International -- European Cover Story
Booming Frankfurt (int'l edition)
London, it's not. But if the Continent gets a New Economy, this may well be the hub
Crows pecking at piles of rubble are about the only sign of life at a former freight yard near downtown Frankfurt. Yet the 90-hectare vacant lot is destined to become the biggest construction site in Europe. With almost $5 billion in financing organized in part by Dresdner Bank, it will sprout luxury office buildings lining a grand boulevard, 4,000 apartments, and Europe's tallest building by 2006.
This isn't just a real estate project. It's an effort to create creature comforts for Europe's emerging class of dealmakers and entrepreneurs. As the euro and the Internet shake up Europe's economies, Frankfurt is making a bid to become the financial capital of the Continent. Its stock exchange is at the forefront of efforts to unify European financial markets within the next two years. As headquarters of the European Central Bank, which sets monetary policy for the euro zone, Frankfurt is the hub for analysts and bankers trying to predict the ECB's next move.
The Frankfurt-based Neuer Markt is becoming Europe's premier exchange for high-growth, high-risk shares. Dozens of new biotech, software, and Internet companies are springing up around the city, founded by entrepreneurs who dream of Silicon Valley-style riches. In the last two years, the Neuer Markt has helped them to go public and to create $59 billion of new wealth. EARLY START. Sound familiar? This is the same convergence of risk capital and innovation that in the U.S. and Britain fires the so-called New Economy. Now it's happening on the Continent, and Frankfurt is leading the way. "You notice it in the hotels, in the restaurants, in the shops, and on the street," says Ernst Welteke, who will take over as president of the German Bundesbank on Sept. 1. "Frankfurt is booming."
Frankfurt has been in the money business at least since 1585, when a currency exchange was founded there. Its commercial banks nurtured Germany's postwar industrial boom, taking major stakes in and lending to the country's biggest companies. But what was long a quiet, German-oriented banking capital has suddenly become a far more lively, outward-looking place. The launch of the Neuer Markt two years ago and the founding of the ECB last year spurred a new dynamism as a younger generation of investment bankers and entrepreneurs flocked to the city.
Now, locals boast that no other European city except London is more unabashedly capitalist or willing to embrace technology and globalization. "This is really an international city at heart," says Michel Friedman, a lawyer and talk-show host who is a leader of Germany's Jewish community. Nearly a third of Frankfurt's 640,000 residents are foreigners, just one sign of the city's openness.
Frankfurt's ambitious attitude is reflected in the skyline. Destroyed in the war, Frankfurt made only a token attempt to restore its prewar architecture. Instead, the city features monuments such as the 50-story, 300-meter Commerzbank tower, the tallest building in Europe, London included. It will be surpassed by the 380-meter Millennium tower, part of the planned redevelopment of the former rail freight yard. Plans for 20 other new skyscrapers defy a three-year building recession in most other German cities.
The signs of a hot economy are multiplying. International banks are luring top merger and acquisition experts to Frankfurt with salaries ranging into the high seven figures. In the city's best neighborhoods, would-be buyers bid up the price of apartments that feature butler service, reaching sums in the millions of dollars. "We have an unbelievable boom in expensive living space," says Jurgen Weigand, president of real estate consultant Blumenauer Immobilien. LOTS OF JOBS. While Germany's retailers complain of stagnant sales, shoppers on Frankfurt's pricey Goethe Strasse snap up Versace blouses and Bogner ski outfits. Sales of silk scarves and other luxury items at Hermes' Goethe Strasse shop have risen for eight years straight. "There's a lot of money in Frankfurt," crows Jurgen Vignold, general manager of Hermes' German unit. And the Frankfurt area's unemployment rate is a relatively low 7.2%, compared with more than 10.1% in Germany as a whole.
Of course, Frankfurt will face plenty of competition as it tries to become the capital of the European Monetary Union. Paris isn't ready to concede Frankfurt's hegemony in financial markets, and it can boast some victories. Once the mighty German bund set the standard in the European bond market. Now, French government bonds are challenging the German to become the benchmark among shorter-term securities.
And Germany has much work to do if Frankfurt is to have a chance of rivaling London as a financial center. Even Frankfurt's top banks prefer to base operations such as equity analysis in the City. The biggest trading floor in Europe is in London. Its proprietor? Frankfurt-based Deutsche Bank. Highly paid finance professionals prefer London because its top tax rate is 40%, compared with 56% in Germany. The market capitalization of publicly traded British companies is $2.6 trillion, more than double that in Germany, whose gross domestic product is 57% bigger than Britain's.
Still, Frankfurt is making inroads. The value of German stocks traded in Frankfurt last year was 40% higher than that of British stocks traded in London, according to German financial sources. The Frankfurt-Zurich Eurex derivatives exchange has become the biggest in the world. Frankfurt was chosen as the site for a new exchange that will trade electricity in Europe's newly deregulated energy market. The European Central Bank's interbank payment system handles more than $1 trillion a day in overnight loans and other transfers between financial institutions.
One factor behind Frankfurt's growth is a fundamental shift in German attitudes toward savings. In the postwar era, citizens put their money in banks and banks lent the money to industry. These days, Germans are no longer content to earn 2% on their savings accounts. They're moving money into mutual funds, which have doubled in value since 1995. The number of people who own stocks has grown 28% since 1997. But it's still just 7.9% of the population of 82 million, according to the German Institute for Share Ownership, a research and lobbying group.
That's a third the level of the U.S., and half the level in Britain, suggesting there's plenty of room for growth. The more daring investors are putting their money into young companies listed on the Neuer Markt. Initial public offerings doubled in Germany last year, to 78, and could almost double again this year. Some new listings have misfired, but stars such as entertainment company EM.TV have created instant millionaires.
The performance of Neuer Markt shares helped end a longtime shortage in venture capital by giving initial investors a better way to cash out. Investment by members of the German Venture Capital Assn., an industry group, rose 38% last year. "People have seen they can make an enormous amount of money in a short time," says Roland Welzbacher, partner of Concord Consulting, a Frankfurt-based investment bank that handles IPOs for smaller companies. Frankfurt stands to benefit as the premier conduit for investment.
That flood of new capital in turn is driving an entrepreneurial boom as talented young people decide it's more exciting to design Web pages and earn stock options than spend decades working their way up some corporate ladder. "That plays as well here as it does anywhere else," says Paul M. Achleitner, managing director of Goldman Sachs & Co.'s Frankfurt office. Optimism about Frankfurt has prompted Goldman to boost its office to 300 people from a handful at the beginning of the decade. That's still a fraction of the 2,500 Goldman employs in London.CAPITAL ATTRACTION. The companies fueled by this flood of new capital are often in Bavaria or the Black Forest, or scattered across the country. But many are locating in and around Frankfurt itself. There is no European Silicon Valley, where high-tech firms are concentrated and analysts and investment bankers can also congregate. So some entrepreneurs are moving to Frankfurt in hopes that proximity to the source of money may give them an edge in gaining financing.
Take Jens Leinert, 33. He studied law at the University of Frankfurt but chose to start his own Internet company. In 1995, working out of his parents' basement, he founded Mails+Media, which helps smaller businesses sell products on the Internet. Located next to a beverage warehouse in the suburb of Eckenheim, the 10-employee company expects sales of $543,000 this year and hopes to be profitable in 2002. His goal: to list on the Neuer Markt in two years. "For us it's paradise," Leinert says of Frankfurt.
Older companies are using this new capital to grow at rates they wouldn't have dreamed of a few years ago. i:FAO was founded in 1977 as a travel agency but has offered online hotel booking since 1988. Now, i:FAO's Internet booking system is used by companies such as Siemens. Since a March IPO, i:FAO's share price has tripled, to $61. With second-quarter sales of $9.6 million, it has a market cap of $327 million.
All this is a far cry from even a decade ago, when Deutsche Bank and other huge financial institutions dispensed most of the credit for the German economy and wielded huge influence. Now, those same banks are frantically recruiting investment bankers and convincing privately held businesses to sell shares rather than take out a loan. The potential could be enormous. The market capitalization of German companies is 39% of GDP, compared with 162% in Britain and 165% in the U.S. For now, Deutsche Bank and other German banks are playing catch-up with U.S. firms such as Goldman, which dominate mergers and acquisitions and big IPOs.
At the vanguard is the Deutsche Borse, which runs the Frankfurt stock exchange and Neuer Markt. When the Neuer Markt was founded in 1997, the Deutsche Borse forced companies seeking a listing to issue quarterly earnings reports, including an English translation. The Borse also insisted that companies use international or U.S. accounting standards, hold regular meetings for analysts, and adhere to voluntary standards protecting shareholders in case of a takeover.
The measures were revolutionary in Germany, where companies were used to hiding profits with opaque bookkeeping and reported earnings only once a year. The rules built investor confidence, attracted foreign fund managers, and helped spark a fourfold rise in the Neuer Markt's NEMAX index since the end of 1997. Now, the Neuer Markt commands 85% of the market capitalization of high-tech European issues.
Even reform-averse German politicians did their part by passing laws to make financial markets more transparent and flexible. For example, they tightened rules prohibiting insider trading. That boosted confidence in German exchanges and helped German banks keep pace with international peers in offering modern investment vehicles.
But it takes more to make a financial capital than just money. One of Frankfurt's handicaps is its reputation for being, well, boring. Lord Mayor Petra Roth raves about Frankfurt's shopping streets reserved for pedestrians, its bustling airport, and its proximity to open fields and forests. But she concedes, "Let's be realistic. We can't compare to Paris or London."
That has economic consequences because it makes it harder for businesses to attract young talent. The rap isn't entirely fair, as nightcluB owner Johnny Klinke insists. A leftist revolutionary turned entrepreneur, Klinke is proud of his unofficial title as Frankfurt's Lord Mayor of the Night. Ten years ago, he created the Tiger Palast, an effort to revive the German cabaret tradition stamped out by the Nazis. The show, which sells out months in advance, features jugglers, magicians, torch singers, and other exotic acts from around the world. Guests have included everyone from Deutsche Bank CEO Rolf E. Breuer to Bette Midler. The club's trademark: tigers that perform a few feet from diners--uncaged, but with trainers.
Still, Most of Frankfurt grows decidedly still after dark. Like most big cities, it has its seamy side, including open drug use in downtown subway stations and a raunchy red-light district near the main railroad station. Critics say it's too obsessed with money. "It's a cold, hideous city," growls Jurgen Gross, a beefy former police detective who writes crime novels set in Frankfurt but lives an hour away in rural Solms. "If you give top analysts a choice, they'll choose London or Paris rather than Frankfurt," says Jean-Francois Theodore, CEO and chairman of the Paris Bourse.
City leaders want to give Frankfurt more zip. "Cities with a future are cities where young people dream of going," observes community leader Friedman. Then again, many dreams are made of money. If Frankfurt keeps its lead as Europe's primary source of financing for entrepreneurs, the boom will go on.By Jack Ewing, with Andrea Zammert in Frankfurt and Inka Resch in ParisReturn to top