Commentary: How Germany Inc. Is Loosening Up

It's ditching the old network of cross-shareholdings. That's good for investors

Germany's Heidelberger Druckmaschinen may be the world's leading maker of big printing presses, and Hochtief Germany's largest construction company, but what do these businesses have in common with RWE, Germany's No. 1 electricity provider? Good question -- and one Harry Roels couldn't answer when he took over as chief executive of Essen-based RWE in early 2003. So Roels sold off RWE's 50% stake in Heidelberger and 56% position in Hochtief earlier this year, part of a selling spree worth $6.5 billion. "Now management can concentrate on our core businesses" of electricity, gas, and water, says Roels.

The logic behind that strategy -- why tie up capital in businesses that don't have anything to do with your main mission? -- may seem obvious. But it escaped much of corporate Germany for years. Managers seemed to have a tough time letting go of Deutschland AG, or Germany Inc., the postwar system in which banks and corporations helped one another rebuild the economy through interlocking shareholdings. Big financial institutions such as Deutsche Bank and insurer Allianz Group owned pieces of almost every major company, including each other. They exerted influence over industrial conglomerates, which in turn were active in an array of unrelated businesses.

This cozy network of cross-shareholdings became a drag on the nation's competitiveness at least a decade ago. But even after the German government abolished the capital-gains tax on corporate disposals in 2001, companies moved hesitantly -- raising suspicions that managers were reluctant to cede the power they enjoyed over swaths of the German economy.

Turns out they were just waiting to get a good price. In the past two years Germany's major corporations have been focusing on what they do best and unloading the rest. The rest of Europe has been busy unwinding its cross-shareholdings, too.

That's positive not only for corporate balance sheets but also for the whole economy. Companies operate more efficiently when managers can concentrate on their strengths. "Clearly there is an effect on management time," says RWE's Roels. Some economists say that corporate restructuring has even helped boost German productivity, which Commerzbank expects to surge 4.8% this year, after growing 2.9% in 2003.

Another encouraging development is the rise of private equity. German bosses used to regard private-equity firms as vultures to be avoided. But lately managers have come to see them for what they often are: a catalyst for restructuring. Private equity is especially good at helping companies unload businesses too small to spin off via initial public offerings.

Of course, plenty remains to sell off. For instance, Deutsche Bank still owns a huge 10.4% chunk of auto maker DaimlerChrysler. Deutsche CEO Josef Ackermann says the bank's long-term plan is to focus on banking, but he won't commit to a time frame for untangling the bank's remaining industrial stakes. Troubled Daimler, though, is nothing but a distraction for Deutsche as it focuses on boosting its own business. Ackermann ought to get rid of it and the bank's other industrial stakes quickly.

Moreover, healthy competition is still stymied by a strong network of personal relationships even as companies sell off their holdings. Corporate observers, though, say the new generation of executives -- managers like Siemens CEO-designate Klaus Kleinfeld -- are less clubby and more interested in the bottom line. Look for the the Great Unwinding to continue.

By Jack Ewing

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