COMMENT: Global investors are not locusts

For many companies, they are the last chance at a future

COMMENT
Franz W. Rother is Editor-in-Chief of Automobilwoche

They have lived at Edscha for years. They've already infested Novem. Peguform is being filleted. Beru is practically consumed.

International capital funds have settled into many German suppliers since the late 1980s.

Now Franz Muentefering, the leader of Germany's ruling Social Democrat Party, compares international finance companies to a "swarm of locusts" besetting Germany.

These private equity enterprises account for more than 40 percent of all takeovers in the auto sector. The entry of the Blackstone Group into TRW or Kohlberg Kravis Roberts (KKR) into Auto-Teile-Unger (ATU) are among the most spectacular cases.

And there is no end in sight. Or at least one hopes there isn't.

During times when mid-sized firms are finding it more difficult to raise capital due to stricter underwriting, investors from the U.S. and the Netherlands are often the last chance for an enterprise to save itself from bankruptcy.

There is only the most distorted truth in the frightening image that Muentefering conjured up: Voracious locusts descending upon perfectly healthy firms like a biblical plague, brutally ripping them apart and sucking the life from them.

Certainly, money, not charity, is the motivation for financial investors.

To reach the goal of a 20 percent annual profit, they occasionally apply brutal methods, including replacing entire boards and closing factories.

But one affected manager tells me that such blood baths are rather rare. And restructuring measures are good for the company's bottom line.

For example, under the management of a German holding company, Edscha has strongly boosted its revenues.

Financial investors are characteristically very active shareholders, something that should offend no one. They mostly gain ground in areas that the firm's tired management has missed, making the firm fit for competition and globalization. So in the end they promote a necessary, if sometime painful, structural transformation.

Naturally, some people in Germany consider themselves no friend to private investors.

In the executive suites of many a large company, people have been getting nervous since several private equity firms positioned themselves for a DaimlerChrysler takeover last year. The plan only faltered when Deutsche Bank proved unwilling to part with its stake in the company.

Likewise, MAN has felt the capital markets' hot breath. To prevent a takeover, MAN chairman Hakan Samuelsson ratcheted up goals for return-on-equity, boosting the company's share price appreciably.

Is this maximization of profits objectionable? Is this predatory capitalism? Hardly. It is simply a necessity to give a company a future, in whatever form, with whatever partners.

With these kinds of processes, financial investors can absolutely be the driving force for that.

They bear no blame if, as a result of a restructuring, production is transferred to Eastern Europe and jobs in Germany are lost.

Those who would like to put a stop to such investments should consider that German companies depend upon the influx of foreign capital when domestic banks leave them high and dry.

That's even true for large commercial enterprises. Some would rather bring an active shareholder, someone like United Auto Group, on board sooner rather than later.

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