Germany's conservative institutional investors are under pressure to maximize returns rather than maintain longstanding business relationships. And as more Germans buy shares in Deutsche Telekom and the other formerly state-owned companies, they are becoming more tolerant of tough business practices that produce higher returns. Far from backing Mannesmann CEO Klaus Esser to the hilt, as they traditionally would have done, many of the company's German shareholders actually pressed him to strike a deal with Gent. Shareholder value is in. Organized labor also seems to accept that the old system is finished. Mannesmann workers, despite initial protests, acquiesced in their company's acquisition. Since layoffs aren't likely in Mannesmann's fast-growing mobile phone business, accepting a new owner was made easier. Worker representatives on the supervisory board voted in favor of an agreement with Vodafone after assurances that the British company will continue Mannesmann's strategy. ''The shareholders have decided, however we might feel about it,'' says Michael Monks, an employee representative on the supervisory board. ''We can only try to make the best of it.'' That more or less sums up Social Democratic Chancellor Gerhard Schroder's thinking as well. He does not hide his dislike of hostile takeovers and is now studying whether restrictions should be put on them. But he steered well away from the Vodafone-Mannesmann battle once it began in earnest. ''He accepted that the markets would decide the outcome,'' says a spokesman. Despite his socialist rhetoric--heard most loudly last November, when the Chancellor engineered a $2.3 billion package to keep troubled construction outfit Philipp Holzmann alive--Schroder suddenly seems to have emerged as a champion of restructuring. Next January the government plans to sweep away the 50% capital-gains tax that banks and insurers currently pay when they sell holdings. That will encourage them to sell off their massive stakes in German industry--worth well over $100 billion--thus putting dozens of previously acquisition-proof outfits into play. Indeed, big insurers and banks are hinting that they will push restructuring. Drugmaker Schering and retailing giant Karstadt, for example, can no longer count on Allianz, the Munich insurer that owns large stakes in both of them, to protect them from acquisition. Just about the only listed companies that aren't vulnerable now are ones like carmakers Volkswagen and BMW in which families or the government have blocking stakes. OPEN SEASON. The hunt has already started. Among foreign companies, the predators include Credit Suisse Group, the Swiss financial-services conglomerate, and French construction-material company Lafarge. Domestically, Deutsche Bank, the soon-to-merge utilities VEBA and VIAG, and retailer Metro are among the many expected to go on the prowl. That's assuming they don't get snapped up first, of course. The arrival of the euro, coupled with the dizzy growth of the German stock market, makes it easier to finance both domestic and cross-border mergers with stock. Meanwhile, German companies' returns on equity tend to be lower than their U.S. peers', so there are plenty of targets with dissatisfied shareholders--among them some big banks. And there are many midsize companies--such as Commerzbank and phone company Mobilcom--that are ripe for consolidation. To be sure, there will be limits to the pace of restructuring. Although there were a record 200-plus initial public offerings in Frankfurt last year, relatively few German companies are listed. So large swathes of the economy will not be directly affected by takeovers. Many listed German companies don't focus on one business, so they may be less attractive to acquirers than investment bankers hope. Although they rolled over in the Mannesmann case, the unions won't be so accommodating about mergers that involve job losses. What's more, federal and local or municipal governments still control many corporate assets, especially in banking. There are some downsides to the process, too. With change comes instability and resentment. Helmut Kohl served as Chancellor for 16 years, until even change-averse Germans got sick of him. Now his party, the conservative Christian Democrats, is self-destructing amid a campaign-finance scandal. The danger is that the political vacuum could be filled by a populist in the mold of Austria's Jorg Haider. Such a politician might attract the votes of Germans who fear that globalization, exemplified by the takeover of Mannesmann, could threaten their jobs. ''We have 20% in Germany who could vote for Haider,'' says Michel Friedman, a Frankfurt lawyer. Still, there seems little doubt that Germany is heading for a huge corporate shakeup. If Germans can handle the instability and the government can push through some radical reforms, the payoff in prosperity could be huge. By David Fairlamb and Jack Ewing Fairlamb and Ewing cover German business and politics from Frankfurt. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS The Race to Rule Mobile (int'l edition) EUROPEAN COVER IMAGE: Why Europe Loves Mobile TABLE: Three Titans Face Off What's a Cell-Phone User Worth? (int'l edition) The Wizards of Telecom (int'l edition) TABLE: Telecom Gold Commentary: Auf Wiedersehen, Germany Inc. (int'l edition) TABLE: A Deal with Impact INTERACT E-Mail to Business Week Online

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