Back to Basics at Bertelsmann

Succession spats haven't stopped the German media giant's recovery

Gütersloh, the hamlet that hosts the headquarters of German media giant Bertelsmann, is usually a pretty sleepy place. But lately, the back-stabbing and power-grabbing going on make this cow town look more like the setting of a potboiler by John Grisham, one of the company's best-selling authors.

The plot goes something like this. In the opening chapter, Thomas Middelhoff gets fired as CEO, and his ambitious Net strategy is dismantled. Then, company patriarch Reinhard Mohn, although deep in his autumn years, loudly and visibly rejects the go-go international dealmaking of the 1990s and calls for a return to the values of a mythical age when businesses were passed from generation to generation and owners cared for employees like family. Bertelsmann managers quit or get fired as the 81-year-old patriarch's wife Liz, a former secretary 20 years his junior, acquires ever more power. Then the company's éminence grise, Supervisory Board Chairman Gerd Shulte-Hillen, issues an extraordinary public warning that Bertelsmann, with 80,000 employees and $20 billion in annual sales, could forsake a tradition of advancement based on merit rather than blood.

Thank goodness someone is actually running the business. For all the turmoil, CEO Gunter Thielen appears to have made substantial progress cutting costs and refocusing Bertelsmann on the things it traditionally does best--producing books, magazines, music, and TV shows. BMG, the troubled music division, is profitable for the first time since fiscal 2000, thanks to artists like Avril Lavigne and Santana. RTL, the group's majority-owned broadcast arm, has a hit talent show, Germany's Looking for a Superstar, that's inspiring magazine and record spin-offs. "The course has been pretty clear since Middelhoff left," says Wolfgang Bock, partner at Mercer Management Consulting Inc. in Munich. "Focus on the businesses that they understand and dominate."

Thielen's goal is to double Bertelsmann's return on sales to 10% by 2005, but the effect on the bottom line so far is subdued. That's to be expected, considering that Thielen took over only in July. While the privately held company won't officially release earnings until Mar. 25, information already available indicates that Bertelsmann's operating profit will be about $1 billion for 2002, down from $1.3 billion the last full fiscal year. Still, it's progress. Not counting one-time gains, Bertelsmann lost money in its past two fiscal years because of huge investments in Internet ventures--including $960 million in fiscal 2001--that never paid off. If the world economy improves, the cost-cutting--begun under Middelhoff--should set the stage for healthy profit growth. A big deal involving a merger or other tie-up between BMG and another music group is also possible.

Steady growth depends on the initiative of lower-level managers. So Thielen has reemphasized a Bertelsmann tradition: decentralization. While Middelhoff tried to get divisions to cooperate more closely, Thielen gives them financial targets and leaves them alone if they perform. That seems to be paying off. For example, the vicious downturn in advertising forced Bertelsmann's Gruner + Jahr magazine unit to shut down Online Today, a German Internet magazine, and bizz, which was aimed at young entrepreneurs. Gruner + Jahr found dozens of ways to cut costs, such as reducing the number of magazine-format sizes by about half to save on printing. All told, the measures saved $75 million, allowing Gruner + Jahr to remain profitable, insiders say.

Thielen, who had been chief of Bertelsmann's Arvato Services Inc. publishing-services division, set the back-to-basics tone early. He cut the CEO staff and has been stingier about hiring consultants, German firms say. The new CEO also has shaken up management. Thielen dissolved the high-flying mergers and acquisitions department, sending its chief, Arnold Bahlmann, to run BertelsmannSpringer, a specialty publisher that is currently for sale. In January, top Random House publisher and editor Ann Godoff was fired after she failed to make profit targets for her label. Didier Bellens, the Belgian CEO of RTL, resigned in a blaze of negative publicity in February.

Some housecleaning is inevitable after a regime change. The challenge for Thielen is to keep the mop-up from becoming a brawl. Reinhard Mohn, the family member who revived Bertelsmann after World War II and helped make it an international player, published a book and an op-ed piece in which he railed against self-aggrandizing managers who put their own glory first.

Mohn has been saying this for years, but repeating it in print was considered a slap at Middelhoff, who cultivated an international reputation. It was also a signal that Mohn wanted to end the days of flashy deals and reassert family stewardship of the company. Mohn has strengthened his wife's role at Bertelsmann, installing Liz Mohn as chair of the company's shareholders' committee, which controls 75% of the voting shares and appoints Bertelsmann's supervisory board.

One fear among company executives is that the Mohns will appoint their son Christoph, who now runs Lycos Europe, to run the whole company after Thielen stabilizes things. Many executives believe the 37-year-old Mohn is not yet ready for the job and lacks his father's charisma. Moreover, the increased power of younger family members marks a departure from the past two decades. Since Reinhard Mohn stepped down as CEO in 1981, Bertelsmann has been run by managers who rose through the organization and aren't members of the family. Reinhard, Liz, and Christoph Mohn declined requests to be interviewed.

Reflecting the fear in the management ranks, Supervisory Board Chairman Schulte-Hillen has weighed in with an implicit warning to Reinhard Mohn. In an interview in the Feb. 17 issue of Der Spiegel, Schulte-Hillen said that managers were "irritated" about a perceived shift away from merit-based advancement. The ex-Gruner + Jahr boss has stuck by the statement and shows no sign of quitting. In response, Thielen has adopted a low profile while also making it clear he's in charge. In an open letter to employees in February, he insisted that decision-making remains with him and the management board.

Even though Reinhard Mohn has soured on the American-style business practices Middelhoff introduced, Bertelsmann cannot turn its back on the world. Some 70% of its sales are outside Germany. The domestic market is stagnant. In addition, co-shareholder Groupe Bruxelles Lambert still has an option to sell its 25% stake in Bertelsmann on the stock market. Such an offering would expose Bertelsmann to scrutiny from outsiders. Thielen will certainly reverse the excesses of the bubble years, and the Mohn family will certainly grumble. But the internationalization of Bertelsmann is unstoppable.

By Jack Ewing in Frankfurt

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