BusinessWeek: January 10, 2000

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 News: Analysis & Commentary: Europe

Gerhard Schroder, Hero of Germany Inc.?
His tax proposals could redraw the corporate map

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Gerhard Schroder, Hero of Germany Inc.?

TABLE: Where the Money Is


The restructuring wave that had been building in Germany could turn into a tidal wave by this time next year. That's when a proposal by Chancellor Gerhard Schroder--if approved by parliament--would eliminate Germany's 50% capital-gains tax, making it possible for banks, insurance companies, and conglomerates that hold vast chunks of the nation's largest companies to sell out. When news of the proposal trickled out, German financial stocks surged 10% before Christmas, pushing the DAX Index to an all-time high. "It's going to be a big bang," says Goldman, Sachs & Co. economist Thomas Mayer in Frankfurt.

Because the punitive capital-gains tax kept them from selling, the financial institutions and conglomerates have built up huge equity stakes in the country's blue-chip manufacturers, from carmaker Daimler-Benz (now DaimlerChrysler) to drugmaker Schering. Earlier this century, companies such as Deutsche Bank often took equity in lieu of cash payments for loans. As Germany prospered after World War II, the stakes increased enormously.

Until recently, the investors and the companies were happy with the arrangement--nobody pushed for big restructurings or layoffs. But in the 1990s, Deutsche Bank, insurer Allianz, and other members of Germany Inc. have lobbied the government to eliminate or lower the capital-gains tax so they could cash out and reinvest in core businesses.

Although the reform was long expected, Schroder surprised many by slipping his proposal into a yearend tax plan. The capital-gains cut accompanies an ambitious-looking plan to cut top personal income-tax rates from 53% now to 45% eventually and corporate taxes from 45% at present to 25%. Deutsche Bank economist Ulrich Beckmann figures the combination of no capital-gains tax and lower income taxes could boost growth by 0.5% in 2001.

STOCK HOARDS. Now investors are feverishly figuring out what the big companies will do with their stock holdings. Deutsche Bank is sitting on shares worth $25 billion, including 12% of DaimlerChrysler. Allianz' German stocks are worth $40 billion, analysts say. Dresdner Bank, Commerzbank, and Munich Re have similar stockpiles of shares.

How will the selling unfold? Veba, a utility with holdings in chemicals, oil, and transportation, is expected to accelerate sales of units that don't fit with the main corporate mission. That will likely mean investing in utility companies around the continent. Giant Siemens can also speed up its spin-off of unwanted units.

There are still hurdles to clear. The left wing of Schroder's Social Democratic Party has been quiet on the proposal so far. While the Deutsche Gewerkschaft Bund, a union group, pronounced the proposals "tolerable," the German left usually opposes anything that looks too pro-business.

Those suspicions could translate into action if it becomes clear the stock sell-offs will bring in new investors who will force restructurings or mergers that cost jobs. And even successful companies could fall into foreign hands. If Allianz sells its 10.1% position in Schering, the buyer won't necessarily be German. And German banks and insurers are likely to use their new cash to balance their portfolios with investments outside Germany. Their former holdings, meanwhile, are likely to go to foreign buyers.

If political resistance stiffens, Schroder's reaction will be pivotal. The Chancellor has warmed to the tax proposals of his Finance Minister, Hans Eichel, because he wants to boost growth and cut unemployment before the next national elections in 2002. But with the election in the balance, reform could yet be postponed.

By Jack Ewing in Frankfurt

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TABLE

Where the Money Is

ALLIANZ

Total value of holdings: $40 billion in major companies, including Deutsche Bank, Schering, and BASF

DEUTSCHE BANK

Total value of holdings: $25 billion, in DaimlerChrysler, Allianz, tire maker Continental, Munich Re, and Philipp Holzmann

MUNICH RE

Total value of holdings: $29 billion. The reinsurer has stakes in Allianz, insurer Ergo, HypoVereinsbank, and truckmaker MAN

DRESDNER BANK

Total value of holdings: $15 billion, in Allianz, BMW, Metallgesellschaft,

and retailer Karstadt

DATA: COMPANIES, BUSINESS WEEK, AND ANALYST ESTIMATES

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