Costly mergers
March 23, 2011
Ron Sommer, Jürgen Schrempp and Klaus Zumwinkel are the names of former German CEOs who shared "the American dream" but lost billions pursuing it.
Their successors - Rene Obermann, Dieter Zetsch and Frank Appel - have been making tough decisions ever since as they try to right those wrongs and put their companies back on a healthy course.
This week, Deutsche Telekom CEO Obermann finally pulled the plug on its US wireless venture, T-Mobile USA. The business unit was once the prized baby of his predecessor, Sommer, who frantically sought to turn the former state-owned monopoly telephone company into an international giant.
Too great a risk
In 2001 Sommer paid $35 billion (25 billion euros) to purchase US mobile phone company VoiceStream, which a few months later forked over another $7.2 billion to acquire rival Powertel. Another $10 billion-plus was spent on infrastructure investments over a 10-year period.
Despite its reputation for good service, attractive prices and innovative handsets, T-Mobile remained a distant number four in the fiercely competitive US market. To close in on its rivals, it would have been forced to invest billions in new network technology. Obermann eventually decided the risk was too great and agreed to sell the US unit to AT&T for $25 billion in cash, which he aims to use to help lower the parent company's mountain of debt, and $14 billion in common stock.
Schrempp, former CEO of then Daimler-Benz, spent $37 billion in 1998 to buy ailing US carmaker Chrysler. The so-called "marriage in heaven," as Schrempp once called the merger, turned out to be "living in hell." Nine years later Daimler CEO Zetsch unloaded the US unit for $7.4 billion. Total losses are estimated at more than $40 billion.
Deutsche Post-DHL CEO Appel, by comparison, is still hanging on to DHL. Germany's former postal monopoly completed its purchase of the US parcel company in 2002. But the executive's hands have been full ever since as he tries to turn around a business that has racked up more than 7.5 billion euros ($10.6 billion) in losses. DHL continues to face tough competition from the world's largest parcel company UPS and FedEx. Some analysts believe it's a fight the German-owned company can't win.
The forays of these three German companies into the US have one thing in common: they were based on acquisitions. And these, arguably, can be tricky.
"If you want my honest opinion, German companies that acquire US companies are often taken for a ride," said Helmut Becker, director of the Munich-based Institute for Economic Analysis and Communication. "You have plenty of consultants, analysts and others all trying to make a buck on these deals, not to mention the CEOs of these companies who often have big egos to feed."
US beachhead
Becker points to German automotive suppliers as successful examples of companies that have "grown organically" by building their US operations from the ground up and introducing their way of doing business.
Henning Klodt, from the Kiel Institute for the World Economy, argues that German companies looking to enter the US market need to offer "something better" to compete with what already exists. "Ideally, they need to offer products or solutions that have some competitive advantage or offer some special benefit to stand out from the rest," he told Deutsche Welle.
German companies establishing a beachhead in the US have faced challenges for years, concedes Dierk Müller, managing director of the Frankfurt-based American Chamber of Commerce in Germany. But that hasn't deterred more than 3,000 German firms from making the leap across the pond.
"Liability law is a burden for all companies, big and small, and for American ones, too, as is patent law; the legal system is quite different," Müller said. "You also need to be smart in marketing, work with local partners and establish a distribution market across the US, which is big."
Grand 'global player' plans
Müller admits that some German companies have learned from previous attempts to expand in the US, notably Volkswagen, which entered the American market, later exited it and has now re-entered. "But if you really want to be a global player, you need to be in the US not only because of its huge market but also the cutting-edge technology coming out of there."
Rene Obermann nailed the coffin to Ron Sommer's grand plans to become a global player this week. But Dieter Zetsch, after abandoning the global strategy of his predecessor, is steadily rebuilding his own, with Daimler car and trucks plants in the US humming at capacity.
And who knows, maybe DHL, with the right strategy, can give UPS and FedEx a run for their money. Frank Appel is giving it a shot anyway.
Author: John Blau
Editor: Sam Edmonds