Karl Ehlerding dislikes the corporate raider rap. The 58-year-old financier from Hamburg prefers to think of himself as a German Warren E. Buffett, tracking down undervalued assets and unlocking dormant wealth. In fact, shares in his main investment vehicle, WCM Holdings and Property, delivered a Buffett-worthy eighteenfold increase from 1995 until they began a 50% decline in late 1999. But Ehlerding is a shier billionaire than Buffett. At WCM's annual meeting in Frankfurt's Old Opera on June 6, he stayed resolutely in the background, never addressing the respectful crowd.
Germany Inc. wishes Ehlerding were always so reserved. In January, WCM completed its $1 billion takeover of packaging and machinery maker Klöckner-Werke, the latest in a string of ever-larger deals that have included a clothing retailer and a grocery chain. Now, WCM has declared its intention to make a bigger move, which could be worth as much as $3.5 billion. Mounting press speculation focuses on MG Technologies, the Frankfurt engineering and chemical company once known as Metallgesellschaft. But there are dozens of potential victims, and in the boardrooms of Germany's Old Economy, the nervousness about Ehlerding's next move is palpable. "It will come this year," promises Ehlerding.
Ehlerding represents the next wave in German corporate restructuring. Until recently, the emphasis has been on consolidation. Companies in the same industry attacked each other in hostile takeovers or merged peacefully, all in a quest for global dominance. Think Vodafone-Mannesmann, Allianz-Dresdner, or Veba-Viag, the merger that created the Düsseldorf utility conglomerate E.ON.
But after Germany's DAX index fell 8% in 2000, and as the DaimlerChrysler (DCX ) deal showed how difficult it can be to pull off a big cross-border merger, the emphasis has shifted to smaller-scale financial deals. In a throwback to the 1980s, the aim is to buy an undervalued company that can be quickly resold at a profit--usually in pieces to other corporations. "We don't do turnarounds," says Ehlerding protege Roland Flach, WCM's CEO.
That kind of deal is about to get a further push. From next Jan. 1, German companies will be able to sell their stakes in other, publicly listed companies without paying capital-gains tax. That's expected to unleash a wave of dealmaking as Germany's banks, insurance companies, and utilities unravel their holdings, typically in Old Economy manufacturers. The value of assets in play could top $100 billion. Ehlerding can't wait. He grins and bounces on the balls of his feet as he discusses the coming tax change. "Germany is a good place to do business," he enthuses.
Ehlerding, the son of a Bremen crab dealer, has shown a knack for dealmaking since he was a business student in the mid-1960s. While doing research, he stumbled on a nearly defunct local railroad in Hildesheim whose shares were still publicly traded. Ehlerding realized that the railroad's real estate was worth far more than its shares. He scraped together $135,000 from friends and family and bought control. After introducing himself to surprised managers as their new boss, Ehlerding shut down the rail line's remaining operations and resold the real estate, more than tripling his investment.
He's been repeating that formula ever since. WCM itself was the corporate descendant of an 18th-century textile maker fallen on hard times. After gradually acquiring a majority, Ehlerding renamed the company in 1991 and appropriated the corporate shell. In the past five years, as Ehlerding's wealth increased, WCM's deals acquired a new scale. He bought and resold grocery chain Spar Handels, a stake in clothing retailer Wunsche, and auto parts maker Ymos. Fueled by such acquisitions, the value of WCM's assets has grown more than fourfold since 1996 to $3.7 billion. He has also bought some 60,000 apartments, becoming one of Germany's biggest landlords.
Real estate is a key part of the Ehlerding business plan. So is not paying taxes. Here's how it works: WCM buys a company with a history of losses. Klöckner-Werke, for example, has some $1 billion in losses carried forward on its books. Under German accounting law, WCM can apply those losses to gains in real estate. As a result, WCM historically pays little or no taxes on profit.
Ehlerding's methods lead to charges he is cold-blooded, which can cause problems. In 1999, WCM was forced to give ground following a bitter, three-year battle for control of a suburban streetcar line near Bremen. It turned out part of the track was home to a collection of antique locomotives. Big mistake: Vintage trains are sacred objects in Germany. In the end, WCM accepted a compromise allowing the trains to keep operating.
ALOOF. That's very much Ehlerding's style. He seems at pains to avoid being seen as a capitalist bogeyman. He and family members own 65% of WCM, but Ehlerding's only title is deputy chairman of the supervisory board. He remains aloof from WCM's day-to-day affairs. There's no doubt who's in control, though. "Ehlerding provides the decisive ideas," says WCM CEO Flach.
Ehlerding has almost always made money, but he's not infallible. In the Klöckner takeover, WCM spent almost a year trying to negotiate an agreement with reluctant Klöckner managers. The idea was to avoid a bloody takeover battle, but it proved costly as arbitrageurs sold WCM shares and bought Klöckner. From a peak of $35, WCM shares slid to $12. Ehlerding was forced to sweeten WCM's $570 million cash and stock offer by kicking in some of his own family's shares. WCM managers vow not to waste so much time making nice the next time around. The shares have since risen to $16.30.
Getting the share value up is key as WCM girds for its next move, which will be financed at least partly with stock. WCM managers vow to boost operating profit this year, to $340 million from $130 million, chiefly by selling holdings. Except for real estate, WCM rarely keeps acquisitions for more than two years. And Flach vows to make enough splashy acquisitions to earn WCM a place in Germany's benchmark DAX index. What's the next target? Analysts are betting it's MG Technologies, which fulfills all the criteria: well-known, with profitable chemical assets but an anemic stock price. Ehlerding says flatly the speculation is wrong, though he won't reveal the real target. Regardless, vows Flach, "once we start it, we'll see it through." No one who knows Ehlerding has any doubt about that.
By Jack Ewing in Frankfurt