Management buyouts riding crest of privatization wave in eastern Germany

October 20, 1991|By Ian Johnson | Ian Johnson,Special to The Sun

Potsdam, Germany -- Ulrich Jakubeit realized he had to move fast after the state-owned engineering company he worked for was targeted for privatization.

A company from western Germany had made an offer, but Mr. Jakubeit and his colleagues knew that could mean layoffs and an uncertain future.

"To put it bluntly, we knew we had to buy or be bought. So we

bought the company," said Mr. Jakubeit, managing director and co-owner of Verkehrsund Ingenieurbau Consult GmbH.

Mr. Jakubeit put together a buyout proposal and approached the Treuhand, an agency charged with privatizing state-owned companies in former East Germany. After months of negotiations, the Treuhand approved the deal. In April, the company, which helped build autobahns, the famous German superhighways, joined the burgeoning number of management buyouts in eastern Germany.

MBOs, which have lost favor in the United States, are all the rage in the East.

Such buyouts once were rejected by the Treuhand as unrealistic because of the difficulty east Germans have raising capital. But the agency has found fewer and fewer outside buyers for the 5,000 remaining companies and has realized that local managers know those companies best.

More than 550 large and medium-sized companies have been sold to their management teams this year, said Norman van Scherpenberg, the Treuhand director in charge of MBOs. The agency doesn't keep statistics on the number of small companies privatized through MBOs, but it estimates that 10,000 managers of fast-food stands, restaurants, movie theaters and small shops have bought their businesses from the government.

Some newly privatized companies are prospering. Mr. Jakubeit's, for example, is adding employees and developing new markets.

But even the most promising companies face serious barriers, from bureaucratic bungling to competition from the west.

Buyouts won't work unless companies are sound, say officials at AGP, a major consulting firm for potential MBOs. "MBOs are not a cure-all. The company has to be standing on its feet before one will work," said Michael Lezius, AGP's managing director.

Most MBOs overseen by the Treuhand involve some financing and cooperation from a western partner.

That includes Mr. Jakubeit's deal. The buyout price of $750,000 was divided into four parts. He and his co-managing director, Wolfgang Verch, put in 25 percent, raising money from friends and bank loans. Seven department directors divided another 25 percent, 50 employees paid another quarter as silent partners, and a west German partner from Koblenz chipped in the final 25 percent and provided organizational help.

The price was kept low because the MBO team agreed to Treuhand stipulations, such as taking over rundown property, keeping a minimum number of employees and giving laid-off employees severance pay. The conditions also were favorable because the Treuhand prefers local buyers.

The company had 325 employees when it was part of the Autobahn Construction "Kombinat," the East German central office that planned, built and maintained the country's autobahns.

Now freed of the unwieldy Kombinat, the company has slimmed down to 240 workers, and Mr. Jakubeit said that it will not drop to 180, the minimum set by the Treuhand. In fact, the company is adding 25 new workers, thanks in part to stepped-up highway construction in the east and the company's decision to diversify into planning shopping centers.

New projects have pushed the company's revenue to a projected $11 million this year, up 15 percent from last year's.

Still, the company faces some problems. One lingering worry is the potential loss of skilled workers to western Berlin, just a mile away. Pay once was only 40 percent of the western level; now it has climbed to 75 percent. The goal is parity within a year, which involves a delicate balance between keeping needed workers and raising salaries to dangerously high levels.

"This is one of the toughest problems for all eastern companies. The main thing for the workers, however, is that they see progress. Then they're willing to stay," Mr. Jakubeit said.

Less happy with his MBO experience is Bernd Ahrensdorf, co-owner and managing director of Tex Ass, a Berlin purse manufacturer.

After Mr. Ahrensdorf bought the company with two partners this year, the Treuhand said that it did not know who actually owned the property. The company's factory, it turns out, was built on land owned by the former East German waterworks, which may have expropriated it from a family that fled to the west decades ago.

Even though the question of property rights might be solved without a court battle, Tex Ass cannot use the property as collateral for much-needed loans. "Our liquidity isn't going to last much longer, and we aren't sure if we can pay our suppliers," Mr. Ahrensdorf said. "We never thought it would be so complicated."

Treuhand officials conceded that they should have clarified the property question before selling. "We're more careful now," said Klaus P. Steinbach of the Berlin Treuhand office.

Mr. Lezius of AGP said there could be 1,000 MBOs in Germany next year, at least half in the east. By the end of 1995, he estimates, MBOs and worker buyouts may have privatized up to 3,000 eastern companies -- more than half of those up for sale.

Mr. Jakubeit, 57, wants to work until he is 65. He is sure the company is sound. Although optimistic, he predicts that the creation of a unified market in Europe will mean that big, efficient engineering companies will be the only ones to survive.

He plans to expand the company by reopening a branch office in the eastern city of Magdeburg and becoming involved in railroad construction.

"Nobody knows this region like we do," Mr. Jakubeit said. "We've been building here for 40 years and intend to stay."

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