International capital is good for Germany, say suppliers

Munich. For most German auto suppliers, the description of international private equity firms as "locusts" is not helpful.

Franz Muentefering, the leader of Germany's ruling Social Democrat Party, sparked a debate when he said that international investors who buy up companies, slash jobs and disappear with the profits were like a "swarm of locusts" besetting Germany.

"That is something that people in the German supplier industry have hardly seen so far," said Rolf Woller, an auto analyst at HypoVereinsbank.

Ex-Edscha Chairman Horst Kuschetzki, who has had multiple experiences with private equity firms, said criticism of these firms is "far from helpful," because it is driving such investors out of the country. Without them, he said, "Edscha would not be an independent company today."

Under the management of Deutsche Beteiligungs, PCA Parcom, and Flint Eco, revenues for Edscha have tripled. Those equity firms held about 43 percent of the company between 1997 and 2002 and took the company public.

These investors "fully and completely" supported the company's strategy, said Kuschetzki.

When their stakes were sold to Carlyle in 2002, the pressure did increase, but the company was in not drained at all.

"Ultimately, these investors want to ride along with a company's rise in value, so they can make a profit when they leave," said Kuschetzki.

The German Association of the Automotive Industry (VDA) was also upset by Muentefering's comments.

"The German industry is highly dependent on capital," President Bernd Gottschalk told Automobilwoche. He said in the supplier sector, equity firms are for the most part committed for the long term. "A blanket condemnation should be rejected out of hand. It doesn't fit in with the global alignment of our companies."

Last year, there was a clear increase in takeovers of German auto suppliers by equity companies. Ali Tasbasi, director of the M&A International consulting firm in Kronberg, said in 2004 there were 16 cases of equity investor involvement, compared with only three the previous year.

Especially prized were the innovation prowess and high quality standards of the German supplier sector.

Patrick Marous, managing director of the equity company Conpair Portfolio-Management, estimates that German investors would buy German suppliers for one to one-and-one-half times annual revenues.

Anglo-American firms are ready to pay up to 25 percent more because the German market seems more attractive than the North American market.

Large U.S.-based financial groups such as Blackstone, Carlyle, Kohlberg Kravis Roberts (KKR) or Permira currently have several billion dollars ready for investment, Marous said.

One of the first entries by U.S. investors into the German supplier community was the takeover of Honsel, a transmission and chassis manufacturer, by the Carlyle group in 1999.

Former Chief Executive Engelbert Heimes said Carlyle's takeover was a positive for the company. "Assistance from Carlyle gave Honsel a crucial step forward," he said. "About 600 jobs were created and more than 220 million euros were invested in new projects that permanently strengthened the company for competition."

And Beru Chairman Marco von Maltzam said he considers private equity to be "an important form of financing, now and in the future," especially for midsized companies. Until recently, Carlyle held a 37 percent stake in Beru.

But not everyone was happy with how outside, proactive investors have handled things.

Von Maltzam's predecessor at Beru, Ulrich Ruetz, said he sees things much differently. He accused Carlyle of enriching itself at the German company, and also of introducing the "fickleness" of an American firm into Beru.

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