Summer will no doubt witness the usual frenzied rush to resorts at home and abroad by German tourists, but it could also be the season for frenetic meetings in board rooms as investor relations practitioners and their colleagues unbutton shirt collars and roll up sleeves for reasons other than the sweltering heat. The reason for the unseasonal rush is an inevitable flurry of fresh questions about future strategic direction in light of a major reform of the country’s capital gains tax currently being considered by the German parliament.
Parliament’s eventual decision – expected in either June or July of this year – could bring an end to the tax of up to 50 percent which is currently levied when companies divest their stakes in other businesses. If agreed by parliament, the reform would actually come into force some time next year and become a vital component in the restructuring of Germany’s economy. As a result, German companies will be eagerly tuning in to this summer’s parliamentary debates with as much avidness as German soccer fans display when watching Euro 2000.
Play it cool
Rather like good soccer managers whose team is facing an especially tough game, many investor relations officers are choosing to play down the significance of the tax abolition although they are quietly admitting that it will indeed affect their company’s strategy.
German-based engineering and electronics conglomerate Siemens says at the very outset that its divestment strategy is largely unaffected by the proposals. Its plan has long been to focus the group’s business on core competencies while selling off divisions that no longer fit in with its strategic objectives.
‘We make sure that we are constantly looking at our businesses to see if they help to put us in number one or number two position in the world market,’ says company spokesman Stefan Denig. ‘If we cannot achieve that then we have a number of other options, including the closure or sale of businesses. It is an ongoing thing which of course will benefit from these tax reforms.’
But while the planned tax abolition may discernibly affect the pace of Siemens’ divestment strategy, it certainly won’t distort the company focus. ‘In contrast to the banks and insurance companies we do not have such very big financial programs,’ Denig explains. ‘The divestment program which is going on now primarily concerns businesses that no longer fit into our portfolio.’ This ongoing strategy of divestment is guided by the application of certain key measures such as the economic value added (EVA) yardstick as well as assessing the return on capital employed.
‘So in terms of the implications that these reforms have for shareholder value, we welcome the plans,’ Denig says. ‘Indeed, we believe that it is another step in the right direction because it does make divestment a great deal easier. But we do already have a process in place at the moment which pre-dates the proposed reforms.’
A focus on core activities is a common theme among German companies. RWE, a multi-utility, multi-energy conglomerate, is another company that is refining its operations, and some possible divestment candidates have already been identified.
Nominees identified by outside observers include a holding in printing press manufacturer Heidelberger Druckmaschinen and a stake in construction company Hochtief, though the company denies that these companies are up for grabs. ‘The abolition of the capital gains tax makes possible divestments more attractive, but both Hochtief as well as Heidelberger Druckmaschinen are not on the company’s selling list,’ explains an investor relations spokesperson for RWE.
‘The group’s strategic repositioning – involving our concentration on core businesses – has just taken place. In terms of the company’s domestic objectives, the tax abolition would have a really positive effect. In fact, we think that investors would in general appreciate divestments if we were to invest the proceeds from each sale in our core business,’ she goes on to explain.
Pondering options
Deutsche Telekom also appears to be pondering its options once the tax goes. The communications giant is currently in the process of selling its majority stake in its North Rhine Westphalia regional cable television company and plans to close the deal by the middle of the year. Deutsche Telekom spokesman Hans Ehnert explains: ‘We have separated our television and cable activities into nine units and we are negotiating with six partners. Some of these deals will not be finalized until the beginning of next year, depending on what the government decides. Of course, we are waiting for the tax abolition before we proceed with all these divestments so that we can save tax and increase shareholder value.’
While Deutsche Telekom’s sole example of divestment may be very different from other companies that have a number of divestments to consider, it surely cannot be as different from the norm as Aventis, the chemical and pharmaceuticals group. It recently became a fully-fledged French company, and it is a good example of an organization where the strategic objectives of the group far outweighed any taxation penalties that it faced.
Aventis still has peripheral interest in the proposed tax abolition through one of its antecedents, Hoechst. Hoechst retains its quote on the Frankfurt Dax and has already carried out an enormous divestment agenda despite the less favorable tax regime. However, there are some divestments still to be considered – like its 67 percent stake in gas company Messer.
Aventis spokesman Carsten Tilger explains: ‘In the case of Messer we have said that we will now think about how to go about divesting the company in light of this new tax legislation. It makes sense. If one has the chance to sell a business in November and pay 50 percent tax or to sell it in January 2001 and pay zero tax, that is where you say, Let’s evaluate all of the options,’ he says.
But he also stresses that Aventis has been going through billions of euros of divestment activity over the past few years and its strategy has always been stronger than the obstacles that it had to overcome to realize that strategy. The underlying value that Aventis wanted to create and the strategy that it wanted to follow was much more important. Indeed, by being innovative the company found it could make divestment a little bit more tax efficient.
‘A recent move was a demerger from Hoechst of the chemical company Celanese, which is now listed in New York and Frankfurt. For every ten Hoechst shares our existing shareholders received an additional Celanese share. By demerging the company to our existing shareholder base, this was much more tax efficient than doing a real IPO,’ Tilger adds. ‘The Hoechst company had less business than it did before, but the share price went up and the new company price did well too. Very simply, this was a good example of creating shareholder value.’
Enter the banks
Many observers believe it’s banks and insurers that will be most affected by the death of the 50 percent tax on divestments, since most have cross-holdings in non-core activities and in competitors. Munich Re has many holdings in other German companies – including a 25 percent stake in fellow insurer Allianz. Clement Booth, a member of the board of management, welcomes the proposed reforms because, up until now, the tax has been an inhibiting factor. The proposed change will allow investment decisions to be made entirely on their own merits without having to consider the tax issue.
‘The market has taken a certain position as regards our stock value in relation to the existing tax situation,’ remarks Booth. ‘If this changes it will establish a new market perception of our value. That in its own right is a very positive feature.’
Booth talks of a ‘value distraction’ element caused by the existence of the capital gains tax. ‘While it may be good to have a shareholding for strategic reasons, the capital gains tax makes it a less attractive proposition because of constraints on what a company can do with such stakes. But, we have never really developed too much of a discussion around this issue as it was not something we could do much about.’
Thinking again
Munich Re has stated in the past that certain holdings might be reconsidered in the light of the new tax environment. Typically, these would be ‘non-strategic’ holdings which are in any case insignificant in relation to the big picture. Amongst these are marginal holdings in Heidelberger Druckmaschinen, MAN and IKB bank.
‘In the past it has not been a question of holding on and saying, Well this stake in company x represents a good address and also gives us a friendly relationship with that organization. We would not hold on to such a shareholding against our financial judgement. Not before and not in future,’ says Booth. ‘However, with marginal cases one could not ignore the tax impact because it was huge and the major part of the sale would end up in the hands of the government.’
He believes the issue has to be looked at not so much in terms of divestment strategies but in terms of the tax abolition being a major new factor introduced into the equation. This will be fully taken into account when considering shareholdings that don’t perform to the company’s expectations. ‘Those which do not and which are not clearly strategic stakes will therefore be sold or will be put under the microscope more thoroughly,’ he says.
Munich Re appears to be on the verge of a real change in the way it conducts investor relations and the tax reform might have an impact on this shift. Previously the company concentrated its investor relations activities on receiving visits from analysts at its Munich headquarters. It was ‘not a very aggressive’ investor relations strategy, says Booth, but it was appropriate in the days when the company only needed to speak to a handful of institutions.
As the company’s free float increases – the number of shareholders is 2.5 times what it was two years ago – investor relations activity will no doubt step up a gear. ‘Our board is extremely aware of the environment and of the need to give very clear answers to key questions. Looked at over time I think that any substantial force has an effect on the business and the tax abolition could be in this category,’ Booth explains.
The company has also recognized there is a need to be more overt with its shareholder value message, though there’s no need to ‘turn the business on its head’ to achieve this.
Booth continues: ‘When we talk about divestments – as presently everybody does – this implies you not only have a divestment policy but a corresponding investment policy. As regards our relationship with Allianz, we still see a very strong relationship between our two organizations. How exactly that may evolve in future is another question, but it’s a longstanding and forward-going relationship, which both parties consider to be of high strategic value.’
Broad spectrum
In stark contrast, there are some financial services companies that are largely unaffected by the new tax reforms. At Bankgesellschaft Berlin, IR manager Hans Mindermann says that while the financial services group covers a broad spectrum of activities – including retail banking, capital management and real estate – it does not really have substantial industrial holdings and the tax reform probably won’t have a significant impact on the company.
But Mindermann goes on to observe: ‘The reform would be a very positive step – especially for IR in Germany. There is a shortage of IROs here and the demand for them will continue to grow,’ he says. ‘Last year we had about 200 IPOs in Germany but the number of IROs is still very limited.’
As a result, Mindermann frequently receives calls from headhunters – no doubt as taxing an experience as explaining your group’s complicated divestment strategy to an analyst.
But he’s clearly unattracted by the offers, although other investor relations professionals may well be tempted. If, as some observers predict, the tax reform precipitates a mass restructuring of German companies, investor relations practitioners may not only want to brush-up on their tax knowledge; they may also want to dust off their resumŽs as demand for experienced hands continues to grow.
