In Sweden, It's No Longer a Family Affair

It's now Wallenbergs vs. shareholders

It was the fall that shook the boardrooms of Europe. In late November, Percy Barnevik, once lauded as the manager who introduced shareholder value to the Continent and who had the science of restructuring down cold, resigned as chairman of Swedish-Swiss electrical engineering giant ABB Ltd., a company he helped create through a merger in 1987. Barnevik says he wanted to take responsibility for ABB's wretched performance since becoming chairman in 1997. But Martin Ebner, the Swiss shareholder activist who holds 10% of ABB stock, helped drive him out.

In Corporate Europe, everyone is connected, and no one more than Barnevik. That means there is another chapter to write in this saga. The story involves Barnevik himself, Ebner and other activists, and Marcus Wallenberg, heir apparent of his family's vast corporate empire. Wallenberg, 45, is eager to make his mark and prove that the dynasty, which has dominated Swedish industry for nearly a century, is a vital force and not a relic of the past.

Barnevik is still chairman of Investor, the publicly traded holding company that is the main investment vehicle of the Wallenbergs. Investor has major stakes in ABB, Swedish phonemaker Ericsson (ERICY ), appliance maker Electrolux (ELUX ), Swedish bank SEB, and drugmaker AstraZeneca (AZN ), among others. Marcus Wallenberg, who became chief executive of Investor in 1999, has been trying to recharge the portfolio by putting money into technology and venture capital and by replacing poor managers at the family-influenced companies. But Investor has yielded only humdrum returns in recent years. That undercuts the Wallenbergs' credo that their long-term nurturing of companies produces better results than short-term trading. If the slide continues, they could face increasing pressure to relinquish control--which they maintain through special share schemes--to professional management.

Barnevik's departure at ABB has led to speculation in Investor circles that he may be on his way out there, too. Barnevik and Investor would not comment. But he has been slow to deliver on promises made early in his tenure to dump poorly performing companies and managers. Investor's share performance hasn't been a disaster. During the last five years its total returns of 14.1% have slightly edged that of the Swedish index. But Investor's huge discount to net asset value--now 28%--infuriates investors.

MARCUS' MARK. If Barnevik goes, it may be because he no longer sees a role for himself with Marcus coming into his own. Marcus is a Georgetown University graduate who worked at Citibank in New York and Hong Kong and the family paper company Stora in Düsseldorf before joining Investor in 1993. A low-key person known to friends and family by the childhood nickname "Husky," he cut a timid figure when he first took the reins at Investor. But he has already put his mark on the company--with mixed success. He championed big investments in technology at the top of the market, like Spray Networks, a Swedish Internet portal. Yet Investor has had to write off about $450 million in such investments, including a $70 million hit for Spray. Wallenberg defends his record, saying that since 1998, Investor's new plays have earned the company a net $130 million.

Other Wallenberg decisions have also cost Investor big money. He engineered an extraordinary $1.3 billion transaction last June in which Investor swapped large or controlling stakes in ball-bearing giant SKF, Swedish/Finnish paper giant Stora Enso, and airline SAS, to Wallenberg foundations for shares of Ericsson and the family controlled bank, SEB. The move aims to give the Wallenberg charities slow-growing but high-dividend investments while adding more upside potential to Investor's portfolio. Investor shareholders are about $90 million the worse for the switch so far, but Wallenberg says the deal should be judged over three to five years. He declined to speak to BusinessWeek for this story.

For now, Investor's biggest problem is Ericsson. The Swedish phonemaker, which accounts for 16% of Investor's core portfolio, has run up $1.66 billion in losses for the first three quarters of 2001. Although the company's cash flow turned positive in the third quarter, it is far from out of trouble. Douglas Smith, an independent telecom analyst in London, says Ericsson's costs are still too high and that Nokia Corp., which has bested Ericsson in mobile phones, may now train its guns on its Swedish rival's market-leading position in mobile networks.

PRIDE. It was Marcus, sources say, who persuaded Industrivarden, a rival Swedish holding company that jointly controls Ericsson, to name Michael Treschow, CEO of Electrolux, as Ericsson's chairman on Oct. 25. Treschow made his career at Wallenberg companies and is related to the family by marriage. But he didn't flinch while at Electrolux, shedding about 40,000 employees through layoffs and unit sales. He also displayed a flair for innovation, championing robot lawnmowers, for example. His lack of telecom experience may not be fatal. "The game today is not technology, it is cost," says Smith. Treschow himself is eager to save Ericsson, Sweden's high-tech pride. "I am a little bit blue and yellow," he says, referring to the national colors.

Still, Investor's disappointing results leave the Wallenbergs vulnerable to pressure from outsiders like Ebner, who holds 10% of Investor and who played a role in the resignation of Barnevik from ABB. "At the end of the day, Barnevik was all talk. He didn't follow through with action," says David E. Marcus, managing director of Marcstone Capital Management, a New York hedge fund that specializes in European stocks.

However they fare, Marcus and the other Wallenbergs cannot be dislodged against their will. Family foundations, which hold most of the Wallenbergs' wealth, have 44% of the votes. But the likes of Ebner can still make things hot for the Wallenbergs. Kurt Schiltknecht, a board member at several of Ebner's companies, says the Swiss group would like to see Investor use share buybacks and other efforts to narrow the glaring gap between the share price and its net asset value. "If they don't want to do something, they don't care about shareholders," says Schiltknecht. "In the long run that is bad for Investor and the whole Wallenberg group."

Over time, the Wallenbergs under Marcus' prodding seem almost certain to relinquish control over some of the major companies they once closely monitored. Investor, for example, sold off its star money maker, Astra, to Britain's Zeneca in 1998, and now retains only a 5% stake in the combined company. As he reshuffles the family holdings, Marcus may opt to focus the energies of Investor's staff on the growing venture-capital and leveraged-buyout businesses, which now account for about 10% of Investor's portfolio. Investor says it has hit home runs in the U.S. with investments in two U.S. health-care companies, Jones Pharma and Medimmune, and an American IT company, Qeyton Systems. Venture capital is where the Wallenbergs' still matchless name in Swedish industry could make a bigger difference--and where the family may yet recover the prestige lost through Investor's fumbling.

By Stanley Reed in London

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