Revolution At Daimler
It was a very German coup--quiet, slow-motion, thorough. In a bare-bones press handout in June, 1994, Daimler Benz announced that Edzard Reuter would be replaced as chief executive by Jurgen E. Schrempp, head of Daimler Benz Aerospace (DASA) after the annual meeting the following May.
For Hilmar Kopper, chief executive of Deutsche Bank and chairman of Daimler's board of supervisors, Reuter's removal was the payoff for weeks of intense meetings with Daimler directors and advisers. Slowly, Germany Inc. woke up to what had happened: A powerful CEO had been overthrown by the company's bank and major shareholder.
NEW SCENARIO. Fast forward to January, 1996. Schrempp is now doing things Reuter would never contemplate. In mid-January, Schrempp folded the remnants of the money-losing AEG electronics subsidiary into other divisions. The cost: a write-off of $1.1 billion. Then came the real shocker. On Jan. 22, Schrempp cut off funding for Fokker Aircraft, the floundering Dutch airplane maker 51%-owned by Daimler. The probable fallout: Fokker's bankruptcy and a write-off for Daimler so huge it will report a 1995 loss of $4.2 billion.
What is happening at Daimler Benz is familiar enough in Corporate America these days. Major shareholder gets mad; shareholder boots out old CEO; new CEO gets tough. But in Germany, this scenario has until recently been a rarity. Boardroom politics are too consensual, and shareholders unaccustomed to rocking the boat. "There isn't even a phrase in German for `shareholder activism' or `corporate governance,"' says Hans Decker, former vice-chairman at Siemens who now teaches at Columbia University.
Yet Kopper is signaling that his bank, which holds 24% of Daimler, must be more active. "Deutsche Bank had to take a role in unseating Reuter," says Arie Y. Lewin, a professor at Duke University's J.B. Fuqua School of Business. "It's not the [German] stock market that's going to do it." If Kopper and Schrempp pursue their program to the end, the idea of shareholder-inspired restructuring could become part of the corporate mentality in Germany. Kopper even hints he might sell off a chunk of Deutsche Bank's $6 billion stake in Daimler--provided the price rises enough and punitive capital-gains taxes for large holding companies are legislated out of existence. Such a move would show other German investors that they too can profit by getting tough.
It's certain that both men want profound change. The focus for Daimler is now on cars, trucks, and those areas of aerospace that actually make money. "It's profitability first and strategic fit second," says Schrempp. Meanwhile, Kopper has been anything but idle at Deutsche Bank. Deutsche, a lumbering giant, is facing global challenges. Its return on capital of 8% sadly lags the 20% of U.S. rival Citicorp. So he's pruning thousands of jobs in Germany and building a huge investment-banking business. Kopper acknowledges that Deutsche Bank has an image of being a financial battleship that is "extremely solid." Trouble is, he adds: "The age of battleships is over."
Another age may be ending in Germany--the era of patient capital where banks hold outright stakes in key companies for years. Deutsche, for example, has stock worth an estimated $15 billion in more than a dozen companies ranging from Daimler to insurer Allianz. Deutsche itself has been a Daimler partner since the 1920s, when it gained stock in a debt-for-equity swap. Deutsche cultivated a close relationship with its client, which used the bank's loans and capital-raising expertise to expand rapidly.
As executives, Schrempp and Kopper grew up inside this profoundly stable corporate world. Unlike most bank bosses these days, the 61-year-old Kopper worked his way up from banking apprentice. Kopper reached the bank's management board at 42 and assumed the top job after Alfred Herrhausen was assassinated by terrorists in 1989. Schrempp, 51, started at the bottom too, as an automotive apprentice at Daimler's luxury auto maker Mercedes-Benz, and had stints in the U.S. and South Africa before reaching the top.
While they were both climbing the corporate ladder, Kopper and Schrempp saw their world change dramatically. German manufacturers, forced to compete with global rivals and counter the effects of a rising Deutschemark, discovered they were often overstaffed and inefficient. German banks, facing international rivals too, needed every bit of capital for acquisitions and write-offs. The stock banks held in German companies began to look like poor investments.
It still took Deutsche a long time to wake up to the failure of Reuter's strategy. Even after he succeeded Herrhausen, Kopper did not immediately block any of Reuter's plans. "Kopper let Reuter do whatever he wanted," complains Ekkehard Wenger, finance professor at Wurzburg University.
Some of Daimler's top managers were privately having doubts. When he needed backing for substantial layoffs at DASA in 1993, Schrempp, insiders say, opened back channels to both Kopper and Deputy Chairman Karl Feuerstein, the ranking official of labor union IG Metall at Daimler. When Kopper decided Reuter had to go, there was no doubt in his mind who would succeed him.
Yet critics point out that it was Schrempp who thought up the idea of buying 51% of Fokker in 1993. Complains one Frankfurt banker: "The manager responsible for dreadful mistakes is now in charge of the whole company." Schrempp now admits his blunder. Still, says Kopper, "Schrempp is the right man for the job." The market has certainly responded warmly to Schrempp's tough act. Since the announcement on Fokker, Daimler's German-traded shares have hit a 16-month high of $545. The U.S.-traded ADR shares are getting popular, too. San Diego's Brandes Investment Partners Inc., for instance, piled up 1.8 million U.S.-traded shares worth $94 million in six months. Says Brandes Senior Vice-President William A. Pickering: "[Schrempp] is finally taking steps to undo the diversification."
ESCAPE HATCH? Kopper must still figure out his designs for Deutsche's Daimler stake. A sell-off would realize billions--but also trigger a 60% capital-gains tax that holding companies have to pay. "No deal!" says Kopper. But he adds, "If Germany had a different pattern of tax and legislation, I would reorganize [our holdings]."
An escape hatch could spring open. The opposition Social Democrats may propose legislation whereby Deutsche and other banks could sell off industrial holdings without paying a huge capital-gains tax, provided that they reinvest the proceeds in the German economy. Kopper says he is open to discussion, but will fight any bill that dictates how he must invest. For now, Deutsche has no choice but to push for a turnaround at Daimler to unlock its value and achieve a better flow of dividends.
Failure to turn Daimler around would vindicate the pessimists who say Germany is too rigid to adapt to the global economy fast enough. But for Kopper and Schrempp, there can be no retreat. They have started a revolution--and revolutions have a way of continuing. Look for more upheaval at these two giant companies.