Trading In Their Caution
Rational-expectations theorists, hold on to your hats. Germans have caught a bad case of stock market fever.
Most of the time, Germany is a nation of dedicated risk avoiders. And rightly so: Twice in this century, its citizens have seen war and hyperinflation devour their life’s savings. Bitter experience has taught them to never put their marks anywhere without a firm guarantee, and that means they almost never buy stocks.
Perhaps in no other way is the German psychological makeup so different from that of the U.S. Whereas the ever-hopeful American middle class hands over billions of dollars to mutual fund managers in their 20s and 30s, cautious Germans sock their money away in savings accounts that draw a paltry, but guaranteed, 2% interest. (However, Germany’s negligible rate of inflation makes that rate more attractive than it would be in America.)
Bonds? Life insurance contracts? That’s about as adventurous as the German individual investor normally gets. Mutual funds are in their infancy here, and just two big German companies--Daimler-Benz and Siemens--operate anything like an American-style managed pension fund. Overall, less than 5% of the population owns stocks, compared with more than 40% in America.
But that was yesterday. Today, small savers who a few months ago couldn’t have told you what a mutual fund was are positioning themselves to snap up the shares of a huge initial public offering to take place Nov. 18: $10 billion worth of stock, nearly double the total value of all the new issues in Germany last year, which itself set a record. The offering would give the new investors a 20% stake in Telekom.
Stranger still, where should these eager new investors be running with their hard-earned marks but to Deutsche Telekom, the government telephone and cable TV monopoly--until this year one of the most popular whipping boys in the land.
Just months ago, bringing up the subject of the phone company here was a sure way to get a laugh. The company was famous for--to put it delicately--terrible service. Getting a phone line installed in your house could take months, and even then, chances were that Telekom’s directory assistance operators couldn’t give you the numbers you wanted.
Products taken for granted by phone customers the world over--such as extension phones or itemized long-distance bills--have long been unavailable in Germany. Phone customers here who suspected overbilling have had almost no means of appeal.
And even on correct bills, the rates are sky-high. Placing a local call in Germany is almost as expensive as calling coast-to-coast in America. When Telekom issued new rates in January and promptly made billing errors all over the country, people marched down the streets in protest.
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So what is making these same people now march to their brokers, eager to entrust Telekom with their money?
For one thing, Telekom has begun to clean up its act. But the broader answer is that Telekom’s initial public offering represents much more than just another government enterprise trying to raise money on the stock exchange.
Telekom’s huge offering marks an all-out, once-in-a-generation attempt by German policymakers to turn their stock-shunning country into a Volk von Aktionaeren, or nation of shareholders.
“This is all part of a growing understanding that we have to give the little flower, capitalization in Germany, some fertilizer,” says Ruediger von Rosen, managing director of the German Stock Institute, a group that is trying to promote equity ownership.
Von Rosen and other analysts argue that if Germany can create an “equities culture,” that would go a long way toward solving some of the deep problems now eating away at the national economy.
A big one is chronically high unemployment. There are many causes, but one of them undoubtedly is the conservatism about savings and investment. At the moment, with all of those individual savers cautiously pumping their spare marks into bank accounts, most business financing here must come in the form of bank loans--and banks here are not generally known for a spirit of daring and entrepreneurship.
If a measure of risk taking were injected into the German investment mind-set--and if the capital markets were to develop accordingly--Von Rosen believes that low-cost equity financing would grow, providing the funds that existing and start-up companies need to expand and create thousands of new jobs.
The hope here is that Telekom will be just the beginning. Its offering, if successful, presumably would whet the appetites of individual investors for more German offerings from former public-sector companies--for another slice of Telekom, perhaps, or for Postbank, a savings institution that used to be part of the post office; for Deutsche Bahn, the German railway system; or for the 36% stake in the airline Lufthansa that the federal government still holds and wants to sell.
And if the public can be persuaded to buy those offerings, it could be just another step to get it to participate in untold numbers of initial public offerings from the famous Mittelstand, the much-admired but closely held universe of successful medium-sized, family-owned businesses that are the bedrock of the German private sector.
Much is clearly at stake, and Telekom is promoting its offering accordingly.
All through the fall, Germans have been subjected to a blitz of advertising--from television and radio, from billboards along the autobahn, from compact discs sent through the mail, from colored party balloons hanging in bank lobbies. At one point, every single household in Germany--that’s 14 million addresses--received a piece of promotional mail.
The ads have urged ordinary Germans to enroll in a newly created Shareholder Information Forum, which will entitle them to receive a Telekom prospectus and buy Telekom stock with certain sweeteners that the foreign and institutional investors won’t get when official trading begins Nov. 18 in New York and Frankfurt and Nov. 19 in Tokyo.
Forum members will be offered a 2% discount on the stock price, reductions on their phone bills and, if they hold the stock for a full three years, an extra free share for every 10 they own. All shareholders will receive guaranteed dividends for the first two years.
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The total cost of promoting all this has not been revealed, but estimates start at about $80 million. Much of the campaign’s effectiveness lies in its use of such one-of-the-guys actors as German television star Manfred Krug, known for his blunt-speaking, working-class roles.
“If Telekom goes to the stock market, I’ll go along,” Krug says in one ad. The unspoken message: Even a truck driver--which Krug played in one TV series--ought to be playing the stock market through Telekom.
It seems to matter not a bit that the real-life Manfred Krug hates telephones and refuses on principle to own one. The ad drive has created intense investor curiosity. More than 3 million people have enrolled in Shareholder Information Forum, and Telekom reports even getting queries from pregnant women who want to sign up their babies in utero.
Though nowhere near 3 million forum members are expected to buy stock in the end, some analysts predict the issue will be oversubscribed. And if that happens, the forum members will get first crack at the shares.
Such a successful offering would be good for Deutsche Telekom, which wants to use most of the proceeds to reduce its mountain of debt. Over the last six years, Telekom dropped a cool $33 billion bringing state-of-the-art telephone equipment to the woefully under-served former East Germany, and it has emerged from that project with more debt than any commercial entity in the world except Tokyo Power. The total approaches $70 billion, or equivalent to the foreign debt of the Turkish government.
But there are still analysts in Germany who worry that in its zeal to attract investors, Telekom is courting small savers and inexperienced people who are probably not spiritually prepared for the inevitable days when the stock’s trading price will dip below the price they paid.
Indeed, some foreign institutional analysts have called the offering price range, $15 to $20 per share, too high.
Such worries are much on the mind of Annaliese Hieke, business administrator for the Society for the Protection of Small Investors, an organization that studies corporate reports, attends annual meetings, asks unfriendly questions and files the occasional lawsuit in the name of that rare bird, the German individual investor.
This fall, Hieke is crisscrossing the country appearing on talk shows and trying to make her voice heard above the din of Telekom advertising.
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“The great danger is that the price range is too high,” she says. “These new investors could, in the end, be disappointed if the share price does not meet the expectations that are now being created.”
Even Goldman Sachs, one of three investment houses coordinating the issue, reportedly tried to talk Telekom into bringing its stock to market at a lower price. Under conventional American stock-valuation techniques, an offering price of as little as $13 per share might more accurately reflect Telekom’s intrinsic value as an enterprise.
And if the price starts to slide toward that level, Hieke says, individual investors are likely to dump the stock, driving the price down faster and setting off a nasty chain reaction that could hurt investor attitudes for years to come.
It’s happened before. In 1960, in an earlier attempt to create a Volk von Aktionaeren, the partly state-owned Volkswagen made a successful stock offering. Germans got stock fever then too and bought the VW shares--just in time to get burned when the Cuban missile crisis erupted and stock markets sank worldwide. Inexperienced investors bailed out, only to discover later that they would have made handsome returns had they hung on for the ride.
That helped sour German small investors on stocks for a generation.
On the plus side, Telekom has taken impressive steps to reform itself in recent years, particularly under the stewardship of Chief Executive Ron Sommer, who came from Sony in 1995. Those once-unhelpful directory assistance operators seem better trained today. The fully itemized bill is still unavailable, but for a fee, customers can now get at least the beginnings of a list.
Bizarre rules and regulations-- such as a strange old ban on telephones in the kitchen--have been dropped, and Telekom has launched what has become the country’s most popular Internet access provider, T-Online. It has also formed an international strategic alliance with France Telecom and U.S.-based Sprint called Global One.
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But critics ask whether even these reforms will be enough to help Telekom grow its way out from under all that debt. To match international standards of productivity, Telekom will also have to eliminate tens of thousands of employees over the next few years, and layoffs in Germany come with large severance payments.
And it will have to move quickly, because Telekom will be exposed to harsh new winds of competition beginning in January 1998, when the countries of the European Union are scheduled to open their telecommunications markets to foreign competition.
Heightened competition is bound to improve service, and costs are sure to come down--good news for the customer--but it’s not the sort of thing to set earnings per share soaring.
Hieke is all for promoting an equity culture in Germany, but she thinks Telekom has been so busy selling the stock that it hasn’t conveyed all these risks.
“They should be more open and honest in their information policy,” she says. “It would be better to portray the company as being in less great shape. The small investor has to understand that the business is not always going to go well.”
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The Cautious Type
Fewer than 5% of Germans own stocks, preferring more cautious investments. A recent survey asked Germans what they consider the best ways to invest their money for retirement:
Real estate: 86%
Life insurance: 80%
Bank certificates of deposit: 65%
Federal treasury bills: 60%
Passbook savings accounts (Currently paying about 2% annual interest): 46%
Stocks: 19%
* Source: Alllensbach pollsters
