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BusinessWeek: January 10, 2000 |
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International -- Int'l Business: Germany
Germany: Big Bang, Anyone? (int'l edition) Schroder's surprise proposal to cut taxes could redraw the corporate map--and not just in Germany
It's just the kind of Yuletide goody investors have longed for. When news of the proposal trickled out, German financial stocks surged 10% in a burst of pre-Christmas trading that pushed the DAX Index to an all-time high. Investors are hoping that elimination of the tax on such stock sales will unravel all the cross-shareholdings that German companies have built. That in turn could lead to the wholesale restructuring of big swaths of industry, a surge in German equity markets, and a huge pickup in European dealmaking. "It's going to be a big bang," says Goldman, Sachs & Co. economist Thomas Mayer in Frankfurt. Through most of this century, German banks, insurers, and conglomerates have built up huge equity stakes in the country's blue-chip manufacturers, from carmaker Daimler-Benz (now DaimlerChrysler) to drugmaker Schering. Companies like Deutsche Bank often first got these stakes in lieu of cash payments for loans. As Germany prospered after World War II, the stakes increased enormously in value. Now these holdings are worth more than $100 billion, but taxes of 50% on the capital gains have made it impossible to liquidate such positions without giving up a weighty chunk of profits to the government. Besides, the German Establishment was quietly glad that such large stock positions remained in the hands of the banks and insurers, friendly shareholders who rarely demanded harsh layoffs and restructuring to boost profit. But times have changed. For most of the 1990s, Deutsche Bank, insurer Allianz, and other charter members of Germany Inc. have lobbied the government to eliminate or lower the tax that kept them from selling off these holdings and investing the proceeds more profitably in their core businesses. The politicians, leery at first of granting such a windfall to big business, gradually warmed to the idea. Yet while Germany Inc. expected the tax to go eventually, Schroder's stealth approach to the proposal still came as a shock. The deal on capital gains accompanies an ambitious-looking plan to cut top personal income tax rates from 53% now to 45% and corporate taxes from 45% at present to 25%. 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. Those shares may soon be turned into cash that would bankroll banking and insurance acquisitions across the Continent. SPIN-OFF CITY. But that's only the beginning. Expect German conglomerates like Veba, a utility with holdings in chemicals, oil, and transportation, to speed up the sale of units that don't fit with the main corporate mission. They can use the tax-free proceeds to court likely partners in the utility business across Europe. Giant Siemens can also accelerate its spin-off of unwanted units. These sell-offs will greatly increase the number of shares traded on the markets. Foreign companies or big investment funds could acquire those shares and use them to pressure German companies into mergers and restructurings. Thus the combination of no capital-gains tax and lower income taxes could boost growth by 0.5% in 2001, says Deutsche Bank economist Ulrich Beckmann. There are still hurdles to clear, however. The proposal does not state this, but some analysts wonder if companies will have to reinvest the proceeds of these stock sell-offs in operations or acquisitions if they are to enjoy a tax-free deal. In that scenario, companies that just bank the profits would end up paying income tax. If such a stipulation gets added to the proposal, it could prove a deterrent to a wholesale sell-off. Political resistance could also mount. The left wing of Schroder's Social Democratic Party has been quiet on the proposal so far. The Deutsche Gewerkschaft Bund, an umbrella group for labor unions, pronounced the tax proposals "tolerable." Still, Germany's left is reflexively suspicious of anything that looks like a boon for business. Those suspicions could translate into action if it becomes clear the stock sell-offs will lead to job losses, attract unwelcome investors, or set the stage for hostile takeovers. And even successful companies could fall into foreign hands. Allianz will be tempted to sell its 10.1% position in Berlin-based Schering. The buyer won't necessarily be German. Allianz, Deutsche Bank, and others such as reinsurer Munich Re will want to rebalance their portfolios to reflect the economic zone created by the euro. That implies unloading German holdings to foreign buyers. "MOMENTUM." If resistance materializes, 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. "Economically it didn't make sense to make people hold on to things they didn't want," says Volker Halsch, Eichel's chief of staff. One thing in favor of the tax break on industrial holdings is its cost to the treasury: almost zero. The current tax is so high that most companies just hold on to their stakes instead of selling and triggering a big liability. Just weeks ago, though, Schroder was acting like a card-carrying interventionist. He engineered a bailout of deeply indebted builder Philipp Holzmann. He also bad-mouthed Britain-based Vodafone AirTouch's takeover bid for Dusseldorf's Mannesmann. That reminded jittery investors that Schroder was the same person who arranged a state bailout of steelmaker Salzgitter in 1998. The populist moves did boost Schroder's approval rating. "Say what you want about Holzmann, it gave him some political momentum," says Deutsche Bank's Beckmann. For now, Schroder seems willing to use his new political capital to push through reforms. The trouble is, Germany is still years behind countries like the Netherlands in reforming its economy and cannot afford leaders who waver too much. "We've waited for a long time already," complains Jorg Schwenker, a tax expert for the Deutsche Industrie und Handelstag, an industry group. The hope is that Schroder won't keep the markets waiting much longer. Return to top | |
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 TABLE Where the Money Is Germany's big financial outfits have huge holdings in other German companies. ALLIANZ Total value of holdings: $40 billion in major companies, including Deutsche Bank, Munich Re, HypoVereinsbank, Schering, and BASF DEUTSCHE BANK Total value of holdings: $25 billion, in DaimlerChrysler, Allianz, tire maker Continental, Munich Re, forklift maker Linde, and construction company Philipp Holzmann MUNICH RE Total value of holdings: $29 billion. The reinsurer has stakes in Allianz, insurer Ergo, HypoVereinsbank, truckmaker MAN, and Heidelberger Druckmaschinen, a maker of printing presses DRESDNER BANK Total value of holdings: $15 billion, including stakes in Allianz, BMW, chemical and engineering conglomerate Metallgesellschaft, and retailer Karstadt DATA: COMPANIES, BW, AND ANALYST ESTIMATES Return to top |
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