LONDON CALLING
Germany Is Changing--Somewhat
Western Europe's biggest country has become a pretty appealing place, tax reform or no.
FORTUNE.COM
Thursday, November 1, 2001
By Justin Fox
Germany Is Changing--Somewhat
A Gas-Guzzling Scapegoat
When Will Harmony Return?
The New Friction-Filled Way of Flying
A City in Sadness
Archive
For a long time now, people have been predicting that some event or other was about to change everything for European business. That was the line in the months leading up to the birth of the euro as a financial entity in 1999. The euro's debut next year as a genuine paper and metal currency is spurring similar chatter, as I'm sure the advent of the single European market did back in 1993.
But everything never changes in Europe. This is a region that, despite a widespread willingness to put naked people on prime-time broadcast TV, is in most ways much more conservative than the U.S. Especially in matters relating to business, labor relations, financial markets, and such, revolutionary change simply isn't in the cards. Evolutionary change, sure. In fact Europe often doesn't get credit for the changes that do happen because everyone's always so focused on the ones that don't.
So right now we're coming up on another of these events that's supposed to change everything for Western Europe's biggest country and the world's third-largest economy, Germany. This time it's a rewriting of the German tax code and, I kid you not, I have an actual report from Commerzbank on my desk titled: "The German Tax Reform: Change Tax and You Change Everything." So here's my bold prediction: Lowering income-tax rates for individuals and corporations, and eliminating capital gains taxes for corporations selling stakes in other corporations, isn't going to change everything.
It will, however, change some things. So on Tuesday, after avoiding the topic for months, I finally gave in and talked to somebody about the tax reforms, which start to kick in Jan. 1. The somebody's name is Hartmuth Jung, and he runs UBS Warburg's German operation. He's an M&A guy, so the tax reform he's most interested in is the one involving capital gains, which will presumably motivate German banks, insurance companies, and other corporations to start selling off their huge stakes in other corporations (Commerzbank estimates that about 50% of German equity is tied up in such cross-shareholdings), thereby untangling the keiretsu-like webs that have governed German corporate life for decades.
The motivation is pretty obvious. If Deutsche Bank were to sell its 12% stake in DaimlerChrysler tomorrow, it would pay a 50% tax on the capital gains. If it sold its stake in January, however, the tax bill would be zero. Jung doesn't expect Deutsche and Germany's other big corporate shareholders to start selling their stakes immediately--they won't want to give the impression that they need to sell, and most will also want to wait around to see if equity markets can stage a serious comeback. But he does expect big selloffs over the next few years, and he thinks they'll force German companies to become more shareholder-friendly, more focused (Germany still has a lot of conglomerates), and more likely to need the services of investment bankers like Hartmuth Jung.
That, I'm willing to accept. A sudden explosion of change, no. But change, sure. Because Germany has been changing. When Jung got into the investing-banking business in the 1980s, only five or 10 companies went public in Germany every year, mergers were rare, and, he says, "capital-markets-related thoughts were irrelevant." Last year 153 companies went public in Germany and the value of announced M&A deals involving German acquirees topped $100 billion. This year's numbers are way, way down, of course, and the spectacular rise and collapse of Germany's tech- and media-heavy Neuer Markt has probably made lots of German small investors wish they'd never had a capital-markets-related thought. But still, it's definitely not the 1980s anymore.
* * *
My own perspective on how Germany is changing doesn't have much to do with investment banking. I was, I'm afraid, paying no attention to German capital-market developments in the 1980s. But I was paying attention to Germany. I spent a significant part of that decade (well, a quarter of it) living in two countries that border Germany (the Netherlands and Austria). I read German papers, I sometimes watched German TV, I listened to German music. And while I did think the German version of those Bob-Geldof-inspired "feed the world" celebrity songs in the mid-1980s was possibly the best of the lot, the country generally seemed like a stiff, gray, humorless place where I didn't want to spend my time.
I still have never spent more than three consecutive days in Germany. But I do get over there a lot. I watch late-night TV in German hotels, eat dinners with German businesspeople, read my Der Spiegel every week, and buy the occasional German music CD and read the occasional German book. (All of which means that I have about the same perspective of Germany that the average educated German has of the U.S., except they've all spent a couple weeks in Florida at some point.)
And here's the thing: Germany has become a pretty appealing place. On late-night TV there's Harald Schmidt, who was mocked in the Wall Street Journal as a pathetic Letterman wannabe when he launched his show six years ago but is now a beloved national institution whose show is always more thoughtful and sometimes actually funnier than the original. The German businesspeople I meet, especially the under-40 ones, are a charming, sharply dressed, worldly bunch. Der Spiegel has been transformed from the grating organ of the know-it-all left I remember from the 1980s into a remarkably deep, nuanced, well-written weekly portrait of the world.
I don't want to go overboard on the German pop music, but I can say that '80s pop-star Nena's foray into children's music is an unqualified success. Her CD Rabatz is one of my two-year-old son's favorites. As for books, I just finished Generation Golf, journalist Florian Illies' best-selling riff on the cohort of Germans (born between 1965 and 1975) who drive VW Golfs, wear nice clothes, get along with their parents, watch Harald Schmidt, and don't much go for protest marches. I think it's even cleverer than David Brooks' Bobos in Paradise, although I can't be entirely sure since I only got about a third of the pop-culture references.
I don't know what all this means for German financial markets and the German economy. But it is pretty cool, no?
Germany Is Changing--Somewhat
Western Europe's biggest country has become a pretty appealing place, tax reform or no.
FORTUNE.COM
Thursday, November 1, 2001
By Justin Fox
Germany Is Changing--Somewhat
A Gas-Guzzling Scapegoat
When Will Harmony Return?
The New Friction-Filled Way of Flying
A City in Sadness
Archive
For a long time now, people have been predicting that some event or other was about to change everything for European business. That was the line in the months leading up to the birth of the euro as a financial entity in 1999. The euro's debut next year as a genuine paper and metal currency is spurring similar chatter, as I'm sure the advent of the single European market did back in 1993.
But everything never changes in Europe. This is a region that, despite a widespread willingness to put naked people on prime-time broadcast TV, is in most ways much more conservative than the U.S. Especially in matters relating to business, labor relations, financial markets, and such, revolutionary change simply isn't in the cards. Evolutionary change, sure. In fact Europe often doesn't get credit for the changes that do happen because everyone's always so focused on the ones that don't.
So right now we're coming up on another of these events that's supposed to change everything for Western Europe's biggest country and the world's third-largest economy, Germany. This time it's a rewriting of the German tax code and, I kid you not, I have an actual report from Commerzbank on my desk titled: "The German Tax Reform: Change Tax and You Change Everything." So here's my bold prediction: Lowering income-tax rates for individuals and corporations, and eliminating capital gains taxes for corporations selling stakes in other corporations, isn't going to change everything.
It will, however, change some things. So on Tuesday, after avoiding the topic for months, I finally gave in and talked to somebody about the tax reforms, which start to kick in Jan. 1. The somebody's name is Hartmuth Jung, and he runs UBS Warburg's German operation. He's an M&A guy, so the tax reform he's most interested in is the one involving capital gains, which will presumably motivate German banks, insurance companies, and other corporations to start selling off their huge stakes in other corporations (Commerzbank estimates that about 50% of German equity is tied up in such cross-shareholdings), thereby untangling the keiretsu-like webs that have governed German corporate life for decades.
The motivation is pretty obvious. If Deutsche Bank were to sell its 12% stake in DaimlerChrysler tomorrow, it would pay a 50% tax on the capital gains. If it sold its stake in January, however, the tax bill would be zero. Jung doesn't expect Deutsche and Germany's other big corporate shareholders to start selling their stakes immediately--they won't want to give the impression that they need to sell, and most will also want to wait around to see if equity markets can stage a serious comeback. But he does expect big selloffs over the next few years, and he thinks they'll force German companies to become more shareholder-friendly, more focused (Germany still has a lot of conglomerates), and more likely to need the services of investment bankers like Hartmuth Jung.
That, I'm willing to accept. A sudden explosion of change, no. But change, sure. Because Germany has been changing. When Jung got into the investing-banking business in the 1980s, only five or 10 companies went public in Germany every year, mergers were rare, and, he says, "capital-markets-related thoughts were irrelevant." Last year 153 companies went public in Germany and the value of announced M&A deals involving German acquirees topped $100 billion. This year's numbers are way, way down, of course, and the spectacular rise and collapse of Germany's tech- and media-heavy Neuer Markt has probably made lots of German small investors wish they'd never had a capital-markets-related thought. But still, it's definitely not the 1980s anymore.
* * *
My own perspective on how Germany is changing doesn't have much to do with investment banking. I was, I'm afraid, paying no attention to German capital-market developments in the 1980s. But I was paying attention to Germany. I spent a significant part of that decade (well, a quarter of it) living in two countries that border Germany (the Netherlands and Austria). I read German papers, I sometimes watched German TV, I listened to German music. And while I did think the German version of those Bob-Geldof-inspired "feed the world" celebrity songs in the mid-1980s was possibly the best of the lot, the country generally seemed like a stiff, gray, humorless place where I didn't want to spend my time.
I still have never spent more than three consecutive days in Germany. But I do get over there a lot. I watch late-night TV in German hotels, eat dinners with German businesspeople, read my Der Spiegel every week, and buy the occasional German music CD and read the occasional German book. (All of which means that I have about the same perspective of Germany that the average educated German has of the U.S., except they've all spent a couple weeks in Florida at some point.)
And here's the thing: Germany has become a pretty appealing place. On late-night TV there's Harald Schmidt, who was mocked in the Wall Street Journal as a pathetic Letterman wannabe when he launched his show six years ago but is now a beloved national institution whose show is always more thoughtful and sometimes actually funnier than the original. The German businesspeople I meet, especially the under-40 ones, are a charming, sharply dressed, worldly bunch. Der Spiegel has been transformed from the grating organ of the know-it-all left I remember from the 1980s into a remarkably deep, nuanced, well-written weekly portrait of the world.
I don't want to go overboard on the German pop music, but I can say that '80s pop-star Nena's foray into children's music is an unqualified success. Her CD Rabatz is one of my two-year-old son's favorites. As for books, I just finished Generation Golf, journalist Florian Illies' best-selling riff on the cohort of Germans (born between 1965 and 1975) who drive VW Golfs, wear nice clothes, get along with their parents, watch Harald Schmidt, and don't much go for protest marches. I think it's even cleverer than David Brooks' Bobos in Paradise, although I can't be entirely sure since I only got about a third of the pop-culture references.
I don't know what all this means for German financial markets and the German economy. But it is pretty cool, no?
