German dynasties feel the crunch
Families have seen their fortunes dented through a mixture of bad luck and poor judgment
There is a saying in family-owned businesses that the first generation starts it, the second builds it up and the third destroys it. Some of Germany’s great industrial dynasties took decades to build, but less than two years to demolish, their owners the victims of bad luck, greed and terrible advice.
The Merckle, Porsche, Schaeffler and Schickedanz families have come to stand as symbols of the excesses of the financial world in the build-up to the economic crisis. On the advice of trusted managers, investment bankers and lawyers, they entered into risky transactions and trades that backfired when the economy turned against them. The results were devastating.
According to Forbes, Adolf Merckle was the 36th richest individual in the world in 2006 with personal wealth of $11.5bn (€7.9bn). By January 2009, he had taken his own life, his business empire in tatters.
Porsche, once praised for being as efficient a hedge fund as it was a carmaker, is now in the hands of rival Volkswagen. Schaeffler, a ball-bearings maker, has been left saddled with debt after its takeover of German autoparts group Continental went awry; and Madeleine Schickedanz witnessed the Arcandor conglomerate, of which she is the largest shareholder, file for insolvency in June.
Peter Veranneman, corporate partner at Skadden Arps in Frankfurt, said: “Capital markets, and particularly derivatives, have become more and more complex and it seems that some of these families failed to keep up to speed. Instead, they entrusted control to advisers and directors without question because they worried they would be left behind the competition. In doing so, they disregarded the principles upon which their businesses had been built for generations.”
Questions over the efficacy of the German regulatory system came to light in September 2005, when Porsche announced to the market it had built a 20% stake in rival Volkswagen via the use of cash-settled options.
The move was controversial because in most other countries disclosure rules would have prevented an investor building such a large stake without declaring it to the market. In April 2007, Porsche announced it had breached the 30% mandatory threshold, thereby triggering a full offer. German rules allowed Porsche to pitch deliberately a low-ball offer that investors inevitably rejected, enabling it to increase its holding without paying a takeover premium.
In July of the following year, Schaeffler stunned the market with the announcement that it owned or had access to 36% of the shares of Continental. Like Porsche, Schaeffler had taken advantage of Germany’s lax disclosure rules to build the stake unannounced, using derivatives. Merrill Lynch helped Porsche and Schaeffler build their stakes by finding third parties willing to hold the underlying stock on their behalf.
Again like Porsche, Schaeffler pitched its offer as low as German law would allow because it had no intention of acquiring the whole company. What followed would have been too difficult to predict for Schaeffler’s advisers UBS, Dresdner Kleinwort and ABN Amro. As the financial crisis deepened, automotive stocks globally collapsed and Continental’s shares fell below the offer price.
Schaeffler’s investors enthusiastically tendered their shares and Schaeffler was left owning more than 90% of Continental and facing a debt pile of more than €12bn ($17.5bn), which lenders would soon demand be refinanced.
Adolf Merckle took over the family business in 1967 and built it up into a global conglomerate, with international operations spanning the pharmaceuticals and building materials sectors. Unlike Schaeffler, Porsche and Schickedanz, Merckle held close control of the family business and took personal responsibility for the decisions that led to its collapse.
At the height of the market, Merckle’s HeidelbergCement paid $16.1bn for UK rival Hanson in a heavily debt-financed transaction that looked increasingly expensive as the crisis pushed the construction sector into decline.
Merckle was also one of the victims of the October 2008 announcement by Porsche that it had increased its holding in VW to 76%, again using undisclosed derivative positions. Merckle, along with hundreds of other speculators, had taken a short position in VW, assuming Porsche had no intention of increasing its holding in light of the worsening outlook for the automotive sector.
Instead, he was caught up in the largest short-squeeze in history when VW’s share price jumped almost fivefold to more than €1,000 in the days around the announcement. Within two months, Merckle had thrown himself under a train, faced with the break-up of the empire he had worked hard to create.
Today, both the Schaeffler and Porsche families are facing up to the consequences of decisions made under the strong influence of advisers outside the family. At Porsche, chief executive Wendelin Wiedeking and chief financial officer Holger Haerter, the original architects of the plan to acquire VW, were ousted in July, but by then the damage had been done.
Alexander Gehrt, head of M&A Germany for UBS Investment Bank, said: “As these businesses have grown larger, family owners have relied more and more on principal agents to run them and in some cases that has been a problem. The owners do not always appear fully aware of the details of the plans of management or their exact implementation, and have underestimated their impact and potential consequences.”
Schickedanz hired Thomas Middelhoff as chief executive of retailer KarstadtQuelle in May 2005. Middlehoff was chief executive at another family-owned business, media group Bertelsmann, and inherited control of KarstadtQuelle when it was struggling to compete on the German high street.
One of his first decisions was a sale and leaseback of €4.5bn of KarstadtQuelle’s property portfolio, but it did little to turn round the retailer’s fortunes. Arcandor was declared insolvent last month while Middelhoff is being investigated over real estate deals.
What these companies share is a highly concentrated ownership structure that places important decisions solely in the hands of family members and the advisers they entrust to run their businesses for them. When those decisions are bad and that advice is flawed, there are none of checks and balances afforded by a fragmented, institutional shareholder-base. The results have often been catastrophic.
Dominic Hughes, head of corporate broking at Berenberg Bank, said: “The operational discipline of knowing that you have to report to and rely on external shareholders should make you less likely to make significant errors.”
• From riches to rags: The decline of German family wealth
2005 May – Thomas Middelhoff named chief executive of German retailer KarstadtQuelle, part of the Arcandor conglomerate whose biggest shareholder is Madeleine Schickedanz
September – Carmaker Porsche announces that it has built a 20% stake in rival Volkswagen (including 10% that it had acquired previously)
2006 March – KarstadtQuelle offloads property portfolio in €4.5bn sale and leaseback
2007 April – Porsche submits mandatory takeover offer for VW after crossing 30% threshold
July – Building material group Heidelberg Cement acquires UK rival Hanson for $15.8bn in a heavily debt-financed deal
2008 July – Car parts maker Schaeffler announces it controls 36% of rival Continental’s shares. Days later it launches a hostile bid for €11.3bn
August – Continental’s chief executive Manfred Wennemer is ousted after resisting the takeover
September – Schaeffler’s deliberately low-ball offer becomes increasingly attractive as the financial crisis hits the automotive sector. Investors overwhelmingly accept, leaving Schaeffler with an unwanted majority stake in Continental
October – Porsche announces it holds stock and options giving it control of 74% of VW’s votes, kick-starting the biggest short-squeeze in history. Adolf Merckle, who had bet heavily that VW shares would decline in value is one of the worst hit
2009 January – Adolf Merckle commits suicide by throwing himself under a train. The family attribute the decision to loss of family wealth
February – Schaeffler, struggling to refinance its debt, calls on the German Government for €6bn in fresh financing. The German Government declines
March – Thomas Middelhoff turns his back on Arcandor and launches investment boutique BLM Partners
June – Porsche begins talks with investment fund Qatar Investment Authority. Probe is opened into Middelhoff’s real estate dealings
July – Porsche axes chief executive Wendelin Wiedeking, one of the architects of the plan to acquire Volkswagen
August – Schaeffler reaches an agreement with five banks on the refinancing of €12bn debt. QIA pays $10bn for a 17% stake in VW
September – Arcandor insolvency proceedings begin and its businesses are put up for sale. Heidelberg Cement raises €2.2bn via an equity-raising
Continental drift
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