The Young Wallenbergs
In the executive suites of Europe's financial powers, last week's surprise takeover bid by Sweden's S-E-Banken for the country's second-largest insurer, Trygg-Hansa, caused a buzz. Founded in 1856, S-E-Banken is the original building block of the massive global business empire controlled by the much-talked-about but stubbornly mysterious Wallenberg family. The $2.2 billion merger catapults S-E-Banken into the big leagues of asset management and could have ripple effects far beyond Sweden's borders. What, wondered their rivals and colleagues, were the Wallenbergs up to?
The Wallenbergs' web of holding companies, businesses, and family-picked executives is a self-styled "Western keiretsu" that has long been known for farsighted strategy and deliberate moves. But the bank deal is one of several recent signs that the Wallenbergs are significantly stepping up the pace. In Sweden, the family is reviewing its holdings while looking for fast-growth businesses to complement its world-leading industrial companies. At the same time, through their huge holding company, Investor, the Wallenbergs plan to test the waters abroad, targeting areas such as health care, telecommunications, and information technology.
The result, the Wallenbergs hope, will be a historic corporate Goliath updated for the new millennium. From Electrolux vacuum cleaners to Zanussi dishwashers, from Scania trucks to Astra's top-selling ulcer pills, from Ericsson mobile phones to Saab fighter planes, Wallenberg company products already have a potent presence in global markets. They have helped make Sweden a far bigger player on the world stage than its 8.5 million population would seem to justify.
The next few years will be crucial for the family. Its companies face increasing rivalry from other global players and from upstarts in developing countries. The Wallenbergs will also come under heightened scrutiny from institutional investors such as the aggressive American fund manager Michael F. Price, who has taken a 7% stake in Investor. "They are entering an interesting phase," says a Swedish financier who knows the family well. "The pressure on their CEOs will increase; underperforming companies will be scrutinized as never before."
Some critics charge that in an age of savvy fund managers who excel at spotting businesses with high returns, the Wallenbergs' management style is obsolete. They have been slow to reallocate their portfolio into growth industries, and though Investor shares have shown a very respectable gain in recent years, much of that has come from a meteoric rise in Astra stock. "The products they develop are high-caliber, but they have not operated in growth businesses," says one major shareholder. "They have been slow to the punch."
But that judgment may be overly harsh. Supporters argue that the Wallenbergs' hands-on management style and the structure of their empire both create value. They point to the family's long track record, the synergies among its companies, and the Wallenbergs' willingness to bring in new blood to shake things up if necessary.
As a new generation begins to take control, change could come faster to the empire founded in the mid-19th century by A.O. Wallenberg, a sailor turned entrepreneur. Peter Wallenberg, at 71 the latest in a series of strong-minded patriarchs who have guided the group, is moving into the background. His 41-year-old son Jacob, and his nephew Marcus, also 41, are gradually assuming leadership.
And for the first time in decades, the Wallenbergs have named a nonfamily member as chairman of Investor: Percy Barnevik, who succeeded Peter Wallenberg in April. Barnevik made his international reputation running engineering dynamo ABB, one of the Wallenbergs' premier companies. He brings a global view, nonpareil business and political contacts, and a restless, unsentimental approach to the hallowed organization. "When he is around, the steam pressure rises," says a key Wallenberg exec.
Barnevik will turn up the heat on Wallenberg company managers and push them to invest in emerging markets. Some big restructurings may be in the offing, too. Barnevik may help find merger partners for longtime holdings, such as forest-products giant STORA and roller-bearings powerhouse SKF. But investors say such moves should be timed carefully. "We want them to bring up the value of their holdings rationally," says Rob Friedman, senior vice-president of Price's Franklin Mutual Advisers, of Short Hills, N.J.
Even before Barnevik took over, the family was modernizing its operations, which have their offices behind a modest, gingerbread facade on a cobblestoned square up a hill from Stockholm's harbor. They have started small venture-capital and leveraged buyout arms and have opened offices in Hong Kong, London, and New York to scout for opportunities. They now have over 1% of their assets invested in Asia, with small stakes in about a dozen companies. "Sweden is a very small place," Peter Wallenberg said earlier this year. "There are a lot of opportunities in the world outside."
The Wallenbergs have already done better than many other European giants in going global. Ericsson has become a leader in the mobile telephone revolution, setting up big operations in China and across Europe. Astra, which the Wallenbergs took over in bankruptcy from the state alcohol monopoly in 1924, boasts the world's largest-selling drug, the ulcer medication Losec, which pulled in $3.2 billion in 1996.
ABB, which Barnevik led until 1996, has become a textbook global company. During his groundbreaking tenure there, Barnevik slashed some 60,000 jobs in Western Europe and North America, while adding almost as many in Asia and Eastern Europe. ABB has major contracts in Asia, including a $250 million deal to supply generators for China's Three Gorges dam. During Barnevik's eight-year term, ABB's share value rose an average of 23% a year.
In fact, the Wallenbergs have delivered impressive value for their stockholders. In the 10 years ended in December, 1996, Investor shares produced annual total returns averaging 19.7%, compared with 15.3% for the Swedish market overall. For Investor to beat the Stockholm Stock Exchange index is a tough goal--its companies account for roughly 40% of that index, or more than $100 billion. Marcus Wallenberg says his family should get credit for nurturing these big winners. "We have had the good fortune of working with very talented people," he adds.
CRUCIAL "ANCHOR." Now, Wallenberg watchers are asking what Peter Wallenberg's gradual withdrawal will mean for the empire. Peter has been the king of Swedish industry. A crusty chain-smoker, he has a remarkable seat-of-the pants knowledge of business, partly gained through such lowly jobs as operating mining equipment and selling industrial compressors in the U.S. He has also been an effective ambassador able to open almost any door.
It is bound to take years for Jacob and Marcus to assume the elder Wallenberg's gravitas. But they have been well trained. Jacob has an MBA from the University of Pennsylvania's Wharton School and worked at J.P. Morgan & Co. in New York and Hambros Bank in London. Marcus got his undergraduate degree at Georgetown University and worked in the marketing arm of Wallenberg paper giant STORA in Germany. The two share Peter's almost missionary zeal to continue the family tradition of presiding over a stable of companies.
Wallenberg company executives give the family credit for shielding them from the tyranny of quarterly results and allowing them the freedom to make strategic investments. Lars Ramqvist, CEO of Ericsson, whose voting stock is 40% controlled by the Wallenbergs, says their long-term view permitted Ericsson to double its research and development spending in 1991. That happened despite a fall in sales and profits due to the poor business environment created by the gulf war. The stepped-up R&D helped Ericsson successfully battle Japanese mobile- phone systems and emerge as an industry leader. "Our owners have always looked not to the next quarter, but to the coming three to five years," says Ramqvist. Astra CEO Hakan Mogren also thinks the Wallenbergs have been key to his company's success. "They have made a big difference as an anchor," he says. "They have always supported us in difficult times."
But when it is time for a change, the Wallenbergs move. Michael Treschow, then the highly respected CEO of family-controlled Atlas Copco, got a call "out of the blue" last winter. Anders Scharp, chairman of Electrolux and a key Wallenberg aide, summoned him across town to a meeting at the appliance giant's Stockholm headquarters. During a 20-minute conversation, Scharp offered him the top job at Electrolux, whose CEO, Leif Johansson, left to take the helm at Volvo. Although Treschow relished his job at Atlas Copco, it didn't take him long to accept the offer. "It is better to leave the party when you are enjoying it most," he says. Then he jokes: "They hinted it was a promotion, but you can never be sure."
Treschow says he wasn't given any marching orders, but the problem at hand was clear enough. Although a world leader in home appliances, Electrolux was only marginally profitable. Sluggish sales in Europe were depressing the company's bottom line. On his first weekend on the job, Treschow called his top management team together and bluntly put the problem to them. "Shall we just sit cool and wait and hope that things correct themselves, or do we need to do something more substantial?" he recalls asking. Not long afterward, Electrolux embarked on a big restructuring program that will reduce head count by 12,000 over the next two years. The stock market lapped it up: Electrolux' shares are up 45% since the revamping was announced in mid-June.
Another transformation has been taking place at Incentive, an unfocused investment company that Investor is turning into a dedicated health-care company. Since taking over in 1991, CEO Mikail Lilius has sold off a hodgepodge of some 60 businesses, ranging from renowned camera maker Hasselblad to two Chilean graveyards. In 1994, he gained control of Swedish kidney dialysis firm Gambro. Then, last June, he acquired a California-based dialysis clinic company, Vivra, for $1.5 billion, giving Gambro a major U.S. base. After further refining Incentive, Lilius may eventually wind up listing its stock, probably renamed Gambro, in the U.S.
With Barnevik on board, investors hope for action at other big companies that have been in the Wallenberg fold for decades. Those that have trailed the market, such as STORA and SKF, look vulnerable. Barnevik says that if companies don't perform, strategies will be reassessed, managers let go, and structures overhauled. If none of those moves work, Investor will reallocate its capital. "We are not interested in administering and cultivating history," he says.
JAPANESE LESSONS. But he is impatient with the notion that the Wallenbergs should abruptly ditch their engineering companies for high technology. Barnevik notes that he has made a career of squeezing value from unglamorous businesses such as ABB and specialty steelmaker Sandvik. "It is immature to say, `Get out of that mature stuff,"' he says. "Even mundane businesses like white goods and engineering have the same opportunities as others."
Indeed, Barnevik, the younger Wallenbergs, and Investor President Claes Dahlback indicate that the family is likely to refine rather than scrap its traditional, long-term management approach. Barnevik says he has been studying Japanese behemoths such as Mitsui and Fuji to see how the Wallenberg companies can reap more benefits from being part of the group. For example, he wants them to share their expertise in penetrating the Chinese market. "We have tremendous experience and knowledge among hundreds of thousands of employees," says Barnevik. "Strengthening the exploitation of that knowhow is a key concern I have."
The Wallenbergs are hoping to tap their companies' enormous technical skills to help evaluate new investments. When the group earlier this year paid $33 million for a 17% stake in Tessara, a California-based chip packaging startup, engineers from both Ericsson and Saab Combitech, the group's military electronics company, checked out the technology.
Adulated and envied as the royal family of Swedish business, the Wallenbergs are closely watched in everything they do. For example, S-E-Banken's offer for insurer Trygg-Hansa set off speculation about power plays within the empire. S-E-Banken has been struggling in the '90s, and some observers think Barnevik made sure to give a protege of his own the CEO job at the newly merged financial-services giant. It will go to Trygg-Hansa's chief, Lars Thunell, who started up a financial-services unit at ABB under Barnevik. Jacob will become chairman but stay closely involved in the finance company's operation.
Jacob's role seems to be shifting from that of an executive to that of an owner. It has become conventional wisdom that he will handle the financial businesses, with Marcus looking after industrial companies. But Jacob scoffs at this division, pointing out that Marcus already serves on S-E-Banken's board. Indeed, some observers think that Jacob will assume more of his father's ambassadorial role, while Marcus will be more of an inside player, evaluating new deals and keeping a close watch on the family companies. Marcus now serves as Investor's executive vice-president and seems likely to become its president eventually.
Much as observers and investors love to gossip about them, the Wallenbergs don't flaunt the kind of ostentatious wealth that makes many international tycoons so unpopular. Although their compensation has been rising in recent years, most of their holdings are locked up in nonprofit foundations set up by the family decades ago and devoted to pursuits such as scientific research. In 1996, Peter Wallenberg reported an income of $2.98 million and a net worth of $22.2 million. The combined net worth of Marcus and Jacob was reported at less than $12 million. They live relatively quiet lives, enjoying sailing, grouse-hunting, and other popular Swedish pastimes. Shortly after becoming Investor chairman, Barnevik said that one of the things that appeals to him about the family was that they are not "fast-buck, playboy guys."
Barnevik also lauds the Wallenbergs for "not loading up the companies with family members." Besides Marcus and Jacob, the only other Wallenberg in the family business is Jacob's younger brother, Peter, who manages Stockholm's sumptuous Grand Hotel, an Investor property. Other relatives may have opted out because the heritage can prove oppressive. Peter has been divorced three times and Marcus once, apparent testimony to the strain of running an empire. The cost has been steeper still: Marcus' father, Marc, also named Marcus, killed himself in 1971. It is often said that the worry that he was not living up to the family's expectations played a role.
Jacob, outgoing and affable to the point of flippancy, seems to wear the burden of his heritage lightly. He insists he doesn't feel more pressure to succeed than the next guy. "Ambitious people strive to be given more responsibility regardless of name, background, and history," he says. But he knows the world is watching the Wallenbergs tinker with their formidable assets. With Percy Barnevik calling more of the shots and investors clamoring for results, the buzz around the family isn't about to go away.