Performance review September 2014 – Comment “Stupid German money”

Performance September

September was a pretty bad month for the portfolio, both in absolute and relative terms. The portfolio lost -2,2% against -0,2% for the Benchmark. YTD the portfolio is up +4,99% against 0,45% for the benchmark.

A significant part of this underperformance was driven by Sistema which I sold with a loss of 40%. The decision to sell quickly seemed to have been right as the share price has fallen a further 40% since then.

Other big losers were G. Perrier with -17,2%, Ashmore with -12,5%, Hornbach -7,6% and TGS with -6,0%. in contrast to Sistema, I do not see any structural issues with those companies. Clearly the fact that small caps are underperforming since a couple of months als plays a role here.

Portfolio transactions:

Additionally to Sistema, I sold my 0.9% position in Poujoulat. Overall, I am not happy with the way they allocated their capital and the result of the wood pellet segment is pretty bad so I decided to get out of this relatively small position. I sold at around 40 EUR, resulting in an overall gain of 23,5% including dividends.

Additionally I sold my Sky Deutschland shares at a small loss at 6,73 EUR. Unfortunately, they never moved up and the offer period is slowly approaching the end and I have no opinion about the value of Sky Deutschland without the “special situation” aspect.

As a result, the direct cash percentage went up to 13,2%, the economic cash position is close to 20% (including MAN and Depfa LT2 which I consider “close to” cash). Another side effect of my sell transactions is the fact that with 25 positions the portfolio is in my personal “Sweet spot” with regard to the number of positions.

The current portfolio, as always can be seen on the “Current Portfolio” page.

Comment: “Stupid German Money”

September was high time for German Corporations to announce large acquisitions in the US. In a short period of time, transactions were announced from Siemens, Merck Kgaa, SAP and privately held ZF group.

This is a quick overview of the four deals:

Target EV USD bn Buyer P/E Target P/E Buyer Buyer/seller multiple
TRW 12,4 ZF 13,0 not listed  
Dresser Rand 7,3 Siemens 32,0 15,2 211%
Sigma Aldrich 15,7 Merck Kgaa 31,1 16,0 194%
Concur 7,1 SAP 208,0 16,6 1253%

We can easily see that the multiples paid by the 3 listed entities are significantly higher than their own multiples. Large acquisitions are a big risk in any case, but in the case of German – US acquisitions the track record is particularly bad. Daimler/Chrysler is clearly the worst German-US deal ever, but there are loads of other value distracting US deals like Dresdner/Wasserstein, Siemens/Dade-Behring, RWE/American Water etc. There are a few good deals as well, but in my opinion the success rate is definitely below 50%.

Why is this the case ? In my opinion, there are 3 major reasons for this:

1. German companies are normally very risk averse. So in “difficult” times, they keep their cash and wait until times get better. At some point in time when the good times are rolling (as they are now) they feel the urgent need to catch up with their international competitors and then buy into the boom which creates a very procyclical behaviour.

2. German companies often underestimate the cultural differences between Germany/Europe and the US. Many top managers might have been on vacation in the US or even studied there, but running an US company is very different from running a German company. Financial incentives are much more important in the US and often don’t fit with the rules here in Germany. So it is often almost impossible to keep the best people of a recently acquired company and without them, the business often deteriorates quickly.

3. In general. especially large German companies are just not good capital allocators. Buying back own shares is more often than not a no go and considered to be a sign of weakness. Equity is often thought as “Management’s equity” then “Shareholder’s Equity”. The term “shareholder’s equity” actually doesn’t exist in German language, “Eigenkapital” translates into “own funds” and I think most German managers consider it as their own funds and not the shareholder’s.

As a result, the acquisition behaviour of German companies is almost always super procyclical and then looking back mostly looks pretty stupid and is value destroying for the German shareholders.

As a private shareholder, my advice would be: Watch out !!

– You don’t want to own the stock of a German company which acquires a big US company. Chances are high that they will regret it in a few years time
– You don’t want to own the sector longer term they are investing in. This sector might be at or close to a cyclical peak
– although I am not a market timer, you might be very cautious in general despite M&A induced further increasing share prices

10 comments

  • @MMI: Very good article! I can definitely say the same thing about Austrian Companies. One of the best examples for how many Austrian CEOs are caring about shareholders is Immofinanz: with a stock lingering at and below half of their book value they were recently discussing to buy Bank Austrias 17% stake in CA Immo, a competitor at a price near Net Asset Value instead of buying back own shares. The combination of Managements tendency towards “Empire Building” with the lack of activists is in my opinion one of the main reasons that the Austrian stock market performs that bad…

  • Hi MMI,

    regarding ‘Stupid German Money’: Infineon taking over International Rectifier (last net income was 59 million) for 3 billion $ is another example…

    Regards,
    Markus

  • Hi MMI,
    with regards to your sale of Sky Deutschland why did you not accept the tender offer at 6.75 Euro but instead sell the shares at a price below what you can expect to get from BSkyB?

  • “German companies often underestimate the cultural differences between Germany/Europe and the US.”
    But for example ZF and Siemens already had US operations prior to the acquisitions. Do you think despite having US employees already they still can’t assess differences between US an Europe? Of course companies do have different cultures, too.

    One success was Aldi North’s acquisition of Trader Joe’s in 1979.

    re point 3: Maybe Germany lacks the activist investors, who can put pressure on the company to improve corporate governance.
    This could be happening at Adidas. For me the buy-back is signalling that management cares about the share price, which is not a bad thing.

  • By quickly glancing through Adidas’ reports I’d be very hesitant to call this buyback value accretive. With a p/e between 15-20 (depending on what earnings number you use) and most of the earnings going already into dividends (capping their growth numbers) I have a hard time seeing this a bargain price at all. If done at the current price, I’d say it’s more of a wealth transfer from staying shareholders to leaving shareholders. Sure we’ve all seen buybacks done at a lot worse prices in many companies but that doesn’t really make this one better. Because they gave a 3 year time period to implement the buyback, there’s the opportunity to make it value accretive for staying holders if, say, the buyback prices on average were 20% lower than current price, assuming the business doesn’t deteriorate in the meantime.
    On a more general note, it’s really interesting to see how companies do these buybacks. Very rarely do you see them done at a bargain price (always keen to hear about examples!), for whatever reason.

    • I have never really looked that deeply into them. They made a lot of bad acquisitions in the past….

    • I looked into Adidas when the stock took a dive. I concluded that it is overvalued and remains that to this day. The buyback is probably supposed to create the impression that management is “doing something”. The kicker is, the debt/equity ration is already not that great. To take on more debt for something that diminishes value for the shareholders even more is just the wrong way to go.
      Plus, I don’t want to know how hard Under Armour is kicking their behind.

      The buyback itself doesn’t seem to be part of the german management toolbox. Only a few companies use it well. Sometimes I see it executed well at SMEs where the founder remains a dominant shareholder.
      This is not the country where the buybacks live.

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