Commentary: EM.TV: A How-Not-To Guide for German Investors

Otto Welschak figured he could supplement his modest pension with an investment in EM.TV & Merchandising. And why not? All the experts said the Munich children's programming company had a fabulous future. The experts were wrong. Welschak, 63, who used to work for the German Automobile Club, figures he lost about $5,700 when EM.TV shares plunged more than 95% in the past year, to less than $5, on shoddy bookkeeping and big shortfalls in predicted sales and profits.

Now, Welschak thumbs through the German stock-picking magazines that urged him to buy and wonders how it happened. "The analysts and [EM.TV CEO Thomas] Haffa really pulled one over on us," says Welschak, who lives in Geretsried, about 40 kilometers south of Munich.

It's hard not to concede Welschak's point. As late as November, long after warning signs began to emerge, bank analysts continued to recommend EM.TV stock. They weren't the only ones to get it wrong. Haffa, 48, had the imprimatur of Germany's business Establishment. When his stock was riding high early last year, Haffa was the keynote speaker at business events and was photographed, tuxedo-clad, with luminaries like Mark Wossner, former CEO of Bertelsmann.

MYOPIA. Why was everyone--including BusinessWeek--so myopic? It's a good time to ask. Haffa's tarnished empire is effectively passing into the hands of his former employer, Leo Kirch. The Munich media king is acquiring 25% of EM.TV's voting rights (17% of equity) and a hefty dose of control. Haffa is still CEO, but it's hard to see how he'll survive the shareholders meeting in July.

The EM.TV story is coming to an end, and, with hindsight, it's possible to draw lessons from the disaster. They won't help Welschak or others who were burned. But maybe they'll avert debacles in the future and teach investors how to act more wisely.

Lesson one: Make sure the company visionary has adult supervision. Everyone agrees that Haffa is a heck of a salesman. His strategy wasn't bad either: Assemble a cast of venerable cartoon characters, then milk the merchandising and broadcast possibilities. But Haffa needed someone to keep him from overextending EM.TV's financial and management resources. Chief Financial Officer Florian Haffa, the CEO's younger brother, wasn't that person. Since the ill-prepared younger Haffa resigned in December, successor Rolf Rickmeyer has been struggling to make sense of the company books. Rickmeyer is a finance veteran, the ex-CFO of a subsidiary of utility RWE. If he had been there from the start--and if Haffa had listened to him--things might have turned out differently.

Lesson two: Scrutinize the deals. EM.TV was paying eye-popping prices for its new properties. True, amid the Internet frenzy, almost any price seemed reasonable. It's also true that Haffa covered part of the tab with EM.TV's own overpriced stock, which reduced cash outlays. Still, he raised eyebrows when he paid $680 million for Jim Henson Co. Some thought Henson's 30-year-old Muppets were past their prime and valued the Henson company at half that. But nobody cared.

DISCREPANCIES. Lesson three: Scrutinize the partners. Haffa's watershed deal was the acquisition in 1998 of 10,000 hours of children's programming by forming a joint venture with Kirch Gruppe. Now, it looks more like an arrangement designed primarily to raise badly needed cash for Kirch. After all, the main venue for the programming is German station SAT.1, which Kirch controls. Investors were dreaming if they thought Haffa had gotten the better of a sly dog like Kirch.

Lesson four: Watch for discrepancies in the company's announcements. Last March, EM.TV bought a 50% stake in the company that owns the rights to broadcast Formula One races. The company press release said EM.TV was "in discussions" about acquiring an additional 25%. Later, Haffa owned up to analysts that he had committed the company to paying nearly $1 billion for the additional stake--a risky obligation. Now, all of EM.TV is worth $1 billion.

Lesson five: Don't be afraid to break up the party. Nobody wanted to be a naysayer when EM.TV shares were soaring and early investors were racking up paper millions. Next time, perhaps, investors will know better.

By Jack Ewing

With Katharine Schmidt in Stuttgart.

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