Pushing Around Germany Inc.

As foreign hedge funds raise the pressure on boards, CEOs are running scared

Majorca hedge fund FM Fund Management Ltd. hardly caused a ripple in Germany last year when it bought a 30% stake in Comtrade, a Hamburg provider of software and services for financial institutions. No politicians complained when FM's managing director, Florian Homm, used his fund's clout to shake up management. Nor did German pundits raise an outcry in the local media as FM pushed Comtrade to boost productivity and profits.

Of course, with $20 million in sales, Comtrade hardly counts as an icon of German industry. But suddenly, FM Fund Management and its ilk have German execs running scared and leaders in Chancellor Gerhard Schröder's Social Democratic Party up in arms. That's a result of the May 9 ouster of Werner G. Seifert, CEO of stock-exchange operator Deutsche Börse. London hedge fund TCI led a shareholder revolt against Seifert and proved that an aggressive investor can rock the boat. Now speculation is rife that other German corporations could be in line for a shakeup. Some of the names mentioned are industrial gas supplier Linde, truckmaker MAN, and travel company TUI. Analysts say even Germany's 30 biggest listed companies are vulnerable. "There is clearly a move into the German market by hedge funds, and they certainly have the resources to go after [the biggest] companies," says Martin Korbmacher, who heads the German office of Credit Suisse First Boston (CSR ).

To be sure, no hedge fund attacks on blue-chip companies have come to light, and some say there's little to fear from shareholders seeking to exercise their rights. But Homm -- a Harvard Business School graduate who has worked at Merrill Lynch & Co. and Fidelity Investments -- has become a bogeyman in Germany. He first jolted public opinion last year when FM bought a 26% stake in Dortmund soccer team Borussia Dortmund. Yet he and his partners insist they have no secret plan to wreak havoc in German industry and say their investment in Comtrade and Borussia Dortmund is for the long term."The debate is getting out of hand," says Guillermo Hernandez, trading chief at FM. "Hedge funds save a lot of jobs."

CAUGHT OFF GUARD

What makes execs quake is that under German law, investors do not have to reveal their holdings in a company until they own 5%. That means hedge funds can accumulate shares unnoticed and, once they cross the 5% threshold, make tough demands. That was the strategy used by TCI -- which had the tacit support of other big shareholders such as mutual funds -- and it caught Deutsche Börse officials off guard. "What are hedge funds all about? We are asking for more transparency," not less, says Rüdiger von Rosen, head of the Big Business-backed German Share Institute and former CEO of Deutsche Börse.

German blue chips present a ripe target. Many trade below their book value and are potentially worth more broken up than whole. They are especially vulnerable because longtime institutional shareholders are selling down their stakes to free up capital. That weighs on stock prices and gives the hedge funds an opportunity to snap up big blocks of cheap shares. In January, for example, insurer Allianz Group netted $126 million by selling its shares in MAN.

Many market observers say hedge funds like TCI and London-based Centaurus Capital, which has invested in TV-rights marketer EM.TV and industrial holding company WCM, are the vanguard of a wave of more outspoken shareholders. Some companies have proposed responding by restricting the voting rights of newer investors. But such moves would probably run afoul of European Union rules. Like it or not, hedge funds are in Germany to stay. And German execs have every reason to be nervous.

By Jack Ewing in Frankfurt

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