Middelhoff: Why He Gets No Respect

After being bounced from Bertelsmann, he struggles to prove himself at a German retail conglomerate

The intrepid CEO at the KaDaWe department store in Berlin Sean Gallup/Getty Images

by Jack Ewing

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Middelhoff rescued Germany's best-known retailer, Karstadt, from bankruptcy Bastian/Caro Fotos/SIPA

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It's a sunny day in October, 2000, and I'm sitting across from Thomas Middelhoff as his Gulfstream jet banks over the south of France on his return from meetings in Cannes. Life is sweet for Middelhoff, CEO of German media giant Bertelsmann. He enjoys a reputation as one of the first media executives to embrace the commercial potential of the Web, and he hangs out with stars of the bubble era such as AOL (TWX) founder Stephen Case and Vivendi CEO Jean-Marie Messier. An ultraconfident Middelhoff will soon take the revolutionary step of forming a partnership with Napster (NAPS), the pioneering—but outlaw—file-sharing service loathed by the recording industry.

In April of this year, I travel to see Middelhoff again. This time we meet at a low-rise office building bordered by a middle-class residential neighborhood on the outskirts of Essen, in German steelmaking country. He's now CEO of travel operator and retailer Arcandor, a job that seems to offer less prestige and far more risk. Middelhoff's days as a media visionary ended in July, 2002, when Bertelsmann's family shareholders ousted him in a dispute over his plans to take the company public. The conservative Mohn family resented Middelhoff's flamboyance, his embrace of the Internet, and costly failures such as the Napster deal, which provoked record-company lawsuits that Bertelsmann later settled for $380 million.

When Middelhoff took over Arcandor, then named KarstadtQuelle, in 2004, the company was weeks away from bankruptcy. Middelhoff averted the crisis, but the outfit's department-store and catalog operations—both mature businesses—still face big challenges amid wavering European growth. Moreover, Middelhoff, now 55, has gotten little credit for saving Arcandor. Instead, he has become a lightning rod for resentment of what Germans call "Anglo-Saxon capitalism." His tenure at Arcandor coincides with a surge in antibusiness sentiment, fed by politicians who call private equity investors "locusts" and back measures such as punitive taxes on manager pay.

Middelhoff is a prime target. Since his days at Bertelsmann, when he famously described himself as an American with a German passport, Middelhoff has flaunted his affinity for U.S. business practices. After leaving Bertelsmann, he joined private equity firm Investcorp International in London, which only reinforced his image as a member of the locust club. "There is no doubt about the diagnosis," Germany's Manager Magazin said in a biting cover story last September. "Middelhoff has succumbed to the English disease."

So why take another post in the heart of Germany Inc., especially if Germany Inc. doesn't much care for you? It wasn't like Middelhoff needed a job. Investcorp provided stimulating, lucrative work comfortably outside the limelight. In fact, his colleagues there urged him to steer clear of the failing German company. Says one longtime observer of German business who was once close to Middelhoff: "It's the worst job you could take to restore your reputation."

He ignored the pessimists. In part, Middelhoff says, he felt a sense of duty. Somebody needed to save Karstadt, Germany's biggest department-store chain, as iconic as Macy's (M) in the U.S. "I thought, You are obliged to be responsible. You can't walk away,'" he says. Although he denies it, Middelhoff may have also missed being in the middle of the action. Other European business celebrities of his day, such as Vivendi's Messier, have faded from view. That's not Middelhoff's style.

"MISSION IMPOSSIBLE"

There was another reason for taking the job, Middelhoff concedes: After his painful departure from Bertelsmann, Arcandor offered a chance to show he is a manager of substance, not a dot-com has-been. "Deep, deep in my heart, I thought, O.K., I'll show that I can accomplish mission impossible.'" In a country other than Germany, Middelhoff might have found vindication.