Reckoning At Bertelsmann

Now CEO Thielen has to show that he can do more than just lop heads

Woe to any Bertelsmann executive who hasn't been hitting his numbers lately. In January alone, three high-ranking executives were pushed out of the German media giant for failing to deliver a bottom line that satisfied the bean counters. Being a high-profile dealmaker doesn't seem to help these days, either. Daniel B. Brewster, chief of the Gruner + Jahr magazine unit in the U.S., fell into disfavor after paying top dollar for acquisitions such as business magazine Fast Company and for a legal feud with Rosie O'Donnell over a partnership to publish Rosie magazine. Antonio "L.A." Reid, CEO of Bertelsmann's Arista records company, and Thomas M. Stein, president of the BMG music unit in Germany, were also corporate celebrities whose penny-pinching skills were deemed wanting. Hey, big spender -- you're fired.

Executives should be held accountable, of course. And there's no denying that Chief Executive Gunter Thielen's hard line has been helping profits. The Gütersloh-based company reported net earnings of $25 million in the third quarter of 2003, after a loss of $459 million the year before. The troubled music business and book clubs are in the black after drastic cost-cutting and the success of artists such as British singer Dido, while TV unit RTL Group has seen an upswing in German ad revenues. But the bloodbath has taken its toll on Bertelsmann's image. Each departure cranks up a vicious gossip mill and encourages the impression that Gütersloh, at first glance a sleepy Westphalian burg, is in fact a nest of corporate intrigue. At the very least, the turmoil could make it harder to attract top talent. "Whenever there's an exorbitant amount of turnover, questions have to arise about what's going on at the very top," says Thomas L. McLane, vice-chairman of Directorship Search Group, an executive search and consulting firm in Greenwich, Conn.

Thielen is under pressure to prove he can do more than just lop heads. As the world economy improves, he must also reverse a decline in sales, which totaled $14.7 billion in the first nine months of 2003, vs. $16.2 billion in the year-earlier period. In a yearend letter to employees, Thielen acknowledged that cost-cutting alone won't allow Bertelsmann to prosper. "There is no entrepreneurial alternative to growth," he wrote.

His plan? Thielen declined a request for an interview, but public statements reveal a strategy that draws heavily on the precepts of corporate patriarch Reinhard Mohn, who, with other family members, controls 75% of the voting shares. In line with the Mohn management handbook, Thielen is giving managers plenty of freedom but setting strict margin targets. "Develop new business for creative minds, for new content and products...tap new markets," he urged 550 managers who convened in December at the company's new offices in Berlin, a replica of a Prussian palace.

Thielen's back-to-basics course contrasts sharply with the approach of Thomas Middelhoff, his predecessor, who focused more on deals such as the acquisition of a majority stake in RTL Group and big spending on Internet ventures such as online bookseller Middelhoff enforced margin targets -- and some say he was tougher than Thielen -- but the Net investments were disappointing. was barely breaking even when Thielen sold it.

Thielen's performance in December won hearty applause from execs. But among people no longer drawing a Bertelsmann paycheck, he has plenty of doubters. "Thielen is a good cost manager, but he lacks vision," says one ex-executive who left before the January bloodletting. Critics note that Thielen, 61, secured a contract extension through 2007, worth $2.5 million a year according to one outside estimate, even as others were walking the plank. Thielen, who previously ran Bertelsmann's arvato printing and media services unit, stepped in as CEO after Middelhof's departure and was initially expected to be a transitional figure. Middelhoff ran afoul of the Mohns primarily for pushing too hard for an initial public offering. Bertelsmann needed shares for acquisitions if it wanted to play in the big leagues, Middelhoff argued.

Thielen clearly enjoys the backing of the Mohns, who feared losing control of the company in a public offering. Indeed, there's grumbling that Liz Mohn, wife of Reinhard and a member of the supervisory board, is bypassing board members and making decisions directly with Thielen. A Thielen loyalist denies this, however. "Liz Mohn is important, but she's not running the company," this source says.

OBSTACLE COURSE. A bigger issue is whether the Mohn family is now too conservative. That wasn't always so. Bertelsmann, originally a provincial book publisher, wouldn't be where it is without huge acquisitions such as RTL Group, Europe's largest TV broadcaster, or Random House, the world's biggest publisher of English-language books. CFO Siegfried Luther now estimates the company can afford to spend some $875 million a year on new projects and acquisitions. Advocates of a more aggressive strategy say that's not enough to exploit buying opportunities in European newspapers and TV.

Bertelsmann's music business also remains a challenge. A merger between BMG and Sony Music Entertainment Inc. (SNE ) could be blocked by antitrust regulators in Europe and the U.S. Even if it succeeds, music sales are declining because of counterfeiting and illegal Internet file sharing. Indeed, disagreements about music strategy contributed to the departure in December of Gerd Schulte-Hillen, chairman of the supervisory board and former Gruner + Jahr CEO.

Still, the music side shows some signs of promise. A sales drop of 3.6% in 2003 compares with a 13% decline the previous year. Under Chairman and CEO Rolf Schmidt-Holtz and Chief Operating Officer Michael Smellie, BMG has saved tens of millions of dollars over the past two years by cutting 1,500 jobs, streamlining its internal organization, and scrutinizing deals with artists more closely. For his part, Andrew R. Lack, a former NBC (GE ) exec and now Sony's chief, is also on a cost-reduction rampage.

Can Thielen display enough vision to restore growth? He sketches a scenario in which dozens of smaller-scale new ventures help him do so. A new TV magazine in France, Télé 2 Semaines, already boasts a circulation of more than 1 million. In the U.S., Gruner + Jahr may introduce Gala magazine, already popular in Europe, as a competitor to People.

Thielen will get help from a global recovery. Global ad spending will rise 5% this year, Merrill Lynch & Co. (MER ) predicts. And Thielen has his partisans. "He has shown that he can generate growth," says a seasoned executive close to Bertelsmann's top management. Before becoming CEO, he notes, Thielen transformed Bertelsmann's prosaic printing business into arvato, a profitable service provider that now offers customers distribution services and even editorial content. If only printing money were so easy.

By Jack Ewing in Frankfurt

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