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The Wallenbergs' Troubled Empire


The Corporation

THE WALLENBERGS' TROUBLED EMPIRE

Each May 29, Peter Wallenberg, the patriarch of Sweden's most famous industrial family, gathers 100 or so relatives to celebrate his birthday and that of his late grandmother, both on the same date. This year as usual, guests reveled at the old Wallenberg family estate, Tacka Udden, a lovely cream-colored, turreted mansion overlooking Stockholm's archipelago.

But something was different: At least one relative was struck by the ease and self-confidence with which two members of the fifth generation of Wallenbergs worked the crowd. "These guys stood out," the relative says, referring to Jacob, who is Peter's son, and Marcus, who is Peter's nephew. "Suddenly, I had the feeling these guys could stand up to Peter and say, 'No.'"

Jacob, 37, and Marcus, 36, are marked men. They are preparing to shoulder the enormous burdens of running an extraordinary business empire--one that's now under considerable strain. Through a network of shareholdings held by family foundations, the Wallenbergs directly control or influence companies worth $33 billion, a staggering 40% of the total Stockholm market. They include some of Sweden's biggest multinationals, from Ericsson in telecommunications and Electrolux in appliances to Astra in pharmaceuticals and Saab-Scania in cars, trucks, and aircraft (table).

OVEREXTENDED. The changing of the guard comes at a crucial time. For decades, the Wallenbergs have persevered--and prospered--with a formula that mixed family members with professional managers, patient investment, and a commitment to international expansion. Now, the Wallenbergs find themselves overextended as profits weaken, debts mount, and competition intensifies.

Half-measures, such as partial spin-offs and financial gimmicks, may buy some time but won't solve the problems. Analysts say the family just doesn't have access to the huge amounts of capital required to keep an Ericsson fully competitive with American Telephone & Telegraph or a Saab-Scania competitive in the global auto and truck business. Even Skandinaviska Enskilda Banken, Sweden's largest bank and a onetime major source of funding for the Wallenbergs, is now plagued by bad loans and is in desperate need of new capital.

By all accounts, the wily, white-haired Peter, now 68, still calls the key shots, but he is turning over more responsibility to Jacob and Marcus. The main question is whether they are ready: Although both have banking and industrial experience, neither has operated a big business. Now, in a much tougher climate, they will have to referee claims on capital and the family holdings. One man who knows them both wonders "if they can take the pressure."

To save their empire, the Wallenbergs will have to reduce it. By concentrating their firepower, they will certainly be able to maintain their grip on a few key companies. But others will probably have to be sold, merged, or linked with new partners around the world. And the consolidation already appears under way. In June, the Wallenbergs raised $376 million dollars by selling restricted shares in Sweden's Asea to institutions. And in early July, the Wallenbergs sold their 7.5% stake in Christies International PLC for $35 million.

Both young men have recently taken on tough assignments. Jacob has a key role in efforts to revive S-E Banken, which suffered a $692 million operating loss last year, largely because of bad real estate loans. Nonperforming loans rose to 7.9% of the total. The Wallenbergs hold a 7.7% stake in the bank, and Peter is its senior vice-chairman.

Marcus has been working his way up through different branches of the empire. After a three-year stint marketing newsprint for the D sseldorf-based Stora Feldm hle, he is moving to executive vice-president at Investor, the holding company at the center of the Wallenberg empire. In addition, the cousins are now part of an influential inner core of six executives who mull big issues. Dubbed the "presidium," it was set up two years ago after Peter had heart surgery.

The stress is showing at Investor. In good times, Investor receives dividends from its holdings and plows capital into affiliated companies to finance their growth. But Investor reported a first-quarter 1993 loss of $70 million, continuing a downward trend that began last year. Its dividend income is shrinking, while interest costs on its $2.3 billion debt are heavy. Such key holdings as forest-products giant Stora, ball-bearing maker SKF, and Electrolux are being battered by recession in Europe and soft economies elsewhere.

More worrisome is Saab-Scania, now 100% owned by Investor. In 1990 and 1991, the Wallenbergs paid a hefty $2.3 billion to buy out minority interests in the company. The idea was for Investor to use the company's then rich cash flow to bolster its other holdings. The downturn in truck and car sales dashed that plan. Executives expect Saab-Scania to have negative cash flow this year, a result of the weak sales and interest on its $2.4 billion debt.

NEW RULES. The Wallenbergs admit that crunch time at Investor bodes ill for the future. "This is a period when flexibility and preparedness are power- fully important," says Peter. "If you are loaded with debt, clearly you are not able to do many of the things you want to do." Peter himself is partly to blame. He ran up debt in the 1980s by expanding while also fighting off takeover threats from Volvo Chairman Pehr G. Gyllenhammar and others. In the process, Peter violated a key family dictum: Stay liquid.

Aside from the financial squeeze, the rules the Wallenbergs play by are getting a lot tougher. Until recently, the family benefited from a protective Swedish system rigged in its favor. But last January, strict limits on foreign takeovers of Swedish companies were eliminated. Now, as part of Sweden's preparations to join the European Community, the government may change the arrangement that allows for two classes of shares, one holding 10 times the voting power of the other. Capitalizing on the system, the family gained leverage far beyond its stock holdings. For example, the Wallenbergs and an affiliated company, Incentive, control 93.2% of Electrolux with 6.3% of the shares.

The changes would require bigger holdings to control a company. "We would like to have increased holdings in a smaller number of operations to remain the dominant shareholders," says Claes Dahlback, 46, who was tapped 15 years ago to head Investor. There also will likely be more joint ventures or alliances, perhaps similar to the successful 1988 partnership of Asea with Switzerland's Brown Boveri Corp. Incentive, an industrial conglomerate 36% controlled by the Wallenbergs, has a 32.9% stake in Asea, which in turn owns half of ABB, the merged operations. It's an engineering powerhouse with annual sales of $30 billion.

The Wallenbergs may even seek outside help for S-E Banken. As a special adviser to the bank, Jacob is the point man negotiating a cash infusion from shareholders and perhaps the government. One possibility: Bring in a friendly backer, such as J.P. Morgan & Co., and try to carve off one part of the bank, such as the corporate-finance side.

The prospect of entire holdings being sold off has galvanized managers to improve performance--and nurture ties with the two cousins. Stora Chairman Bo Berggren is only half joking when he says that he brought in Marcus Wallenberg to run Feldm hle's newsprint sales as a kind of insurance policy. "I thought it wouldn't be bad to have one of the obvious future leaders of the company on board with us," he says. "Maybe he won't forget us."

The cousins have risen in the traditional Wallenberg way: boarding school, college in the U.S., military training, and years of experience abroad. Each is sensitive to charges of nepotism. "Throughout our lives," says Marcus, "we have been told that to have a place here, we have to perform."

Jacob got an MBA from the University of Pennsylvania's Wharton School before heading off for banking stints in the U.S., Britain, and various Asian posts with Morgan Stanley, Citicorp, and S-E Banken. He sits on the board of Stora, Atlas Copco, and Ericsson and has already helped pull off major financings. In 1990, it was the restructuring of $800 million worth of Investor's short-term debt; a year later, raising the money for the Saab buyout.

SAAB STORY. Marcus, a graduate of Georgetown University's School of Foreign Service, is away this summer at a Stanford University graduate business program. When he returns, he will settle in at Investor. He will oversee business development and financing aircraft sales as a director at Saab-Scania. Quiet and reflective, he also followed a banking path around the world with Citicorp, S.G. Warburg, and S-E Banken.

Jacob and Marcus Wallenberg will face hard choices. So far, executives at Investor are taking the easy steps. They are selling off small pieces of the company's investment portfolio. That raised $727 million last year. But such moves won't solve the big problems. Questions abound over what's to become of major holdings. Cashing out of Astra, where Investor shares are valued at $1 billion, would provide an enormous cash boost, but would deprive Investor of a future growth company. Advisers to the Wallenbergs suggest that Ericsson could ultimately be combined with another company, perhaps Northern Telecom Ltd.

The key to the extent of asset disposals may be Saab-Scania. "If things turn sour," warns Dahlback, "we'll dispose of more." For now, things look bleak at Saab. The vital truck unit is witnessing a free-fall in European industry sales, down one-third this year. Saab-Scania CEO Lars V. Kylberg doesn't expect an upturn before late 1994 at the earliest.

The car division, of which General Motors Corp. owns 50%, has piled up losses of $1 billion since the joint venture was struck in 1989. Earlier this year, each side had to pump $182 million into the venture. Still, thanks to productivity gains, the unit can break even now at 75,000 in sales, vs. 100,000 two years ago. What's more, tying in with GM enabled Saab to cut nearly one-third of the cost of developing a new model.

The division's future may hinge on sales of a new version of the 900, which was launched worldwide on July 21. "If the new model doesn't strike well, we're in trouble," admits Kylberg. "We may have to look at GM again." That would mean reducing the Wallenberg stake in return for more GM aid.

Meanwhile, plans are afoot to off-load more of the risk in Saab-Scania's other two units--military and civilian aircraft. As with other producers, the punishing mix of military cuts, uncertain airliner orders, and huge product-launch costs make going it solo virtually impossible. Talks are under way for possible combinations of the fighter division with British Aerospace, America's Northrop, and France's Dassault. On the civil side, where Saab is a leader in commuter turboprops, there have been talks with British Aerospace, Germany's Deutsche Aerospace, and the French-Italian ATR.

The Wallenbergs have been written off many times since they first set up shop in 1856, but they have always managed to adapt. Now the cousins' chief task will be to change again by deciding which companies to bet on and which ones to let go. If they make the right choices, there could still be an empire to pass on to the sixth generation.Richard A. Melcher, with Ariane Sains, in Stockholm


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