For Sale: Germany, Inc.

The struggle over Deutsche Börse, the company that operates Germany's stock exchanges, has been settled for now: It won't take over the London Stock Exchange (LSE) as originally planned -- investors connected with hedge fund TCI have made this clear.

The reason for this is quite simple: Takeovers usually cost the active party money and share value and dividends can drop as a result. That's something hedge funds can't afford. It's their mission to multiply the money they've invested, as is the case with any kind of investor. But TCI and others are under extreme pressure as they buy and sell almost daily and make their money with falling and rising share values.

German companies have become highly attractive for aggressive investors from the US and Britain in recent years as the German financial sector began selling its shares.

An eldorado for investors

Previously, the so-called "Germany, Inc." had made the country's firms unattractive for investors from abroad. Financial giants such as Allianz, Deutsche Bank and others held shares in companies throughout the country. It was a comfortable arrangement for decades as it gave these investors nice dividends and high reserves.

In today's globalized world, however, the Germans have been forced to sell their shares to free up money. Foreigners are finding many lucrative investment opportunities as a result. The share values of many companies are far below their real value as they've been held by German banks for such a long time.

They're cheap when compared with others internationally, but that's changing rapidly. Share holders may be happy about this, but it can cause tremendous upset within the companies. Deutsche Börse is only the most recent example for this.

The funds' interest is tremendous. Many German companies are or were seen as antiquated, because they relied on safe businesses for too long. But since hedge funds have been admitted to the German market, they're on a shopping tour, just like they have been in the US for years. They want to see yields immediately and push for dividends to keep their own shareholders happy.

A place for profiteers

Individual investors sometimes also play a role. Guy Wyser-Pratte is a classic example. He shook up two German industrial conglomerates. Currently he holds 5 percent of IWKA, a machine-building company based in Karlsruhe that's mainly known for its robots. After Wyser-Pratte invested in the company in 2004, its share value rose significantly. He made it clear that he didn't agree with the company's "sleepy" leadership.

Such statements make market analysts think that the sale of unprofitable parts of the company might be sold in the future. Whether this happens or not, Wyser-Pratte will be able to sell his shares at a higher price -- even if nothing changes after all.

That's exactly what happened at Rheinmetall. The company's share value was stagnating for years because of unprofitable divisions and a complex company structure. In 2000, Wyser-Pratte invested in the Düsseldorf-based concern. He made a lot of noise but did not succeed against the majority of share holders.

In November 2001, he sold his shares for 20 euros ($25.40). He had bought them for 8.50 euros. But Wyser-Pratte's involvement led the company's management to initiate a restructuring process analysts had called for. The company sold off divisions, shrank by half and became highly profitable. Its share value now hovers around 40 euros -- a positive thing for shareholders and employees alike.

Not all is well

But there are also negative examples. Employees in particular often have to fear investors. For decades, Germany's economy was governed by rules, regulations and agreements between unions and employers' groups that are no longer viable in many cases. As a result, companies with big names and good products were and are no longer competitive internationally and become easy targets for a new kind of investor -- venture capital firms such as Blackstone, KKR; Carlyle, Argantis, Lone Star, Capiton, Apax, Cinven, Investcorp, 3i, Permira, and BC Partners to name just a few.

Take Tenovis, formerly known as Telenorma. KKR took over the company in 2002 and half of the employees were let go within the first two years despite an agreement to forego 12.5 percent of their wages. Managers on the other hand received bonuses for their good work. Since then Tenovis has been sold again, this time to US concern Avaya -- with profit.

Another option is to take a company to the stock exchange. This happened in the case of Wincor Nixdorf, formerly Siemens Nixdorf. While investment companies control such firms, they streamline them with profit maximization in mind. When the company is then taken to the market, the investors make money again. In the case of Wincor Nixdorf, about 350 million euros were made on the stock exchange. The company only received 125 million euros.

The list of German companies with similar experiences is long: MTU will soon be taken to the stock exchange, Gerresheimer Glas, Dynamit Nobel, Rodenstock, Celanese, Minimax, ATU Autoteile Unger, Debitel, Tank & Rast, Duales System Deutschland (DSD). More will follow.

Investigating the Börse case

As far as Deutsche Börse is concerned, officials for Germany's financial sector watchdog BaFin announced Thursday that it is investigating the role played by hedge funds in the removal of the company's chief executive officer this week.

BaFin was looking to find out whether the funds had acted in concert to force CEO Werner Seifert to quit after already forcing him to abandon plans for the LSE takeover.

If that were the case, and if funds held a combined stake of more than 30 percent in Deutsche Börse, they would be obliged under German law to launch a public takeover offer for the remaining shares.

BaFin refused to provide a precise timetable for the investigation, but the spokeswoman said the probe could take "some weeks."