The Meltdown At Metallgesellschaft...

The bulletproof Mercedes sedan pulled up onto the sidewalk within inches of the front door of a Frankfurt restaurant. Heinz Schimmelbusch, chief executive of Metallgesellschaft, jumped out and strode to his favorite table. Over prawns by candlelight, he spoke ardently of his vision to create a technology powerhouse out of a loss-making metals company. "We have an unprecedented environmental lead," he said. "We have the biggest technology bank in the world."

In those heady days in 1990, Schimmelbusch capitivated the imagination of Germany. Volatile and charismatic, he had just recently been named CEO of the Frankfurt-based Metallgesellschaft. A confidant of Chancellor Helmut Kohl, he was widely believed to be building a model for German corporations as he changed the troubled metals-mining and trading company into an international conglomerate. "We are the most foolproof company in all of Germany," he said then.

Schimmelbusch's bold gamble has now failed (table). In December, he was fired as Metallgesellschaft suffered losses for the year of $1.1 billion--including $470 million from oil-futures trading--on sales of $16 billion. With creditors haggling over a $1.9 billion bailout on Jan. 12, Germany's 14th largest industrial group teetered on the brink of becoming that country's largest post-World War II bankruptcy.

WEAKNESS. Metallgesellschaft's collapse highlights a devastating weakness in German corporate governance. Like many German blue chips, the company boasted a supervisory board made up of the pinnacle of the country's banking and industrial Establishment. Shareholder-rights groups have long said that the clubby ties among corporate leaders result in lax oversight. Now, they have some dramatic proof. "The supervisory board and the banks failed to oversee management," explains Ekkehard Wenger, a professor at the University of W urzberg.

Before his fall, Austrian-born Schimmelbusch, 49, was considered a pioneer in Germany's drive to embrace new technologies and rebuild its competitiveness. As CEO, he steered billions of dollars into "green technologies." To accelerate the move away from dependence on metals and mining, he embarked on a relentless acquisition drive. He spent more than $2 billion on companies he planned to infuse with new materials technology, including Sweden's Dynamit Nobel.

Schimmelbusch, who declined to speak to BUSINESS WEEK for this article, aimed to speed the creation of a global conglomerate by melding Anglo-American financial engineering with German industrial knowhow. He floated hot spin-offs on the Frankfurt stock market and bought and sold assets feverishly. His made-over Metallgesellschaft included 258 companies scattered from Latin America to Kazakhstan and businesses from auto parts to radiators. And though critics questioned the links among his far-flung businesses, Schimmelbusch saw them converging in a high-tech future. "We are a miniature version of Mitsubishi," he expounded in 1990. "With environmental services and materials technology, it will be very difficult to make this company unstable."But Schimmelbusch spoke too soon. As early as 1990, the company's traditional metals business was being slammed by a flood of cheap imports from former East bloc countries, dragging prices down as much as 60%. The prices for the metals cleaned and resold by Metallgesellschaft also dropped precipitously. So while the investments in environmental technology had produced cutting-edge processes to clean and recycle factory waste such as aluminum sludge, it was too early for Metallgesellschaft to reap big gains on theinvestment.

VISIONS APLENTY. Meanwhile an additional $600 million bet on high-tech environmental gear to clean up copper and zinc mines began looking like a mistake, as governments backed away from costly regulations. That left Metallgesellschaft as the high-cost supplier in a business that still made up about 40% of its revenues. But instead of retrenching, Schimmelbusch used up liquidity with purchases of Dynamit Nobel and Buderus for $706 million. "If he hadn't done the deal, he could have held out longer on the oils-futures markets," says Thomas Michaelson, investment fund manager for Munich-based Parzival.

The beginning of the end came in late 1992, when Schimmelbusch used his skills at financial engineering to book a profit of $147 million for the year. Critics charged that the profits were generated largely through sales of real estate and other assets. Analysts demanded to know how much of the gain was from operating earnings rather than one-time gains. Schimmelbusch withheld details, claiming all the gains should be considered operating earnings.

To generate quick revenues, Schimmelbusch turned to oil futures and his U.S. financial subsidiary, MG Corp. That ultimately brought down his house of cards. "Schimmelbusch needed money and a good economy," says Andreas Heine, analyst at Munich-based Bayerische Hypo & Wechselbank, a creditor of Metallgesellschaft. "The company never had money. He tried every method he could to generate it but failed."

Inheriting the mess is Kajo Neukirchen, the CEO appointed by Deutsche Bank. He is likely to slash nearly one third of the company's 58,000 workers and sell assets unrelated to its core businesses. That will bring the company back to a lackluster metals-mining, trading, and engineering company.

Corporate Germany may read the wrong message from the Metallgesellschaft collapse by seeking to avoid risk. Analysts would like to see greater transparency, and they also think heads should roll at the company's supervisory board. But they won't. Germany Inc. would sooner rally together and pick up the pieces of Metallgesellschaft than look at its own shortcomings.

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