German firms grapple with foreign investment

German firms grapple with foreign investment
Warren shows the size of firms he's shopping for. Photo: DPA
Warren Buffet, the world's richest man, arrived in Germany last week with his cavernous wallet looking to buy solid, family-run firms in the country's world-beating small and medium-sized business sector.

But even though Europe’s biggest economy has become more open to foreign capital in the four years since a top minister likened private equity groups to “locusts,” the relationship remains a complex one. And recent experiences have given foreign investors something of a bad name.

Grohe, for example, furnishes bathrooms all over the world with its taps and other fittings. Its family owners sold it in 1999 to a British fund that sold it not long afterwards to another financial consortium. They cut jobs right, left and centre and were accused of stripping Grohe bare in order to make good on their investment in order to pay back the money they borrowed to make the acquisition in the first place.

More recently Permira, the private equity owners of fashion group Hugo Boss, rankled company directors and staff by demanding a sharp increase in the 2007 share dividend in addition to a one-off dividend.

Permira then found itself obliged in March to make a guarantee that Hugo Boss’ headquarters would remain in Metzingen, southeastern Germany, and that the number of workers would not fall below its level at the end of last year.

But circumstances are forcing many German firms to become more open. The global credit crunch has made banks less willing to lend them cash. Many also are family firms where there is no son or daughter willing to take the reins.

“There is growing demand for capital on the part of traditional small and medium sized companies because of financing problems and worries about succession,” Dörte Höppner, head of a German private equity federation, told AFP.

And Warren Buffet is not after a fast buck. Famously opposed to buying internet companies because the “Oracle of Omaha” says he doesn’t understand them, his approach is seen as more hands-off and more long-term.

The kind of well-run firm he wants needs a “durable competitive advantage” and pre-tax earnings of at least €50 million ($75 million), and Buffett says he will stick with them for five, 10 or even 20 years. And “the bigger the better,” he adds, because he is not interested in negotiating 10 or 20 deals a year.

Small and medium sized German enterprises (SMEs) have also caught the eye of investors from other countries.

French investment group Wendel, for example, said last week there is “a whole range of good quality firms among German SMEs that might be interesting.”

Air Berlin, Germany’s second biggest airline after Lufthansa – albeit by a long way – said last week that British-based Russian billionaire Leonard Blavatnik has bought a 19 percent stake in the company.

Meanwhile, Buffett has put out the word that companies should give him a call – because he’s not a prowling predator.

“I kind of go to the office everyday and wait for the phone to ring and hope it isn’t a wrong number,” he quipped at a news conference in Frankfurt.