Patience Pays Off At Investor

New chairman, red-hot returns, time-tested Wallenberg strategy

Picking at a chicken salad in a simply furnished private dining room near Stockholm's harbor, Jacob Wallenberg seems relaxed, almost bubbly. And why not? After a bad stretch when Wallenberg-influenced companies like engineering firm ABB Ltd. (ABB ) and telecom equipment maker Ericsson (ERICY ) endured existential crises, his family empire has stabilized. Investor, the listed Wallenberg holding company, has had total returns of about 49% this year, nearly double the Swedish OMX Index.

Wallenberg says Investor's strong results are proof that the family's century-long strategy of nurturing companies -- sometimes for decades -- still works: "We invest and put our name on the line and take the blame from time to time, whereas the only responsibility [money managers] take is by selling the shares." Today, Investor, which the Wallenbergs control through family foundations, has a market cap of $12 billion. But its so-called core companies, in which Investor has large stakes or actual control, have a combined value of about $190 billion. Other Investor companies include Electrolux, truckmaker Scania, and Swedish bank SEB.

At 50, Wallenberg, too, has achieved a landmark goal. Last spring he took over as Investor's chairman, making him Sweden's top industrialist, something akin to royalty in Sweden's close-knit establishment. He replaces his cousin Marcus, 49, as the main family influence at Investor. Jacob is a more self-assured communicator and has no problem delegating detail work to others. Associates say he is demanding, ambitious, and not hesitant to tell executives he is the owner and boss.

Analysts welcome the shift to Jacob and his new chief executive, Börje Ekholm, who formerly ran Investor's New York-based venture-capital arm. Jacob Wall, an analyst at ABG Sundal Collier, a Stockholm brokerage, says that Wallenberg "listens to the market," while he says Ekholm is "a self-made man with a good track record."

Despite the welcome, Wallenberg and Ekholm are still on probation with the markets. They know the plaudits could turn to brickbats if Investor shares lose their zip. Insiders say that Investor is reviewing its portfolio, trying to figure out what moves to make. Jacob may increase Investor's stakes and influence in companies such as Scania, where it has 10.6% of the capital and 19.3% of the votes, and ABB, where Investor now owns 8%. Ekholm, the venture capitalist, will be scouting for a home-run deal, preferably in Sweden, that could give the Wallenbergs another Ericsson or AstraZeneca. Stakes in companies that are likely to go, analysts say, include WM-data, an information technology company, and OMX, the Swedish stock exchange operator. Both are in consolidating industries and look like merger bait.

Perhaps the biggest question mark looms over the Wallenbergs' stake in AstraZeneca PLC (AZN ). One of the world's premier pharmaceutical companies, it was created by the 1999 merger of Sweden's Astra, the most successful Wallenberg investment, and Britain's Zeneca. The Wallenbergs have reduced their holdings from 5% at the time of the merger to 3.2%. They retain two board seats, but analysts say the Wallenbergs no longer wield the kind of clout at the London company that they have at other holdings. "They have lost a lot of influence over the company," says ABG Sundal Collier's Wall. He thinks the stake "is likely to be divested." Wallenberg insists that Investor board members, including his cousin Marcus, continue to play a strong role at AstraZeneca. But he adds: "If we don't think we could add value to a particular holding, I don't think we should be there."

How does Investor add value? Wallenberg and his team have a big say over who is appointed CEO at their main companies. They also encourage executives at the various companies in their sphere to share information on markets and technology. "If I have a question on the Chinese telecom market, for instance, then I would call Carl-Henric Svanberg [the CEO of Ericsson] and normally he would help me," says Wallenberg.

The Wallenbergs' role is often clearest when a company gets into trouble. When ABB and Ericsson were melting down in 2002, the family brought in troubleshooters and sent positive signals to the markets by increasing their stakes -- moves that have made them about $1.7 billion, now that the two companies' stock prices have recovered.

Executives at Wallenberg companies say that the protection afforded by long-term owners is useful. "It is good to have stable owners," says Hans Straberg, CEO of Electrolux (ELUXY ), which is shifting its manufacturing operations to Eastern Europe and other low-cost locations while working on a scheme to spin off its outdoor products division. Without the Wallenbergs' presence, Electrolux, whose stock-price performance has been lackluster, might well find itself vulnerable to hedge funds and other predators -- a situation outside shareholders might welcome. Defying the naysayers, the Wallenbergs have recently spent about $112 million to boost their Electrolux stake. "I think that over time, in order to have a clear voice at the table, you have to be a fairly significant shareholder," Wallenberg says.

Does all this tender loving care and collaboration work? Over the past five years, Investor has brought in total returns of 13.09%, outperforming the Swedish index's -4.61%. But over 10 years, the index has beaten Investor by 281.17% to 250.09%, according to Bloomberg Financial Markets.

Yet the Wallenbergs are in a better position to do a big deal to boost future returns. They have slashed debt to near zero, giving themselves scope to buy. "If we see an opportunity, we will have the capital without being forced to sell," says Ekholm.

Investor's only dark cloud today is an investment in a 3G mobile-phone business called 3 Scandinavia in partnership with Hong Kong's Hutchison Whampoa Ltd. (HUWHY ). After zooming to 350,000 subscribers, the company's growth slowed dramatically. Investor expects to pump $500 million to $600 million into 3 Scandinavia and doesn't expect to break even until 2007 at the earliest.

The telecom investment makes Investor executives nervous, but their other new ventures have been a source of cheer. Through the third quarter Investor had reaped about $1 billion from exits from its venture-capital arm and a private equity offshoot, EQT. Investor even operates a $322 million buyout fund in Asia headed by Winnie Fok, the sister of Canning Fok, Hutchison Whampoa's CEO.

Being an early player in China is another Investor strength. Jacob serves as an adviser to the mayor of Shanghai and frequently meets with Premier Wen Jiabao. He is following in the footsteps of his father, Peter, who was friendly with former President Jiang Zemin and Premier Zhu Rhongji. Fok points out that Investor core companies such as Ericsson employ no less than 18,000 people in China. "We have a lot of experienced warriors," she says. And Wallenberg has plenty of ammunition to work with.

By Stanley Reed, with Bruce Einhorn in Hong Kong

— With assistance by Bruce Einhorn

    Before it's here, it's on the Bloomberg Terminal.