Many European observers have tended to dismiss the challenge of American raider Asher Edelman to Société du Louvre, a melange of enterprises controlled by the Taittinger family in France, as a passing phenomenon—a nasty byproduct of the worst of Wall Street. They have argued that it is essentially a case of extreme bad luck that Edelman has decided to invade Europe, and that his threat will in time disappear and everything will be well again.
Others in Europe would apply the label “wishful thinking” to this viewpoint. They maintain that the traditional long-term approach to building and running businesses can no longer be defended in view of the growing internationalization of markets.
Edelman, who earned his reputation from a series of hostile takeover attempts in the 1980s, has been gradually accumulating shares of the publicly traded French holding company, best known for Taittinger Champagne, Baccarat Crystal, and luxury hotels such as the Crillon in Paris. By the end of October he had amassed over 1l percent of the equity in Société du Louvre, but only 3.9 percent of voting rights. The Taittinger family claims control over 36.6 percent of the capital and 54.5 percent of the voting rights.
Edelman has not been afraid to confront the family publicly with questions about the “value-added” of the large number of its members in managerial positions. His French lawyer lists a total of 278 corporate entities in the holding company, run by over 50 family shareholders, together holding between 400 to 500 seats on the boards of the various businesses. At the last annual shareholders meeting, Edelman presented 38 tough questions to the board, asking, for example, whether family members receive remuneration for fictitious jobs or live rent-free in company apartments.
His criticism is essentially that the Taittingers run the company as a private fiefdom rather than a company responsible to all shareholders. He argues that Louvre is undervalued, and that it no longer makes economic sense to hold together a conglomerate of diverse interests built up over decades. “I saw the company and thought the sum of the parts was worth more than what it was trading for,” he explained to the Wall Street Journal.
Anne-Claire Taittinger, Louvre’s 49-year-old chief executive, calls attempts to destabilize the family “intimidation and blackmail.” She adds, “My family does not intend to give up control.” Her uncle, Claude Taittinger, 71-year-old chairman of the champagne company, concedes the enterprise may not yield huge returns but says it has always been a safe investment—“a sort of savings bank”—for shareholders. Managed by someone other than the Taittingers, he contends, the company would indeed become undervalued.
Beyond the media hype, the battle is currently the most spectacular example of a clash between European and Anglo-Saxon cultures. For many North American business owners, the ultimate benchmark of success is the price they can get for their firm when they decide to sell it. Different companies are often bought and sold as part of the owning family’s overall portfolio. Family enterprises in Europe such as Société du Louvre, many of which have been around for centuries, consider tradition more important. They are dynasties that achieve their life objectives when they pass on their enterprises to yet another generation.
It appears inevitable, however, that this traditional, long-term view of doing business will be eroded. European companies will be increasingly influenced by, and subject to, the more aggressively competitive stance from across the Atlantic. The apparent attempt at a hostile takeover by Asher Edelman is just one of multiple warning signs.
Wal-Mart in Europe
Any business interested in survival must think globally sooner or later, as it gets easier and less expensive to do business across borders thanks to rapidly improving telecommunications systems and reduced transaction costs. Although a large number of business leaders proudly proclaim being in a “niche market,” there will be fewer protected markets in the future. New competitors from other parts of the world will appear on the doorsteps of markets that have always been nationally organized. Wal-Mart, for example, recently announced the acquisition of 74 hypermarkets in Germany. Up to now, few German consumers had ever heard of Wal-Mart.
The adoption in January of a common currency, the Euro, is just another step in breaking down barriers to trade in Europe and the creation of a more homogeneous market of 300 million consumers. To many foreign companies interested in growing globally, Europe offers a truly attractive market for the first time. The larger publicly traded companies in Europe are clearly positioning themselves to confront growing competition from overseas. Recently announced mergers, such as the joining of Rhone-Poulenc from France with Hoechst from Germany, are signs of considerable strategic re-thinking by European businesses.
Every day huge sums of capital freely flow from one country to another. Early in 1998, U.S. pension funds delighted European stockholders as they emerged as important investors driving up the value of European shares. However, after the summer, it was apparent that this interest could be a two-way street. When the French telecommunications giant Alcatel revised its profit forecast downward, the share price fell by 38 percent within a matter of hours. Many smaller investors blamed the powerful U.S. pension funds for overreacting and withdrawing their huge investments, immediately driving down the share price.
How to fund growth?
All these changes have together created great uncertainties for many European family businesses. More than ever before, competition in Europe will increase dramatically and affect the way more family enterprises have been doing business. While on average family businesses seem to be adopting a “wait-and-see” posture, a large number are actively preparing for the changes by identifying growth opportunities.
Some companies face a choice of growing or disappearing from the market. But how can growth be funded? For smaller and medium-sized family companies, especially those in Germany, the key problem is capital availability. It is estimated that these companies, on average, have a narrow equity base of 20 percent, with traditional bank financing providing the bulk of financial resources.
There are limits on how much credit the banks are willing to offer. Other than taking in selected new shareholders, the only other major option for raising cash is to go public. The storm over the Edelman-Louvre case has served to highlight the risks of loss of family control involved in this option. European family businesses have tended to look at only the positive side when thinking of raising cash through a public offering. But, like Laura Ashley in the United Kingdom, they have underemphasized the cultural changes that are required to deal with quarterly reports and the expectations of the market.
Most owners of family businesses in Europe appear unwilling to share control over their business with outside investors. They prefer to restrict their growth opportunities to their own ability to generate profits or to do the hitherto unthinkable: sell the company. The increasing number of brokers for the sale of medium-sized companies indicates a growing market.
Is going public an attractive opportunity for European family businesses? A recent study by the International Institute of Management Development (IMD) in Lausanne revealed that European family business owners are still reluctant to make such a move. A total of 30 percent of over 400 leaders of privately owned businesses surveyed by Alden Lank and Monica Wagen of IMD were opposed to going public, citing reasons such as “against the tradition and against family interests.” A full 57 percent answered that they had considered the option but decided against it because either the company or the market were not ready for such a move. Only 13 percent had decided to go public over the last 10 years. These companies were at least 25 years old and employed 400 or more workers.
Clearly, European family owners prefer to retain control over their businesses, possibly foregoing expansion opportunities and taking their chances against international competition. However, two important developments are putting pressure on them to look more favorably on taking their companies public.
The first is the rise of new stock markets—AIM in Great Britain, EASDAQ in Belgium, Neue Markt in Germany, and Nouveau March in France—that will make it easier and less costly for smaller and mid-sized companies to go public. The second is the demand for shareholder liquidity as ownership of companies becomes divided among more and more family members in later generations.
Even more than in the United States, Europe is witnessing a wave of transfers in ownership from members of the postwar founding generation to their heirs. The inheritors, many not active in management, will look for opportunities to cash in their shares. The traditional weak equity structure of European family businesses leaves few options. Unless the senior leaders want to sell the company, they may have to take on new shareholders or go public. The latter step was chosen in 1993 by Hermès, the French luxury goods family business, for two reasons: to provide exit opportunities for family shareholders (surprisingly, few took advantage of the offer once they realized they were no longer locked in), and to provide access to capital for major expansion opportunities.
While few companies have adopted this approach, forward-thinking European family businesses seem more willing to seriously consider all options in order to survive. The current wave of mergers of large public companies could become a model for growth-oriented family businesses. The Spanish Puig Group almost doubled their revenues in 1998 by acquiring the ailing French family business Nina Ricci. But the Puig family, which has been making fine perfumes and fragrances for generations, has no plans for sharing control with outside investors.
Those family business owners who are considering the option of going public in the future should be grateful to Mr. Edelman. His interventions have highlighted some of the pitfalls. A Belgian industrialist commented that he would not consider taking the family company public until the markets were in a more favorable position; more important, he said he would not do so until the owning family fully realized the implications of sharing control with outside investors. The question of how to align the long-term thinking of family business owners and short-term reward-searching of outside investors will continue to be a subject of major debate as Europe enters the next millennium.
Buyout scramble
The growing market for leveraged buyouts in Europe by U.S. and other firms. The left-hand scale and bars represent the volume in billions; the right-hand scale and rising line show the number of transactions.
Joachim Schwass is a professor of family business studies at the International Institute of Management Development (IMD) in Switzerland and director of its seminar on “Leading the Family Business.” He is also executive director of the Family Business Network (FBN), a worldwide educational organization devoted to the concerns of family enterprise.