When it comes to government subsidies, Wendelin Wiedeking has never been shy about making his views absolutely clear. Many corporate executives, the Porsche CEO was once quoted as saying, "get on their soapboxes to rage against government spending" while at the same time "holding out their hands" for public bailout funds. His insisted that he and his company wanted nothing to do with this sort of "government drug program," and that "luxury and subsidy are incompatible."
But sometimes they are, even at Porsche (PSHG_P.DE). Although the carmaker is not asking for subsidies, Wiedeking recently tested the waters at the Chancellery to see if his company might qualify for a loan under the federal government's economic stimulus program. Meanwhile, Porsche Chief Financial Officer and Deputy Chairman Holger Härter paid a visit to the Frankfurt headquarters of the government-owned KfW development bank, also to explore the prospects of a government loan. The company is seeking roughly €1 billion ($1.35 billion).
Eight months after the financial crisis began to intensify, Germany is experiencing a unique type of pilgrimage. Once self-confident executives are shuffling through the main doors of KfW headquarters near Frankfurt's Palmengarten botanical gardens in ever increasing numbers. They are likewise paying visits to ministries in Berlin or to the office of the auditing firm PricewaterhouseCoopers on Potsdamer Platz square, where applications for government aid are being pre-screened. All of them are interested in assistance from the German Economic Fund, a €115 billion ($155 billion) package passed earlier this spring as part of the country's second economic stimulus program.
From Astonishment to Deep Concern
The German government had expected ailing companies like holding company Arcandor (AROG.DE) and carmaker Opel to be taking advantage of the fund. Now though, even some of the preeminent players in German industry are lining up for assistance, prompting a reaction from Chancellor Angela Merkel, Economics Minister Karl-Theodor zu Guttenberg and the rest of Merkel's cabinet that has shifted from initial astonishment to deep concern.
In addition to Porsche, BMW (BMWG.DE) contacted KfW in April to determine the terms under which it could obtain a loan. Although neither company has yet filed a formal application, their interest in government loans raises questions. Is the German economy in such bad shape that even such prominent companies like Porsche and BMW are no longer confident that they can survive the crisis without government help? Where will it lead, when the government starts assuming corporate risk virtually across the board? And will the €115 billion program be enough?
As it is currently designed, the largest chunk of the program, worth €75 billion, is reserved for loan guarantees. The government has earmarked an additional €25 billion for emergency loans for large companies with €15 billion available to mid-sized firms. Should that amount prove insufficient, the German budget could be facing an additional drain in addition to the substantial loss in revenues that can be expected in the near future.
Even as economists have begun talking about an end to the downturn being on the horizon, the number of corporate executives lining up for government bailout funds provides graphic illustration of the recession's effect on German companies. Eight months of crisis have pushed a number of businesses into the red, while banks are holding back on issuing new loans. Many companies now face the choice of either filing for bankruptcy or seeking government help.
The Vultures of Bankruptcy
At issue are jobs, the economic future of entire regions and a fundamental question of economic policy: How can the government make sure that the bailout funds reach the right recipients, without skewing markets?
The issue is further complicated by German general elections approaching in September. The vote provides politicians with a powerful incentive to help out large, ailing companies—even those that perhaps deserve little more than a quiet burial. Many small companies are already complaining about the obstacles they face in gaining access to the government money pot. But when major corporations come calling, hat in hand, they can rely on the support of politicians, union leaders and trade association officials. "The federal eagle comes to the aid of the big companies," complains Guido Westerwelle, head of the business-friendly Free Democrats (FDP), "while the small ones face the vultures of bankruptcy."
More than 1,000 companies have applied for loans with KfW, and about a dozen new applicants join their ranks every day. Inquiries for large loan guarantees worth more than €300 million ($405 million) are steadily on the rise. And the list of companies expressing interest in government loan guarantees and loans reads like a who's who of German industry.
Arcandor—a holding company which owns leading German department store Karstadt and travel agent Thomas Cook in addition to Berlin's posh department store Kaufhaus des Westens—has applied for an emergency loan for €500 million ($675 million). Precision mechanical engineering firm Heidelberger Druckmaschinen (HDDG.DE) is also looking for government bailout funds, in the form of a €300 million ($405 million) loan and a €400 million ($540 million) loan guarantee. Both petitions will likely be approved on Wednesday, when the fund's steering committee meets to issue its first decisions on individual applications.
Another company on the steering committee's agenda is Hochtief (HOTG.DE), a construction company headquartered in the western city of Essen. Commercial truck maker Iveco has also inquired about a loan.
Which Companies Deserve Aid?
Chip manufacturer Infineon plans to ask for a €1 billion ($1.35 billion) loan guarantee. Carmaker Ford and the Wadan Shipyard in the Baltic Sea port of Rostock have applied for government guarantees, both in the triple-digit millions. Family-owned Schaeffler, an ailing ball-bearing manufacturer headed by family heiress Maria-Elisabeth Schaeffler, needs a loan guarantee for €1 billion ($1.35 billion).
The government is becoming immersed in a conflict over how to decide which companies should be bailed out. The bailout program is designed to limit government support to companies that were still considered healthy as of July 1, 2008, prior to the bankruptcy of financial services firm Lehman Brothers. But government officials still lack a list of criteria for determining whether a company deserves aid.
Two of the criteria to be used as guidelines are sales and market share figures. If a company suffered from declining sales years before the 2008 cutoff date, its troubles can hardly be attributed to the economic crisis. Profit development is another indicator. A company that was already losing money while competitors were still turning a profit was probably ailing to begin with.
For businesses that were unable to pay their bills before the crisis began, negotiating loan extensions with their banks or wage cuts with unions, the prospects of being accepted into the bailout program are slim.
But the criteria do not offer a clear set of guidelines, as the Porsche case could demonstrate. Porsche's economic indicators were excellent prior to the July 2008 cutoff date, which would mean that the sports car manufacturer satisfied the conditions for government assistance. Nevertheless, such assistance would hardly be justified, because the crisis was not responsible for Porsche's financial troubles. Instead, the company simply bit off more than it could chew when it attempted to acquire Volkswagen.
For this reason, government officials are less than enthusiastic about bailing out Porsche CEO Wiedeking. They argue that the company could easily raise cash by selling some of its Volkswagen shares.
The legal framework seems clear. The €115 billion German Economic Fund is intended for companies "that face temporary difficulties as a result of the economic crisis, and through no fault of their own." But what exactly does "temporary" mean? And who can determine, without a doubt, whether a given company is in a tight spot "through no fault of its own?"
The Arcandor holding company is a prime example of how questionable many bailout requests are. The company, which is deeply in debt, must refinance €650 million ($878 million) in loans by mid-June and needs €900 million ($1.2 billion) in additional funds to pay for a restructuring program.
"A department store group like Karstadt, with its 60,000 employees, is no less important than an automaker," says Frank Bsirske, the president of German service workers union Ver.di. Karl-Gerhard Eick, Arcandor's new chief executive, says: "Arcandor isn't looking for handouts, nor are we interested in the government becoming a shareholder of Arcandor or in any other special financial injections."
According to Eick, Arcandor satisfies the strict criteria for government loan guarantees, because it was neither insolvent nor heavily indebted before the July 1, 2008 cutoff date. Eick insists that his company's banks and business partners have not lost a single cent to date, and that Arcandor needs the loan guarantee to "temporarily" bridge the "lack of viability of the financial markets."
But the problems of department store subsidiary Karstadt can hardly be blamed on the financial crisis. Rather, they are the result of past management decisions that accelerated the chain's decline. The department store business model seems to be outdated. The future lies with specialty outfits like clothing manufacturer H&M, consumer electronics chain Saturn, shoe retailer Görtz and large shopping centers that now offer what was once the department store's stock in trade: variety under one roof. Because of these factors, many politicians within Berlin's coalition government take a critical view of Arcandor's eligibility for bailout assistance. Nevertheless, it seems likely that the government will approve the company's request.
The members of the relevant committees are not exactly comfortable with their decisions, fearing that a fact-finding commission could start asking unpleasant questions in a year or two. Chief among those questions could be whether taxpayer money was frittered away.
Is Infineon a Candidate?
Computer chipmaker Infineon (IFXGN.DE) is another company that is in constant crisis. The former subsidiary of electronics giant Siemens needs about €1 billion ($1.35 billion) in fresh capital. And when it comes time to refinance its loans in the summer of 2010, the technology giant will not be able to count on the banks. But why should the government bail out Infineon, a company which, except for two years, has lost money every year since its founding? Its weak numbers were caused by many factors, but certainly not by the global economic crisis.
The IT firm, troubled by bitter leadership struggles, lacked a convincing strategy for years—and apparently still lacks one today. Besides, most of Infineon's plants are located in high-wage Europe, while its competitors produce their products in Asia. In fact, the only reason the government is even considering Infineon as a bailout case is the company's role as an important supplier to the automobile industry. If it failed, German automakers would be completely dependent on foreign suppliers.
The same argument could benefit automotive supplier Schaeffler, which is pressing the government for €4 billion ($5.4 billion) in loan guarantees. Schaeffler came into financial difficulties after its takeover of another automotive supplier, Continental, a company three times its size.
But even if the government did not come to its aid, Schaeffler would hardly be at risk. If it became insolvent, the family that owns the company would likely lose its assets, and Schaeffler's banks would probably be forced to write off portions of their loans. In return, they would take over Schaeffler and seek a new investor. In other words, a government bailout is not imperative.
Porsche is also responsible for its current precarious situation. In October 2008, the Stuttgart-based company held a 42 percent stake in VW (VOWG.DE) shares and had only €3 billion ($4.1 billion) in debt. It was only the purchase of an additional share package that increased the debt to €9 billion ($12.2 billion) and triggered the luxury carmaker's current financial problems.
Half a Million Isn't Half Bad
A Porsche spokesman insists: "We do not need any federal or state loan guarantees." In this regard, the Porsche case differs from that of other companies. Nevertheless, Porsche urgently needs an additional loan of €2.5 billion ($3.4 billion), partly to finance its current operations. And it hopes to receive at least a portion of that loan from the government, if necessary.
Not too long ago, Porsche executives were poking fun at government bailouts. When the company released its financial statements last November, option transactions were responsible for profits actually exceeding turnover. CEO Wiedeking and CFO Härter, who had collected more than €100 million ($135 million) in compensation between the two of them, were in high spirits.
Härter joked that if Porsche ever ran into problems raising money, it could also slip under the bank bailout umbrella provided by the Special Fund for Financial Market Stabilization (Soffin), Germany's €500 billion ($682 billion) bank bailout package passed last autumn. He was aware of one of the consequences: a cut in his own salary. Companies that avail themselves of the fund are expected to reduce the compensation of their senior executives. "Five-hundred thousand isn't half bad," Härter said, slapping Wiedeking on the back.
The two men could be in luck. The Germany Fund established after the Soffin, which they could very well end up using, includes no salary cut requirements for executives.
Translated from the German by Christopher Sultan
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