"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

23 December 2006

Private Equity Firms Strip Mine German Firms

Germans are beginning to resent the leveraging up of bought out firms. Wonder why? Private equity companies have been around for a long time; KKR celebrated its 30th birthday this year. But only recently, especially since the burst of the high-tech stock-market bubble, have investors started turning to them in droves. Funds based on share prices simply weren't churning out adequate profits anymore and private equity funds started growing in popularity. As of 2005, investors had handed over a worldwide total of €261 billion ($342 billion) to private equity funds -- with expectations of high returns.

Be it television stations, large machine builders or auto-parts suppliers, international investors are buying up large swaths of the German business landscape. The new lords of business want one thing: profits, profits, profits. But criticism of the "locust" method of doing business is growing in Germany. There are a number of reasons for the focus on Germany. In recent years, the tight web of ownership woven by the country's largest banks and companies has loosened substantially. Recent years of economic stagnation in Europe's largest economy have also forced German companies to restructure and focus on efficiency. Now, many of them are in great shape, but lack capital. Several are among the market leaders in their sectors -- and they can be had for cheap.

Take German TV, for example. Just last week, two private equity leaders, Permira and Kohlberg Kravis Roberts (KKR), announced they had taken over a majority of Germany's largest private television company, ProSiebenSat.1 Media AG. The plan is to merge the company with SBS Broadcasting, which the two funds bought last year for €2.1 billion ($2.8 billion), and grow it into Europe's leading television company.

A noble goal, perhaps. But all too often, the result looks more like what happened to Cognis. Permira, together with Goldman Sachs, bought the chemical giant for €2.5 billion ($3.3 billion) in 2001. Most of the money for the purchase was financed through new debt, with the buyers only investing €450 million ($590 million) of their own money. Now, five years later, Cognis is deeply in debt and burdened by astronomical interest payments on the loans it took to come up with the purchase price. Permira and Goldman Sachs, meanwhile, have gotten out almost twice what they put in: €850 million ($1.12 billion) has so far been squeezed out of Cognis.

Experts say that this sort of grasping for easy money is what can make private equity firms dangerous. The emphasis is on quick money, short term results, and the highest possible returns for their investors, regardless of what it means for their prey. "Buy it, strip it and flip it," is the industry credo. There are indications, says Dieter Heuskel, head of Boston Consulting in Germany, "of a fundamental shift in ownership structures." He is concerned, he says, "about a massive shift in value and profit from the future to the present." In other words: money now, the future be damned.


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