Commentary: Germany Inc.: Time to Pull the Plug

By Jack Ewing

For years, top bankers have been proclaiming the death of Germany Inc., the web of cross-shareholdings and personal connections that coddled and stifled the nation's industry. Well, it turns out someone forgot to drive a stake through the beast's heart. Just as Leo Kirch's Munich-based $5.1 billion media empire seemed ready for burial, the coffin lid has swung open once again. The HVB group, one of Germany's largest banks, is offering to buy Kirch's stake in publisher Axel Springer for about $870 million. Other banks may bid, too. The sale could buy Kirch and his creditors enough time to find a way out of their financial mess.

The cast of characters and the plot here are familiar to anyone who knows how the German establishment operates. Bayerische Landesbank, a state-controlled bank and lender of $1.7 billion to Kirch, also nudged banks such as HVB to lend hundreds of millions more to the media company, whose total debt may top $5 billion. Now neither the Landesbank nor Edmund Stoiber, the Bavarian Prime Minister who's running for chancellor, wants this fixture of the Bavarian economy to come undone in an election year.

Trouble is, Kirch probably deserves to go under. Its problems are further proof that the Germany Inc. concept is out of date in this age of shareholder value. If free-market principles applied, the 75-year-old Kirch would probably have to break up his company and relinquish control. Instead, led by the Landesbank--whose supervisory board is stacked with government functionaries--the banks have kept Kirch Group afloat. Now the company's obligations are so deep that its backers can't afford to let it fail.

Deutsche Bank's involvement in the Kirch affair is a telling example of Germany's corporate arrangements at their most incestuous. Over the last several years Deutsche loaned Kirch $535 million. But Deutsche is also close to Kirch archrival Bertelsmann: Deutsche Bank CEO Rolf E. Breuer sits on the supervisory board of the G?tersloh-based publisher and broadcaster. The venerable German bank also owns 12% of DaimlerChrysler, which is following the drama closely: Kirch owns broadcast rights to Formula One auto racing, and the carmaker covets them. Given all these conflicting relationships, Deutsche Bank is open to accusations it's favoring some customers over others.

It's clear whom the politicians favor. They were terrified that somehow Rupert Murdoch would get control of the Springer stake. Kirch Group and Murdoch's BSkyB are currently partners in money-losing KirchPayTV. But Murdoch wants Kirch to buy him out, an option stated in the terms of their original agreement. The fear was that if Kirch couldn't find the dough for the buyout, Murdoch would be able to grab some group assets, including its shares in Springer, which publishes Bild, Germany's bestselling tabloid. To the intense relief of Germany's political class, HVB's offer seems to rule out the possibility of Murdoch turning Bild into a bully pulpit for his conservative politics.

And what about Herr Kirch himself? You have to tip your hat to a man who in 1956 parlayed the German rights to Federico Fellini's La Strada into a media empire. But Kirch doesn't deserve any more breaks. His woes are largely self-inflicted. In the mid-1990s, Kirch inked multibillion-dollar deals with Hollywood studios that were supposed to guarantee him the best of their output. But--perhaps because much of the content wasn't very good--Kirch's pay-TV business never took off. Other companies deserve a chance to run these assets better.

The good news is that the Kirch episode probably has taught Germany's movers and shakers a lesson. Even though the rescue is under way, some of the bankers involved have shown a decided reluctance in playing their assigned roles. There are signs, for instance, that Deutsche Bank would prefer to restructure Kirch Group, rather than bail it out. "The Kirch circus shows that Germany Inc. still exists," says one senior investment banker. "But it is in its death throes." Incoming Deutsche Bank CEO Josef Ackermann is a Swiss national with no emotional attachment to Germany Inc. The German economy will be better off if he nails down the coffin lid for good. Frankfurt Bureau Chief Ewing covers German media.

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