International -- European Cover Story
Busting Up Sweden Inc. (int'l edition)
Global winds of change are forcing companies that are national icons to merge, sell key assets, or move abroad
One recent Tuesday, Scandinavian Airlines System's early evening flight from London to Stockholm was crammed with Swedish stock analysts heading home. They had traveled to Britain to hear Sven-Christer Nilsson, chief executive of telecom giant Ericsson, discuss the group's 1998 results--and launch a new mobile phone. "Last year, they held this meeting in Stockholm, but now we must go to London," grumbled Jan Ihrfelt, an analyst who follows Ericsson for Stockholm's Swedbank. Ericsson recently moved its European headquarters to London to escape Sweden's high personal-income taxes, and to be closer to investors and customers.
Ericsson's controversial shift is only a small tremor in the series of earthquakes shaking corporate Sweden. Indeed, Sweden Inc. is under siege. The pillars of the country's economy--its system of interlocking, closely held companies and its generous welfare state--are being rocked by the forces of global competition and rising investor demands for better returns. Companies that have dominated Swedish business for decades are merging, selling off key assets, and, like Ericsson, moving operations out of their homeland.
Mergers worth more than $52 billion swept Sweden last year, according to J.P. Morgan & Co.--$6 billion more than in Germany, where the economy is 10 times as large. The country's leading industrial family, the Wallenbergs, led the restructuring wave by merging key assets in their empire--their Stora forest-products company and Astra, Sweden's largest pharmaceutical company--with Finnish and British competitors (table). The most surprising recent deal came in late January, when Volvo announced it would sell its car business to Ford Motor Co. for $6.5 billion. Only six years ago, shareholder and popular resistance scotched a proposed Volvo merger with Renault.
Sweden's shakeup may well accelerate after a new CEO--42-year-old Marcus Wallenberg--is, as expected, appointed to head Investor, the Wallenberg holding company, on Feb. 11. Investor is under pressure, and many observers see its influence declining. Some even believe the Wallenbergs may eventually dissolve Investor by distributing its stakes in companies from Ericsson to Electrolux to shareholders. Although Investor denies having any such plans, a breakup could unleash a wave of deals.
All this could usher in a traumatic era for Sweden, once one of Europe's most prosperous countries. And it puts a burden on Social Democratic Prime Minister Goran Persson to undertake tax and welfare reforms. Until recently, Sweden's left-leaning government kept business happy by buying their products and maintaining low corporate-tax rates of 28%.
But now, with global competition for investors and management talent soaring, Sweden has become a less attractive place to live and work. Personal tax rates of close to 60% make it nearly impossible for Swedish companies to recruit managers from overseas, executives say. And homegrown talent is leaving. The Federation of Swedish Industries says 800 engineers, roughly a quarter of Sweden's engineering graduates, emigrated in 1997, and it expects the number to rise quickly.
In Stockholm, with its stately buildings, Swedish citizens are debating the surprising new developments. If the corporate exodus continues, many worry, Sweden could become an economic backwater. That would mark a big change for a country that has long enjoyed economic importance belying its modest size and population of only 9 million.
Foreign ownership of local operations could lead to layoffs, boosting unemployment well above its current 10%. Although the economy is expected to grow 2.5% this year, Swedes worry about their standard of living, which has slid to No. 17 in the Organization for Economic Cooperation & Development league, down from No. 4 in 1970. Financiers fear that Stockholm's thriving stock exchange may lose its most heavily traded listings and gradually become irrelevant. Businesspeople are also concerned that Sweden's delay in joining the European Monetary Union--not expected for three more years--isolates the country economically.
Not everyone is pessimistic, of course. Some executives argue that restructuring will make Swedish industry more competitive and will improve its management. "It would be good to bring in other elites," says Gustav Douglas, an entrepreneur who controls companies worth $8 billion. "We have good managers, but we are an inbred society."
More important, the shakeup in Sweden Inc. could clear the way for smaller companies. Despite Sweden's taxes and red tape, new venture-capital funds are springing up. And Scandinavia's love of the Internet and mobile phones has sparked the creation of startups such as Parallel Systems. It is growing 125% a year designing software that helps customers such as the Swedish Post Office link up with the Internet. Sales were close to $7 million last year, and the company employs 65 people. "You will see dramatic change [in Sweden]," predicts Carl Palmstierna, who heads a buyout fund called Industrial Development & Investment.TINKERING? Palmstierna foresees a bright future led by dynamic high-tech players. But it may take years for those outfits to take off, and they will face an uphill battle if major customers or partners such as technology-driven Ericsson or Astra move more operations out of the country. Meanwhile, few analysts expect that the Persson government, which still trumpets egalitarianism, will do more than tinker with the tax system to improve the business climate. That's why Sweden is likely to see an even more dramatic overhaul of its traditional industrial sector over the next few years.
Nowhere is this truer than at Investor, the Wallenberg holding company. The Wallenberg empire is still the heart of corporate Sweden, controlling or holding big stakes in ABB Asea Brown Boveri, Ericsson, Electrolux, heavy-machinery maker Atlas Copco, kidney-care specialist Gambro, and other heavyweights that total 40% of the Stockholm Stock Exchange's $265 billion market capitalization. But the family's power has waned since the days when patriarch Peter Wallenberg, now 72, and his predecessors were Sweden Inc.'s undisputed chiefs.
Now, the Wallenbergs are straining to remain relevant in a fast-changing world. The decision to make young Marcus Wallenberg--Peter's nephew--the CEO of Investor is the latest in a series of moves aimed at doing just that. Marcus will replace longtime Investor CEO Claes Dahlback, returning a family member to one of the two top positions at the company for the first time since April, 1997. That's when Peter retired as Investor chairman, and corporate wunderkind Percy Barnevik, known for shaking up companies such as ABB, replaced him.
Most Wallenberg watchers believe the new CEO will have little choice but to accelerate the remake of Investor and its holdings. If Investor does not perform, its increasingly independent-minded shareholders will question the Wallenbergs' control. "They will have shareholders chasing them, and it won't be very pleasant," says a prominent Swedish fund manager. Moreover, the Wallenbergs could be vulnerable because they have little capital of their own. Their ownership vehicles are family foundations, which help them avoid inheritance taxes. The Wallenbergs influence their industrial companies, and even Investor itself, through classes of shares that carry greater voting rights than ordinary shares.
This ownership structure looks increasingly outmoded in today's more transparent business environment. Investor's negative return last year--it lost 1.1% of its overall value, while the Swedish market in general gained 13%--also hurt its image. The Wallenbergs' "grip is loosening quickly," remarks one Stockholm fund manager. "If they lose respect, it will be impossible to keep [Investor] together."SELL-OFF. Some shareholders would applaud a Wallenberg decision to dissolve Investor, bankers say. The reason: Investor shares routinely trade at a 20% to 30% discount to the value of Investor's assets. That means shareholders stand to gain a quick profit from a decision to distribute Investor's assets proportionately to its shareholders. Suddenly, big stakes in Sweden's blue-chip companies could be freed up for sale.
For now, though, most analysts expect Marcus and his cousin Jacob Wallenberg, chairman of SEB bank, to resist such a breakup. Instead, they are likely to keep diversifying outside of Sweden, merging Investor's holdings into other global companies and pursuing venture-capital deals. In this way, they hope to remain prominent figures in international and Swedish business circles. But many analysts doubt their children will end up playing a similar role.
Hostile raids on Wallenberg companies, however, could be in the cards. Volvo CEO Leif Johansson capitalized on shareholder dissatisfaction with Investor when he launched a surprise attack on Wallenberg-controlled truckmaker Scania in January--just days before his sale of the Volvo car unit. Johansson rounded up 13% of the outstanding stock from Swedish fund managers, who were disgruntled with the lackluster performance of Scania's stock since its initial public offering in 1996. While Johansson may not land Scania, the company is in play. The burden is on Investor to find a solution that keeps the stock price at its current robust level.CATCHING FLAK. The Scania-Volvo dustup has stirred criticism of Investor Chairman Percy Barnevik, long a darling of the Swedish press. Barnevik is being chided for failing to achieve a high enough premium in Astra's proposed merger with British drugmaker Zeneca Group PLC. The Swedish Shareholders' Assn., which represents small stock owners and led the fight to block Volvo's merger with Renault, is calling on its members to vote against the Astra-Zeneca deal.
Barnevik made his reputation at ABB, the engineering giant he created through a landmark merger in 1987. But even his legendary stint as CEO--from 1987 to 1996--now draws flak. Recently, the stock of ABB, where he remains chairman, has languished, mainly because of big Asian investments. Martin Ebner, the aggressive Swiss investment manager, has accumulated a large shareholding in ABB and has been offered a seat on the board. He may press for the sale of some units. News of Ebner's bigger role and a simplification of ABB's stock structure boosted the price in early February. Nevertheless, Barnevik has lost some of his luster. "Percy is a great visionary, but I don't think he is a good manager," says a prominent Swedish executive.
As he takes over Investor, Marcus Wallenberg is expected to increase the company's support of midsize and entrepreneurial businesses. Investor has started a leveraged-buyout fund called Scandinavian Equity Partners to invest in midsize Nordic companies. And it is strengthening its New York office, which is looking for investments in information and medical technology. But these new businesses aren't big enough to help Investor's bottom line. And Wallenberg faces critical decisions about Scania and other holdings, including the unprofitable roller-bearings giant SKF.
He may look for Swedish solutions for these problems. But, as the Volvo example shows, takeovers by stronger foreign players are probably the way ahead for most Swedish industrial companies. As that happens, the question will be whether small and midsize companies can make up for lost jobs and wealth. "I would be more comfortable if I saw new sources of employment being created," says former Prime Minister Carl Bildt, who leads the conservative opposition.
In some senses, the ball is in the current Prime Minister's court. Persson has assembled a panel of industrialists and labor chiefs to figure out ways to encourage Swedish business. He is contemplating repealing the 5% surcharge on high-income earners and the 1.5% wealth tax. He has also signaled that he may take Sweden into the EMU around 2002. But he would have to take much more radical steps to improve the business climate dramatically.
It also may be true that market forces are moving too fast for Persson's government to do much to influence the shakeup of Swedish industry. For better or worse, Swedes will probably see many more companies follow the examples of Volvo, Astra, and Ericsson--and shift more of their wealth, jobs, and ideas outside their country.By Stanley Reed, with Ariane Sains, in StockholmReturn to top