Seifert’s stock crumbles

May 10th 2005
From The Economist Global Agenda

It took a group of foreign investors to give Germany a taste of shareholder activism by ousting Werner Seifert as chief executive of Deutsche Börse, the world’s largest listed exchange operator. With the tide of capital from abroad rising, Germany’s bosses are likely to face further challenges to their leadership style

IN MANY ways Swiss-born Werner Seifert was untypical of Germany’s business elite, with his pipe, black polo-neck jumpers and love of playing jazz with colleagues in his office. But in other ways he resembled more closely other German bosses, who generally treat minority shareholders with barely suppressed disdain and consider any opinion voiced as an unwarranted intrusion.

On Monday May 9th, Mr Seifert was forced to step down as chief executive of Deutsche Börse, the world’s largest listed stock-exchange operator, ahead of the firm’s AGM on May 25th. His resignation came after a group of British and American shareholders made it clear that they would force him out if he did not go at once. He is joined by Rolf Breuer, who will quit as chairman of the supervisory board at the end of the year, after he has found a replacement for Mr Seifert. Three other supervisory-board members will also go.

The cause of Mr Seifert’s demise was his relentless pursuit of the London Stock Exchange (LSE). He first attempted a takeover of the LSE in 2000 but was rebuffed by the exchange’s managers and shareholders, who feared the Germans would dominate any tie-up. Mr Seifert’s latest effort to win the LSE and turn Deutsche Börse into a global giant began in December last year with an informal offer of £1.35 billion ($2.6 billion). Again the approach was rejected, though negotiations continued.

The approach was made without recourse to Deutsche Börse’s shareholders. Though such consultation is not required by German law, this raised the hackles of several large shareholders. A war of words ensued between Mr Seifert and Christopher Hohn, a managing partner of The Children’s Investment Fund (TCI), a British-based hedge fund that owns 8% of Deutsche Börse.

Mr Hohn’s misgivings over the wisdom of the deal were shared by other British and American shareholders, including the mighty Fidelity Investments. These critics regarded Mr Seifert’s move as expensive and misguided empire-building while dismissing his estimates of cost savings and “synergies” from the takeover. More generally, they felt that Deutsche Börse’s management was losing its way, and in evidence pointed to the share price, which had risen steeply in the months after they took up arms against Mr Seifert.

The disgruntled investors forced Mr Seifert to drop his takeover plans at the beginning of March, and extracted the promise of a share buyback and the setting-up of a “shareholders committee” (powerless, complained Mr Hohn). But Mr Seifert still talked defiantly of another, future bid for the LSE. The threat of a no-confidence vote at the upcoming AGM persuaded Mr Seifert and Mr Breuer to jump before they were pushed.

Some would claim that Mr Seifert has suffered harsh treatment. In his 12 years at the helm of Deutsche Börse he transformed the Frankfurt-based group from a regional exchange operator into a European leader. Deutsche Börse is twice as big by market capitalisation as its nearest rival in Europe, Euronext (the product of a merger between the Paris, Brussels and Amsterdam exchanges in 2000). It lists over 6,000 stocks, most of them foreign. Under Mr Seifert’s stewardship, it also built strong franchises in clearing and derivatives-trading. He oversaw tie-ups with the German and (later) Swiss derivatives exchanges to create the world’s largest futures market. And he introduced an electronic-trading platform that cut costs and boosted efficiency.

But, in taking Deutsche Börse itself public in 2001, Mr Seifert inadvertently sowed the seeds of his own destruction. He needed capital from outside if he was to realise his bold expansion plans. But the new shareholders proved irritatingly independent-minded—especially those Anglo-Saxons who piled into Deutsche Börse shares in the months before it launched its latest bid for the LSE. Unfortunately, neither the London setback nor Deutsche Börse’s failed attempt to prise large amounts of American derivatives business from the Chicago Board of Trade, tempered Mr Seifert’s imperious approach to running his firm. Right to the end, shareholders’ money was more welcome than their views.

What the future holds for Deutsche Börse and European stock-exchange consolidation is unclear. The LSE lacks a derivatives business, the fastest-growing area of trading these days. A tie-up with Deutsche Börse would have given it that. The LSE is still tentatively investigating a merger with Euronext, though there has been speculation that the Paris-based firm might instead cut a deal with the Germans. Despite many a prediction in recent years that Europe-wide consolidation was just around the corner, it is possible that all three exchanges will carry on separately for some years to come. The main barrier to mergers used to be national pride; now it is shareholder doubts about the returns.

Making political capital by attacking international capital

The ousting of Mr Seifert and Mr Breuer comes at a time of soul searching by Germany’s politicians about the nature of German capitalism (or at least the search for political capital ahead of an important regional election in North Rhine-Westphalia on May 22nd). A leading member of Germany’s ruling coalition recently compared the profit-centred schemes of “international capital” to the action of “locusts”. Hans Eichel, Germany’s finance minister, also expressed concern about short-term investors, pointedly picking out Deutsche Börse as one of their targets.

The intrusion of foreign investors is making life uncomfortable for German bosses and politicians alike, but the country’s hybrid social-market economic model is failing. The economy is languishing in the doldrums while the consensual approach holds out against the advance of the market. In forcing out Mr Seifert and Mr Breuer, Deutsche Börse’s shareholders have thrown a spotlight on the cosy and tight-knit club that operates at the top of German business.

Mr Breuer also chairs the supervisory board of Deutsche Bank, which acted as adviser and financier for Deutsche Börse’s bid for the LSE—a conflict of interest that would beggar belief in Britain or America. Several other supervisory-board members also have links with Deutsche Bank. Now that a precedent has been set with the shake-up at the Börse, foreigners are likely to wield their power more forcefully and effectively. Other large German firms have good reasons to worry: non-Germans now control more than half of the freely traded shares of the average company in the Dax index of blue chips. A stiff dose of corporate reform would be enough to give even the cheeriest of boardroom musicians the blues. But it may be just what is needed to put Germany’s economy back on track.

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