MLP's Coming-Out Party Wasn't Much Fun

Why did investors flee the hotshot after it joined the DAX 30?

Be careful what you wish for. For two years, Bernhard Termühlen, chief executive of German financial-services company MLP, badgered the Deutsche Börse to admit his company's shares into its elite DAX 30 index. Why not? MLP had been a star performer for years. Despite the economic downturn, first-half 2001 pretax profits jumped 32.5%. The stock had outperformed giants like Deutsche Bank. Clearly, MLP deserved to be in the DAX. And Termühlen wanted the exposure.

On June 26, the exchange acquiesced. MLP joined the listing a month later. Termühlen has had no chance to gloat, though. Usually, new DAX members attract buying from fund managers who track the index, which serves as a proxy for the entire German stock market. Yet MLP's share price has fallen almost 50%--to just 70.70 euros on Aug. 28 from its pre-announcement DAX price of 129.50 euros. What a humiliation for Termühlen and MLP's famously loyal, crack sales force. The stock had risen 8,000% since its 1988 flotation. "I was taken aback," says an MLP salesperson. "I borrowed from the bank to buy the company's shares. Now I owe more than my stock is worth."

Termühlen can partly blame technical factors. Institutional investors have long owned MLP. But many felt it was too expensive, so they took profits on the DAX news. A pending $26 million share issue also chilled the welcome. Being center stage has other disadvantages, including closer scrutiny. "There are risks as well as rewards associated with DAX membership," says William Hawkins, who follows the stock for London brokerage Fox-Pitt, Kelton.

Investors also doubt MLP can keep up the phenomenal record engendered by its business model. It gives advice and markets insurance, mortgages, and other financial products to graduates in business, medicine, engineering, and law. As their salaries grow, they remain loyal. The model works. Forty percent of graduates in those fields are MLP customers. Its client base and group earnings have grown by more than 30% a year since its formation in 1971. Pretax profit was $105 million in 2000 on revenues of $755 million, which should hit $1 billion this year.

Now big banks and insurers are trying the same tactic of targeting new graduates. In particular, insurance giant Allianz hopes to make big inroads on MLP's clients with its Advanced Private Finance operation, which will sell Allianz and other company's products to young grads and professionals. Analysts say Allianz wants to lure away its brokers (whom MLP calls advisers). Ironically, MLP holds the DAX slot that Dresdner Bank left when Allianz absorbed it.

A change in MLP practices also makes some investors nervous. The company increasingly sells its own investment products and insurance policies. Currently, it gets 80% of its profits from acting as an agent for other companies. Some fear that MLP brokers will alienate customers by pushing homegrown products when outsiders' are better.

LOFTY GOALS. MLP's expansion into Switzerland, Holland, and Britain also unsettles some. "I'm not convinced its model can be transferred to other countries," says Sven Janssen, who follows the company for B. Metzler seel. Sohn & Co., the Frankfurt private bank. He notes that, on average, revenue from MLP brokers outside Germany is about 35% less than for those in the domestic market--something the company disputes. "The regular banks in many countries already target students with special deals, so there is less scope for MLP," Janssen says.

Termühlen, who became CEO in 1999, says competition doesn't rattle him and rivals have failed to replicate MLP's model. The 46-year-old insists profits and revenues can still grow by 30% a year.

Investors aren't convinced. Frankfurt was alive with rumors in mid-August that Termühlen and Manfred Lautenschläger, an MLP founder, were buying company shares to goose the price. Termühlen confirms he bought shares--because they were a bargain. "I am completely convinced of the future success of the company," he says. He has no angst about the DAX listing either, which once seemed like a no-lose proposition: "At first we thought, `Why on earth did we enter the DAX?' But we are proud to be in it and will adapt." As many ambitious CEOs find, however, the road to hell is paved with good intentions.

By David Fairlamb in Frankfurt

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