Germany’s mittelstand companies are renowned for their technical expertise and efficiency. Usually trading on the MDAX, they combine innovation and experience in a way that often confounds Anglo-Saxon pundits. However, even their best friends would admit that the cutting edge of their IR is unlikely to slice a sausage in the local beer garden.
Compared to most of its mittelstand peers, Friedrich Grohe AG seems somewhat ahead of the game. But life ain’t easy for these German mid-caps, even if you are clued up on IR. Grohe’s investor relations officer, Thomas Hildenbrand, is quick to point out some of the difficulties. For a start it’s difficult to know who many of his investors are because of the German bearer share system. ‘We have no shareholder registers. There is no way to trace them. They are really anonymous, it’s like looking in the dark,’ he says. And with one million non-voting shares floated, it’s something like a black hole. On the other hand, Hildenbrand knows exactly who controls the majority because they are in the hands of two founding families.
Grohe makes high-tech faucets, showerheads and other bathroom accessories that make it one of the world’s three brand leaders in the sector. Two-thirds of its sales are abroad and almost half of its stock is foreign held. Taking the two together, perhaps it’s not surprising that Grohe’s IR is based on the free and unclogged flow of information to its investors.
IR on tap
Hildenbrand moved into investor relations from a financial background. He worked as a financial controller for a French group before taking charge of business development and IR for German Technology group GEA. He joined Grohe in 1996 and admits that most of his IR technique has been learnt on the job, ‘But it’s much easier coming from the financial side rather than the PR side.’ He attended IR seminars in Germany and the Stockholm International Investor Relations Federation conference. ‘And my bible is Investor Relations by William Mahoney,’ he says.
But how relevant is the Anglo Saxon model of IR for Germany? ‘There is only one model. That’s it. I try to push for more transparency, more financial press releases and our CEO is very open to that.’ He points out that by German standards, Grohe is very speedy with results, and produces quarterlies – which aren’t compulsory in Germany. ‘It helps that we have an excellent track record with good margins. Every year we have had a dividend increase.’
While he can’t say exactly who owns the shares, he knows what types of investors he has because the banks have to provide those figures. The company has a very high 44 percent in foreign investors’ hands (30 percent in Europe and 14 percent in the US). Of its float, 46 percent is held by banks and insurers, 28 percent by investment companies, and 23 percent by individuals – far higher than the usual 15 percent in German companies. ‘We are very comfortable with that. Individual investors are long-term oriented, so that’s a good mix as well.’ Naturally this makes for a reactive style of IR. ‘And I don’t know any German company doing it differently,’ he confesses. ‘We cannot say that we target our shareholders by name and company, in detail, so for one-on-ones and other types of contacts we have to wait for them to call us.’ So he tries to contact them indirectly, raising their interest through the quality of publications and through advertising.
He feels that many analysts and fund managers would think it pushy if he called them cold. ‘My feeling and experience is that they prefer to have the first shot. So if they are touring Germany and want to see mittelstand companies like Grohe, the analyst or the fund manager would call and ask for an appointment with us.’
Adventurous history
Grohe has an interesting history, which, Hildenbrand suggests, might explain its relatively innovative approach to the capital markets. From 1968 to 1984 it was 51 percent owned by ITT. ‘It meant management here learnt American ways of doing business and planning and controlling the business, which is exceptional for a German mid-cap company.’ It was also the time that the company began to focus on return on capital and investment in internationalization of the business, opening up subsidiaries in all major markets. In 1984, the founding Grohe bought back ITT’s stake, ‘for an interesting price, looking at the value of the company today.’
The acquisition left the company in debt, and in 1991 it went public to reduce leverage and raise fresh capital. It increased its capitalization in 1994 to finance an acquisition. However, there was nothing American about this deal. The Grohe family holds 74 percent of the 1.7 mn voting shares and the Rost family, as part of the 1994 acquisition by share swap, holds the other 26 percent, in addition to some 280,000 non-voting and non-floating shares. The other million floating shares are, of course, also non-voting. Needless to say, with a non-voting share structure considered shareholder-unfriendly by US institutions, Calpers has no holding.
Domestic listings
Grohe is only listed on Frankfurt, Dusseldorf and other German exchanges. ‘In the future if we made a major acquisition then we may consider an ADR in New York, but we would need to have voting shares to list abroad,’ he says. No moves yet, on either count. Under pressure from EU company law harmonization proposals, this voting/non-voting structure, which Hildenbrand estimates to be typical of about a quarter of MDAX companies, is on its way out. However, he suspects that Brussels would allow a phase-in period of at least a decade to enable the family owners in Germany to get over the shock. He is also at pains to point out that despite its global reach, Grohe remains a relatively small company. ‘We only have a market cap of DM1.8 bn ($3.2 bn)and one-third floated, but even so we have a very good reputation in the capital markets and for our investor relations. It is no problem doing a roadshow, there a lot of banks who are only too happy to go with us on tour; and arrange one-on-one meetings.’
The German magazine, Capital, rated Grohe fifth of all German companies for the quality of its one-on-ones, and among MDAX companies alone, Grohe’s annual report and financial communications were also ranked number five. But, Hildenbrand keeps a sense of proportion. ‘We are not like a DAX company where we have to follow up with major shareholders four times a year. Once a year is enough for most of our investors.’
Even so, Grohe has an intensive program with twice yearly roadshows to London and annual trips to the US. Hildenbrand accompanies CEO Klaus Weisshaar on the trips, and points out that his boss is a major IR asset. ‘He is charismatic, speaks very good English, and actually enjoys IR, as well as taking it seriously. Last time we were in the States we had 30 meetings in five days: New York, Boston, Milwaukee, Chicago and then the West Coast.’
Apart from an annual trip to Switzerland, visits to countries like France and the Netherlands are more in response to investors’ interest. ‘French investors are mainly interested in the DAX. At our size, we’d have to be in chips or software to raise much interest,’ Hildenbrand notes, even though more people have bathrooms than personal computers.
Hildenbrand regularly points to the differences between German mittelstand IR and that of, say, an Anglo-Saxon blue chip. Roadshows are no different. ‘In your magazine and in the books they recommend you do all the IR in-house, or to hire a consultancy. But for our size, I’ve found it’s more cost-effective to use banks. I asked for quotes from consultants, and you cannot do anything for under $30,000. When we do it this way, it’s just the airfare for two people.’
Of course, the meetings flow is two-way as well, with between 25 and 30 one-on-ones per year conducted at Grohe’s headquarters. Most of the investors visiting are British or American (‘You rarely have German investors asking for a one-on-one meeting’) and Hildenbrand conducts the bulk of them himself. A good internal information flow means he feels he can confidently speak for the company in a one-on-one in the absence of senior management. Still, Weisshaar is more than happy to step in when an investor with a large stake requests a meeting with Grohe’s chief executive. Plant tours are also part of the investor relations program and are a means of developing relationships with new investors to include on future roadshows.
Online marketing
Grohe has just established a web site (www.grohe.com) which at the moment remains more of a marketing tool than an IR venue. It hopes to soon have instantaneous release of results on the web to match the worldwide blast fax system, but it’s a very new site. When asked why there are no clues to who the IRO is and how to get in touch, Hildenbrand confesses: ‘We have a very small infrastructure here, so it’s easier to handle requests by e-mail or mail. Of course, in the financial community, the potential investors in Grohe know the company, know our CEO and they know me, so they can find me.’
And what about the individual investors? ‘Most private German investors, are people with money who can really afford to invest, and they don’t call companies directly, though they are beginning to. Basically, they get the annual report and that’s it.’
Grohe is not large enough to allow Hildenbrand to devote all of his time to IR. He also retains responsibility for business development and is considering acquisition possibilities. The advantage of his other duties combined with IR is twofold: he reports directly to the CEO and has regular contact with him and the newly appointed CFO, Klaus Hoevermann (Weisshaar previously did both jobs so he now has ‘more time to focus on strategy’).
The business development role also means that Hildenbrand analyzes Grohe’s competitors, to the extent that sell-side analysts rely on him to help them with industry background. ‘A unique strength of Grohe is that we have a very sophisticated market development department. In an industry of this size with a lot of competitors that’s a big advantage.’
To date Grohe has not had to cope with any investor relations crises, but Hildenbrand is ready to be ‘open and quick’ to react should one come along. In that regard, one small consolation of the world of German investor relations is that there are no momentum players in the market. ‘We have a lot of long-term investors, and a daily turnover of only around 5,000. The problem remains our relatively small free float. When a fund manager decides to go into Grohe – or decides to get out – it can push the price up or down disproportionately.’ In December, for example, two investors sold and the share price dropped ten percent. Hildenbrand adds ruefully: ‘A fund manager stepped in to buy at a very attractive price, but couldn’t find any shares to buy.’
It’s a different world – but it is changing.
