Germany AG Quietly Passes Into Hedge Fund Hands

Date: Wednesday, August 31, 2005
Author: Matthew Lynn, Bloomberg

Aug. 31 (Bloomberg) -- In the past, the giants of German industry and finance looked after one another in a complex web of cross-shareholdings. That has now unraveled.

The typical shareholder of a big German company may now be a hedge fund with offices in London, New York or the Caribbean.

Germany's quiet transfer of industrial power is accelerating as the country's federal election on Sept. 18 draws closer and a victory for the Christian Democratic Union appears inevitable.

The issue is whether Germany AG learns to embrace the new owners of industry, as it should, or whether the country's class of chief executive officers struggles to resist them, as many of their political leaders already have.

``Hedge funds are a welcome help to transform Germany from the so-called cooperative Rhine capitalism to a more free-market-based economy,'' said Dirk Chlench, economist at Hypothekenbank in Essen AG, in an e-mailed response to questions.

Almost every day there are fresh examples of hedge funds -- loosely regulated investment vehicles for institutions and the rich -- building stakes in the leading powers of German industry.

Hedge funds now own about 20 percent of DaimlerChrysler AG, the Frankfurter Allgemeine Zeitung reported last week. Among the big holders of the carmaker's stock were U.S. firms such as Caxton Associates LLC, Citadel Investment Group LLC and Vinik Asset Management LP, according to the Wall Street Journal.

Commerzbank, Balda

Financial Times Deutschland reported that Toscafund, a U.K. hedge fund, holds as much as 2 percent of Commerzbank AG, the country's third-largest lender. Lansdowne Partners, another British hedge fund, has a smaller stake in the Frankfurt-based bank, the newspaper said.

Meanwhile, Balda AG, the world's second-largest maker of plastic mobile-phone parts, said a German hedge fund holds almost 15 percent of the company.

That's just a few days. Go back a bit further, and there are plenty more examples of hedge funds moving into Germany. Earlier this month, Focus-Money reported that TCI Fund Management and four other hedge funds control a 15 percent stake in MAN AG, Europe's third-largest truckmaker.

And in March, a group of London- and New York-based hedge funds led the revolt against the management of Deutsche Boerse AG that stopped it winning control of London Stock Exchange Plc and later led to the downfall of two top executives and three other board members.

There is no mystery about why hedge funds are targeting Germany right now. Their job is to seek out high-risk, high-reward opportunities. Germany certainly fits that bill.

`Wirtschaftswunder'

Flip the coin one way, and Germany may be about to enter a sustained period of growth, after some painful structural change, which would boost exports further and give consumers more confidence. It would be a re-run of the ``Wirtschaftswunder,'' or economic miracle, of the 1950s.

Flip it another way, and costly welfare, an overvalued euro and a demographic imbalance will combine to pitch Germany into permanent decline.

Hedge funds get paid to make such bets. Get that call right, and you'll make a lot of money.

The attitude to hedge funds in Germany has ranged from distaste to loathing. There has been the predictable response from the German left. In April, Franz Muentefering, chairman of the ruling Social Democratic Party, compared investors buying up company stakes for short-term gain to the biblical plague of locusts that descended on Egypt, stripping it of vegetation.

`Loyal, Predictable'

In June, Chancellor Gerhard Schroeder said his government would seek unified international rules for hedge funds to ensure financial market stability.

The reaction from Germany's corporate establishment hasn't been much more sympathetic. Linde AG CEO Wolfgang Reitzle prefers ``loyal, predictable'' shareholders, rather than hedge funds, to hold stakes in the German maker of industrial gases and forklifts, Boersen-Zeitung reported this month. And Fresenius Medical Care AG is engaged in a tussle with its hedge fund shareholders over a capital restructuring.

Indeed, so worried have German executives become about hedge funds on their shareholder registries, they have started tracking them. Die Welt newspaper reported last week that most companies on the benchmark DAX-30 stock index had hired outside agencies to monitor who was buying their shares amid fears of hedge funds building up stakes.

Like Reitzle, many German CEOs would like ``predictable'' shareholders: ones who can be expected to support inadequate management.

Asset Strippers

Germans have never had much time for the free-wheeling Anglo- Saxon version of capitalism, which can be brutal, focused on short- term gain, and often wasteful. It is also good at forcing through change -- which hedge funds may be doing in Germany.

In the U.S. during the 1980s, the corporate raiders and leveraged buyout funds ripped through the heartland of corporate America. You only have to watch Oliver Stone's movie ``Wall Street'' for a reminder of how unpopular they were. In the end, U.S. industry was reinvigorated and strengthened.

Likewise in the U.K., large conglomerates such as Hanson Plc were condemned as asset strippers in that decade. In many ways they were. At the same time, they freed up capital, closed down redundant plants, and released resources to be reinvested elsewhere. They helped the U.K. economy to revive.

In Germany, hedge funds are playing much the same role. It won't win them any popularity contests. They should buy some tin hats, since a lot of stones will be thrown in their direction. Yet if they reinvigorate German industry, they may be the best thing to hit the country in a long time.

To contact the writer of this column:
Matthew Lynn in London at matthewlynn@bloomberg.net.