business

Bertelsmann's Creed: Inner Growth

The German media giant is eschewing big, showy deals for homegrown, entrepreneurial growth. So far, it seems to be working

By Jack Ewing

Tucked into Bertelsmann's 2004 earnings report Mar. 17 was a one-time gain that says a lot about the company's priorities since Gunter Thielen took over as CEO in 2002. The German media giant recorded $233 million euros from the sale of the Bertelsmann Building in New York City. That is pure Thielen: Better to invest in a new printing plant in Italy than showy office space in Manhattan.

The downside for Thielen is that his bottom-line approach feeds the perception that the company has retreated to its provincial roots in the quiet Westphalian burg of Gütersloh, that it has become less international, and less aggressive. Thielen's predecessor, Thomas Middelhoff, engineered the series of deals that gave Bertelsmann control of RTL Group, Europe's biggest TV broadcaster. Thielen's idea of a big acquisition is buying a publisher of car magazines in Stuttgart.

Thielen obviously thinks such criticism is unfair, showing signs of impatience when a reporter at a Berlin press conference the day of the report asked him what deals are in the pipeline. Thielen pointed out that benefits from acquisitions are often held up by regulatory issues and integration problems, which are not an issue with in-house ventures. "We want growth to come from our own strength," Thielen said.

MONEY TALKS.

  It's probably unfair to label a company provincial when its holdings include Random House, publisher of Bill Clinton's autobiography and The Da Vinci Code, or 50% of Sony BMG Music Entertainment, recording label for Beyonce and Avril Lavigne. Bertelsmann's book clubs operate in China and its Arvato outsourcing unit has call centers in Morocco.

But perhaps Thielen's best riposte to the provincialism rap comes from the numbers Bertelsmann reported. Net income soared more than sixfold, to $1.4 billion from $206 million, including minority stakes.

True, some of the profit increase came as the result of special factors, particularly a change in accounting rules that relieved Bertelsmann of the obligation to write off declines in the book value of assets. But operating profit, which doesn't include taxes or special items, still rose a healthy 39%, to $1.9 billion from $1.4 billion. Bertelsmann is clearly earning more money these days.

BIG IDEAS.

  The question remains whether Bertelsmann can continue to deliver the top-line growth that often came from big acquisitions such as Random House and RTL Group. Sales rose a modest 1.9%, to 23 billion euros, adjusting for currency effects and asset disposals. Thielen calls his plan to deliver top-line growth GAIN, an effort to encourage entrepreneurial energy within the company. The program has already produced 100 ideas with sales potential of $1.3 billion, Thielen says.

Some are already fueling growth, such as a pair of French TV magazines launched last year by Bertelsmann's Gruner + Jahr unit. Others are close to launch, such as a dating channel on RTL in Germany. "The best entrepreneurial brains, joined with outstanding creative people and committed employees -- that's the recipe for success," Thielen declared.

Such an approach is likely to deliver incremental rather than spectacular growth. Bertelsmann has, in fact, become more conservative. But that is obviously O.K. with Bertelsmann's main shareholders, the Mohn family. They want to see better profit, and so far, Thielen is delivering.

Ewing is BusinessWeek's Frankfurt bureau chief

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