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May 31, 1998

Push and pull

The German analyst association

It wasn't so long ago that sales figures and staffing levels were the only information German companies were willing to divulge. Now, as European monetary union approaches, globalization encroaches and the competition for capital intensifies, previously tight-lipped German companies are beginning to lay out the welcome mat to investment analysts, shareholders and even non-domestic investment bankers.

Suddenly, Anglo-Saxon terms such as 'shareholder value' and 'restructuring' are making their way into the German business vernacular. The trend toward globalization in sectors such as telecommunications, financial services and pharmaceuticals are forcing German companies to change their tune and do some soul searching. Otherwise they might be left behind. This, perhaps, explains why last year saw a record number of mergers and acquisitions - activity more than doubled to DM 152 bn (ú51 bn) from DM 67 bn in 1996, according to M&A International, a consultancy based near Frankfurt - as companies cut costs, reorganized, focused on core businesses and strengthened their domestic and overseas market position.

And those German powerhouse banks are not immune. Deals are becoming more complicated and can no longer be limited to the cosseted confines of the house bank. The US and UK investment houses have wasted no time muscling in on their once sacred home ground, offering not just a helpful corporate advisory hand but introducing more innovative structures and solutions to corporate Germany's problems.

And although hostile takeovers are still a rarity, Krupp's seemingly audacious bid for its larger steel and engineering rival Thyssen, was a signal that the rules of the game have and will continue to change, even though an amicable settlement was reached.

'I think Emu and globalization are the main driving forces behind the changes we are seeing in Germany's corporate culture,' says Ulrike Diehl, managing director of the Deutsche Vereinigung fÆ’r Finanzanalyse und Anlageberatung (DVFA), the German Society of Investment Analysts and Asset Managers, a non-profit group, which is trying both to raise the professional standards of the investment community and encourage companies to improve their investor relations. It's a two-pronged approach which works well for its members: pushing them up the learning curve while pulling corporates toward better IR.

'Emu is starting soon and it will no longer be a German but a global marketplace. Previously, the banks dominated the corporate sector and companies did not have to go to the public market for funds. This is now changing and companies are aware that they have to disclose more as well as report to international accounting standards if they want to raise capital in a competitive marketplace and widen their shareholder base,' she says.

However, analysts and shareholders should not get too excited. Despite the publicity around German companies' newfound openness and assertiveness, Diehl warns that progress is slow and there is still a great deal of work to be done to get German companies up to speed in international terms. 'Both shareholders and analysts are becoming more demanding but there are still board members of several German companies who are not used to corporate governance. It is a cultural shock for them to be told that they are doing a bad job and that they have to change their attitudes. Our mission is to get companies to act local but think global. It is the only way for them to survive.'

Two-way street

Helping German companies overcome their reluctance to divulge information to the financial community obviously also works in the interests of DVFA's analyst membership. To that end, Diehl and colleagues organize presentation opportunities for companies, featuring leading executives explaining their figures and strategies as well as fielding any questions. In 1997, about 234 individual corporate presentations were made under this program, up from 156 in 1996. The DVFA also provides a platform for companies to showcase their operations and widen their shareholder base at other, more international events. For example, Investing in Germany, was jointly organized with the New York Society of Security Analysts. Likewise, it helps introduce its analyst members to foreign companies, for instance, via the Fourth French Forum where German analysts had the opportunity to meet the chief executives of French companies.

And if corporates are still not won over by DVFA's attempts to help them develop better communications with the outside world, Diehl and company will make a personal visit. 'It is a daily task,' says Diehl. 'We often hold one-on-one meetings with chief executives to persuade them of the benefits of an investor relations program as well as better and more open communication with the investment community.' The DVFA also runs several commissions and working groups pushing for international accounting standards, better investor relations programs and technical analysis.

Question pushers

The flip-side to pushing corporate investor relations is raising the standards and profiles of those asking the questions - the analyst community. Even admission into the society has become tougher. For example, applicants need at least two years of work experience in the industry and two referees - a DVFA member and one who sits on its board of managing directors or advisory board.

'Until the end of the 1980s, we were a small society of 300 people but in the last four to five years we have grown to about 1,000 as analysts and portfolio managers realize they need to become better qualified,' says Diehl, 'We have also signed a reciprocity agreement with the US American Institute of Management Research (AIMR) and those sitting for the three part Chartered Financial Analyst program run by the AIMR will be exempt from level one.'

The DVFA is also currently applying to become an outside member of the AIMR. 'The concept of shareholder value as well as innovative financing techniques and current management theory have all emanated from the US,' explains Diehl. 'As a result, both companies and analysts have to understand these trends if they want to compete more effectively in the global marketplace.'

Currently, DVFA members are subject to a rigorous part-time training and qualification program that covers the nitty-gritty of investment analysis as well as the latest in quantitative and performance measurement techniques. Upon graduation, at the end of roughly 220 hours study, they receive two diplomas - the national investment analyst/DVFA and the European CEFA (the Certified EFFAS Financial Analyst). EFFAS is the European umbrella association of analysts and portfolio managers, comprising 17 national organizations.

And to ensure its members do not lose their edge and are well versed in current market trends, the DVFA runs a series of seminars throughout the year on a variety of topics ranging from new capital market regulations to exotic options.

Quick to embrace

Although some German companies are wary of this new open climate, many others are applauding the DVFA's efforts and have embraced the new world order. Several German heavyweights such as Veba, the utility and telecommunications giant, Allianz, the insurance firm, Munich Re, the reinsurance firm, and Siemens, the electronics conglomerate, are at the forefront of change. Also, high on the list is SAP, the software giant and Germany's fourth largest company, which has reached the top of the US-dominated industry by playing the American game. And that includes sharing the secrets of its success with investors.

Criss-crossing the globe several times, discussing its product line and strategy, SAP has gained a reputation as one of the most open companies in continental Europe. Last year alone, the company racked up a total of 200 presentations and meetings with analysts and private investors.

'Our main objectives are to raise our profile and widen our shareholder base,' says Gundolf Moritz, managing director of investor relations at the company, which plans to list on the New York Stock Exchange via an ADR this summer. 'Increasingly, there is the realization that decisions taken by top executives in companies are influenced by investors and key financial analysts and that can also have an impact on your company and its share price.'

Metallgesellschaft is another company that has taken a leaf out of the DVFA instruction book, taking investor relations as well as its accounting standards seriously. It aims to be one of the next German companies to switch to US Gaap reporting this autumn. After almost collapsing five years ago due to losses on US oil dividends, the company has made a big push to tell its comeback story. In fact, in the first three months of the year, Ulrich Woehr, chief financial officer, spent most of his time on the road including stop-offs in New York, Toronto, Tokyo, London, Singapore and more.

The industrial and trading giant is also one of the first hoping to take advantage of the changes in the law this summer that will allow companies to buy back their shares. The company, which hopes to repurchase up to 10 percent of its shares, may use them to finance new acquisitions through share swaps, according to Woehr.

'Five years ago hardly anybody in Germany had heard of investor relations or enhancing shareholder value,' says Woehr. 'However, it is becoming an everyday part of life for many German companies. They are also beginning to realize that if they want to raise capital, one of the main requirements is to have an open information policy.'

According to Diehl, the DVFA intends to remain committed to that task a long way into the future.