Busting Up Sweden Inc.

Volvo's sale signals sweeping shifts in this clubby business culture

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 Sweden. 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 for decades are merging, selling off key assets, and moving operations out of their homeland.

BRAIN DRAIN. 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 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, 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 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 bring 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 launch tax and welfare reforms. Until recently, the 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 talent is leaving. The Federation of Swedish Industries says 800 engineers emigrated in 1997.

Swedes are debating the surprising new developments. If the exodus continues, many worry, Sweden could become an economic backwater. Foreign ownership of local operations could lead to layoffs, boosting unemployment well above its current 10%. Financiers fear that Stockholm's thriving stock exchange may lose its most heavily traded listings, and 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.

Not everyone is pessimistic, of course. Some argue that restructuring will make industry more competitive. The shakeup in Sweden Inc. could also clear the way for smaller companies. Despite taxes and red tape, new venture-capital funds are springing up, and Scandinavia's love of the Net and mobile phones has sparked the creation of high-tech startups.

But it may take years for those outfits to take off, and they will face an uphill battle if technology-driven companies like Ericsson move operations out of the country. Meanwhile, few analysts expect the Persson government to do more than tinker with the tax system. So Sweden is likely to see a bigger industrial overhaul over the next few years.

HEAVYWEIGHTS. Nowhere is this truer than at Investor. The Wallenberg empire is still the heart of corporate Sweden, controlling or holding stakes in ABB Asea Brown Boveri, Ericsson, Electrolux and other heavyweights that total 40% of the Stockholm Stock Exchange's $265 billion market cap. But the family's power has waned since the days when patriarch Peter Wallenberg, now 72, was Sweden Inc.'s undisputed chief.

Now, the Wallenbergs are straining to remain relevant in a fast-changing world. The decision to make young Marcus Wallenberg--Peter's nephew--Investor CEO is a move 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 Percy Barnevik, known for shaking up companies such as ABB, replaced him.

Most Wallenberg watchers believe the new CEO will have to accelerate the remake of Investor and its holdings. If Investor does not perform, its increasingly independent-minded shareholders will question the Wallenbergs' control. Investor's negative total return last year--it lost 1.1%, while the Swedish market index gained 13%--has 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."

Some shareholders favor a 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 would reap a profit from a decision to distribute Investor's assets proportionately to its shareholders.

For now most analysts expect Marcus and his cousin Jacob Wallenberg, chairman of SEB bank, to resist such a breakup. Hostile raids on Wallenberg companies, however, could be in the cards. Volvo CEO Leif Johansson launched a surprise attack on Wallenberg-controlled truckmaker Scania in January--days before his sale of the Volvo car unit. Johansson rounded up 13% of the outstanding stock from fund managers, who were disgruntled with the lackluster performance of Scania's stock. While Johansson may not land Scania, the company is in play.

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.

As he takes over Investor, Marcus Wallenberg is expected to increase the company's support of midsize and entrepreneurial businesses. Investor 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 unprofitable roller-bearings giant SKF.

He may look for Swedish solutions for these problems. But, as Volvo's case 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.

In some senses, the ball is in Prime Minister Persson's court. To encourage 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 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 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 wealth, jobs, and ideas outside their country.

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