New Ideas Nixed by Old Guard

It was during a secret meeting Friday at a posh hotel in Guetersloh, Germany, that media magnate Thomas Middelhoff realized he had lost control of Bertelsmann.

The sun was shining as Middelhoff approached the hotel in a limousine with the wife of Reinhard Mohn, whose powerful family is the largest shareholder in the privately held corporation, industry sources said. But the mood quickly grew dark as Middelhoff entered the suite where Bertelsmann’s supervisory board had holed up to confront him about his future at the media giant.

Over the next hour, the supervisory board informed Middelhoff that they opposed his long-standing plan to take Bertelsmann public. They also rejected Middelhoff’s proposal for the Mohn family to dilute its 75% stake in the Bertelsmann Foundation, which holds a majority of Bertelsmann’s stock, and significantly reduce the family’s control over the 167-year-old company.

In less than 60 minutes, the board gutted Middelhoff’s entire strategic plan to meld the Internet with more traditional media, such as publishing and music, and divest some of the family’s smaller businesses. After catching his breath, the stunned 49-year-old Bertelsmann chairman and chief executive immediately offered to quit. The supervisory board accepted his resignation, sources familiar with the situation said.

By late Saturday the terms of Middelhoff’s exit had been worked out, and early Sunday morning the Mohn family had signed off.

“Thomas Middelhoff will leave the company,” read a statement released from the company’s Guetersloh headquarters. “The separation resulted from differences of opinion between the Chairman and the Supervisory Board on the future strategy of Bertelsmann AG and on cooperation between the Supervisory Board and the Executive Board.”

Middelhoff was replaced by 59-year-old Gunter Thielen, a loyal and conservative veteran who has worked for Bertelsmann for more than two decades, including running its Arvata publishing unit, the company’s oldest business.

Middelhoff’s ouster, after four years as Bertelsmann’s CEO, stunned many executives in his own company--as well as many rival executives.But sources close to the Mohn family say a showdown between Middelhoff and the family has been brewing for nearly six months over the future of the company.

Middelhoff could not be reached on Monday. A Bertelsmann spokesperson declined comment.

But sources say Middelhoff and the Mohn family have been sparring privately for months. In the spring, Middelhoff initiated discussions with Reinhard Mohn to persuade the family to dilute its 75% stake in the Bertelsmann Foundation to 50.1%. If the Mohn family relaxed its control of the company, Middelhoff reasoned, he would be able to move faster to build Bertelsmann into an even bigger global media force.

During his tenure Middelhoff turned Bertelsmann from a conservatively run family business into the fifth-largest media company in the world, with $20 billion in sales. He bought American publishing giant Random House and control of RTL, Europe’s largest TV broadcaster. He also bought Napster Inc., with plans to develop a legal version of the controversial music file-sharing system, which has been shut down by a federal court.

But by early summer, as the stock of AOL Time Warner Inc. and Vivendi Universal continued to sink, the Mohn family began to get cold feet about Middelhoff’s grand plans. Indeed, many of his highly touted online aspirations, including his vow to launch a legal version of Napster, had bottomed out. The Mohn family began to privately question Middelhoff’s plan to seek a stock market listing--to help raise cash for even more acquisitions, sources said.

A few weeks ago, the Mohn family grew even more agitated after learning that Middelhoff had instigated a fight between Bertelsmann’s executive board and the supervisory board over corporate governance issues. The executive board sided with Middelhoff’s plan to assume more power--an idea rejected by the higher-ranking supervisory board.

Immediately after the meeting, the supervisory board appealed to Reinhard Mohn, 81, a fifth-generation member of the founding Bertelsmann family, to remove Middelhoff and replace him with Thielen.

By late Thursday, the members of the supervisory board had made up their minds: Middelhoff, who still had five years left on his deal and a contract guaranteeing him a post at Bertelsmann until he was 70, was to be fired, sources said.

Then on Friday, Middelhoff agreed to resign.

Several of Bertelsmann’s U.S. executives were in shock Monday and said they had no idea what would happen next at the company.

Last year Middelhoff opened the way for a public offering by trading 25% of its shares with Belgian investment firm Groupe Bruxelles Lambert for control of RTL.

But on Monday, sources close to the situation suggested that Bertelsmann is likely to block Middelhoff’s dream for a public offering by buying back the shares from GBL.