• Tech

Great Expectations

7 minute read

Until recently, calling a european executive Anglo-Saxon was considered a compliment. It meant the manager had a global outlook, was focused on the bottom line and gave top priority to keeping shareholders happy. Lately, however, the term has become an insult, suggesting an egotistical empire builder more interested in expanding the company through acquisitions than in the health of the core business.

The first to come to grief over his Anglo-Saxon ambitions was Jean-Marie Messier, a Frenchman equally at home in New York as in Paris. Messier was forced out as chief executive of entertainment giant Vivendi Universal last month because he ran up huge debts in a spree of expensive media acquisitions, among other sins.

Now it is the turn of Thomas Middelhoff, chief executive of the German media giant Bertelsmann. He was so fond of the U.S. entrepreneurial culture that he began calling himself an “American with a German passport.” But his plan to transform the firm from an insular private company to a stock market star ended up vexing the family that owns it. Last week, Middelhoff was out. “He was a real wheeler-dealer at a time when we’re in a back-to-basics market,” said Nick Bell, media analyst at Bear Stearns in London. “I think he was pushing too fast. It’s a very conservative group.”

In a farewell letter to the staff Middlehoff, 49, said he was leaving because “it was obvious that my strategy was not compatible any longer with the views of the supervisory board and those of our majority partner.” In a television interview, he said the main difference with that majority partner — the Mohn family, which controls 74.9% of the shares — was over a stock market listing expected in 2005. “It was my plan to keep Bertelsmann at the top of the world,” Middelhoff said.

It’s hard to knock Middelhoff for his record at Bertelsmann. He convinced the company to buy a stake in the Internet service provider American Online when it was still a fledgling company. Later, he arranged to sell the stake back to AOL for a $7 billion profit. The deal helped land Middelhoff the CEO job in 1998. He profitably sold off a stake in the German pay-TV service Premiere World long before the company, owned by media tycoon Leo Kirch, went bust. Middelhoff also persuaded Bertlesmann to buy the giant U.S. publisher Random House for $1.2 billion. His contract, reportedly paying him j8 million a year, was extended for five years only last month. (His payout is expected to be suitably generous.)

Some of Middelhoff’s recent deals have been less successful. Bertelsmann invested heavily in e-commerce, including a stake in the booksellers Barnes & Noble.com in the U.S. and bol.com in Europe. He also put $30 million into Napster, which he hoped to turn from an illegal song-sharing website to a legitimate portal for selling music. The site is currently being retooled for its new mission. Last year, Bertelsmann admitted having 890 million in Internet startup losses. Another questionable buy was the $550 million or so Middlehoff paid for the U.S. magazines Fast Company and Inc. just as the Internet boom was fading and advertising along with it.

One of Middelhoff’s most controversial deals was last year’s purchase of a controlling stake in the big European broadcaster rtl. Bertelsmann, which already owned 37% of rtl, got another 30% from Groupe Bruxelles Lambert in exchange for 25.1% of Bertelsmann’s shares. Some analysts found the price too high. But what really made the deal hot was Bertelsmann’s agreement to allow Groupe Bruxelles to sell the shares on the stock market as soon as 2005. Until then all of the company’s shares were closely held by the Mohn family and had never been traded. Middelhoff had made no secret that he wanted publicly traded shares to use as currency in making further acquisitions. He pushed the Mohn family to sell some of its stake in the company at the same time as Groupe Bruxelles, but the family balked.

The family is headed by Reinhard Mohn, 81, who built a 19th century printer of church hymnals into one of Germany’s most successful private companies, with interests from magazines and newspapers in its Gruner + Jahr subsidiary to its record and music company BMG, which includes recording stars like Christina Aguliera and Whitney Houston. Last year the company had earnings of €970 on revenues of €20 billion.

Even when he was supporting Middelhoff, Mohn had indicated he would go only so far in transforming the company. In an interview with Die Zeit last year, Mohn was asked why he hadn’t taken the company public. “But then I could hardly have established this special enterprise culture,” he said. “Corporations, especially the shareholder-value-oriented companies in the U.S., show a different attitude to capitalism.” Told he could be one of Europe’s richest men through an initial public offering, Mohn replied, “That does not mean anything to me.”

Though Mohn remains in ultimate control, there were indications last week that he was ceding more responsibility to his wife Liz, 61, a former secretary at the firm who met Reinhard during a game of musical chairs. According to German newspapers, it was Liz Mohn who confronted Middelhoff last week and told him he had to go. It was also she who was appointed last week to head the Bertelsmann Verwaltungsgesellschaft, the holding company that controls the corporation through the shares owned by the family as well as the secretive Bertelsmann Foundation.

In addition to the dispute about taking the company public, there were clear personality differences between the hard-charging Middelhoff and the more restrained culture at Bertelsmann. Middelhoff tried to force the company to centralize. But Bertelsmann executives “didn’t want to give up their independence,” said Dan Arendt, head of the technology, media and telecom practice at Deloitte Touche Tohmatsu. “There’s a strong culture of entrepreneurship.”

There were other differences as well. Bertelsmann is located in the sleepy town of Gütersloh near Hanover, far from the media centers of New York, London and even Hamburg. Middelhoff offended some executives by discussing their shortcomings in open meetings. He was also comfortable speaking to the press about the company’s future plans, which did not sit well with its insular culture. Middelhoff’s hard-nosed approach to business may yet help him to find another job. There was speculation last week that he might be chosen to head Deutsche Telekom, the telephone giant whose chief executive, Ron Sommer, was ousted last month.

Middelhoff’s replacement is Gunter Thielen, a 17-year Bertelsmann veteran who heads its successful Arvato division, a printing and business-to-business e-commerce unit. But he previously ran the family holding company, which placed him philosophically close to the Mohns. After taking over last week, Thielen made it clear he was going to slow down the pace of expansion. “It’s not the time for great leaps,” he told the news agency DPA. “We will deal less and shape more.” That could mean some selloffs, possibly of the underperforming U.S. media properties. One deal Thielen will have to come to grips with is the purchase of Zomba, the record company of Britney Spears and ‘n sync. In a deal made before Middelhoff’s time, Bertelsmann agreed to buy outstanding shares in the company for almost $3 billion. Thielen has confirmed that the public offering of Groupe Bruxelles shares would proceed, but he ruled out the family’s selling any of its holdings. “A change of the enterprise strategy was appropriate because of the quick and dramatic changes on the world markets,” he said. In other words, the insular, rural German culture of Gütersloh had triumphed over the Anglo-Saxon.

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