Will 'locusts' trigger a German recovery?

By Jorn Madslien
BBC News business reporter in Frankfurt

Schroeder's party has taken a left turn during the election campaign

The question of how to sort out Germany's economy has been central to the campaign ahead of Sunday's federal election, with the two parties moving further apart by the day.

Proposals by centre-right opposition leader Angela Merkel's Christian Democrats Union (CDU) reform tax and labour legislation have come under attack for posing a threat to workers' rights and the welfare state.

"We are concerned about Angela Merkel being like Margaret Thatcher," says Ralf Bartel, of the German trade union federation DGB. "She wants to break up the unions."

Governing Chancellor Schroeder's Social Democrats (SPD), meanwhile, appears to have taken a turn to the left, wooing the unions with talk of social justice and a strong welfare state - as well as with attacks on capitalist investors, many of them foreign.

Unpopular investors

Perhaps the most outrageous attack on foreign investors came during the state election campaign in North Rhein-Westphalia in spring, when SPD chairman Franz Muntefering compared foreign private equity investors with an invasion of "locusts" stripping companies bare.

Despite the fact that [the hedge funds and private equity firms] don't have a majority, they can run the show Michael Ganal, BMW

But suspicions against the hedge funds and private equity investors that have recently flooded into Germany are not confined to those on the political left.

"They just gear up the companies to 90% leverage or something like that," says a former manufacturing consultant in Germany's industrial heartland North Rhein-Westphalia, now working for a property investment fund in Dusseldorf .

"And they don't care about the people working for the companies."

Corporate raiders

The employees who find themselves in the firing line include the companies' executives, many of whom feel threatened by investors with Anglo-American agendas.

A demonstration of how two of the world's most successful capitalist cultures clash came late last winter when the German stock exchange Deutsche Boerse's efforts to take over the London Stock Exchange were blocked by British and American hedge funds.

The dispute claimed the scalps of five Deutsche Boerse executives or board members and caused widespread outrage among some of Germany's somewhat baroque managerial class.

Many of them are concerned about the way their industrial power is being taken a way from them, and there is much evidence to suggest they have reason to worry.

These days, hardly a week goes by without news of yet another push into the German market by private equity investors or hedge funds, many of them known by their often obscure initials TPG, EQT, TCI, KKR or BC Partners.

Across the board

On a basic level, the foreign investors buy minority stakes some of Germany's largest corporations, then launch well-planned attacks on the management to try to get other investors to back their demands.

"Despite the fact that they don't have a majority, they can run the show," says Michael Ganal, a member of the management board of carmaker BMW.

Hedge funds, which are now said to own a fifth of DaimlerChrysler, are expected to put pressure on incoming chief executive Dieter Zetsche to get rid of the loss-making Smart subsidiary.

BMW's Michael Ganal says private equity firms can be beneficial

At the other end of the scale, they venture into the German market by acquiring entire companies, sometimes paying vast sums.

This summer, UK buyout company Terra Firma paid 7bn euros ($8.6bn; £4.75bn) for the German housing company Viterra.

And somewhere in between are acquisitions of "Mittelstand" companies - old, family owned companies worth between 50m euros and 250m euros, sometimes more.

The investors buy the companies with the view to restructure them relatively quickly, then sell at a profit through initial public offerings on the stock market.

Such restructurings can be ruthless affairs. Jobs are axed or moved abroad to low-cost countries, factories are closed, capital is extracted and loans are raised against the value of the companies.

"Morally, we call it theft," says unionist Mr Bartel.

Positive developments

But the fear of the 'locusts' is far from universal.

Grohe planned to cut 3,200 jobs Joerg Weigand IG Metall union representative Reshaping Germany's companies

"I think the old constellation, the old situation could not last any longer," says Mr Ganal, whose company BMW is itself an independent family-controlled company.

"This complex network of cross-ownership was not a recipe for creating fast moving, efficient companies," he says, referring to the way companies and financial institutions have each others' best interest at heart because they own equity stakes in each other's organisations.

"I think the private equity companies bring in new, fresh money," says Mr Ganal. "And foreign owners improve a company's international involvement."

Co-determination

Moreover, not all private equity firms ride roughshod over their staff. Many are quite prepared to go along with the German corporate governance norm, where workers are represented on corporate supervisory boards by members of the works councils.

"It is a matter of codetermination," explains the unionist Mr Bartel.

Outside investment has changed the way German businesses are run

The Hemer based bathroom taps and shower maker Grohe is an example of how a restructuring by private equity owners - involving almost 1,000 job cuts and the closure of a factory - is being pushed through with the approval of the works council.

"At the end of the day, it is an advantage because if the works council agrees [to changes], workers will honour those changes," observes Detlef Spiegel, labour affairs director and member of the Grohe management board.

"As a consequence we don't have strikes."

This sort of governance by consensus is close to the German heart; many Germans hope such willingness to compromise will help if Sundays' election ends in the formation of a grand coalition between the Mr Schroeder and Ms Merkel's parties.

Though seen with the eyes of an Anglo-American investor, it is usually a recipe for disaster, whether it is applied to politics or to business.

This is the sixth, and last, in a series of reports from Germany; in the run-up to the election we are also looking at the country's economy, its unemployed, and how its companies are trying to beat the slump.