Dialog International

Germany falls further behind in the digital economy

The accounting and consulting group EY has released its listing of the world's most valuable companies.  For the first time since 2006 - when EY first compiled the data - no German firm appears in the top 100 most valuable companies:

Deutschland ist erstmals seit Beginn der EY-Erhebungen im Jahr 2006 nicht mehr in den Top 100 vertreten. Der höchstbewertete deutsche Konzern ist der Software-Anbieter SAP mit einem Börsenwert von 106 Milliarden US-Dollar auf Rang 113. Die Deutsche Telekom schafft es mit einem Börsenwert von 98 Milliarden US-Dollar auf Rang 120.

SAP was always the one software company Germany could point to as a global high-tech competitor, but it now ranks at only 113.  Of course, 2022 has been tough on the tech sector, with valuations falling 25% across the board, but still Apple, Microsoft, Alphabet (Google) and Amazon are all in the top five of the most valuable companies.

And what about Germany's revered automobile industry?  Volkswagen comes in at 148 in the ranking, while Tesla is at place #6.  That's because Tesla is valued as a technology company. In fact, with a market value of $692 Billion Tesla is worth more than the combined values of Volkswagen, BMW,  and Mercedes.

Why is Europe - but especially Germany - lagging far behind the US and Asia in competing in the digital economy? Henrik Ahlers - EY's Country Manager for Germany - has the answer:

"Die schwache Aufstellung Europas und Deutschlands im Technologiesegment sollte uns zu denken geben", kommentiert Ahlers. Die USA profitierten im Vergleich zu Europa von einer höheren Risikobereitschaft amerikanischer Unternehmensgründer sowie deutlich besseren Finanzierungsbedingungen: "Vor allem in den USA ist es jungen Unternehmen in den vergangenen Jahrzehnten gelungen, völlig neue Geschäftsmodelle zu entwickeln und damit ganze Branchen zu revolutionieren. Europa hat in diesen Bereichen Nachholbedarf."

Germany will need to invest considerably more in the digitization of its industry in order to catch up with US firms.

 

Equity culture catching on in Germany

I've written before about the hesitancy of German savers to buy stocks as a wealth-building strategy.  While more than 50% of Americans have at least some stocks or equity funds in their portfolio in Germany the number is below 20%.  That imbalance is (slowly) beginning to change for several reasons.  For one, bank savings accounts - traditionally the preferred investment product - now yield zero or even negative interest income thanks to the monetary policy of the European Central Bank.  Also, several mobile apps such as Trade Republic have launched that make it very easy to trade stocks at low or zero commission using a smartphone. And stocks in Germany - and internationally - have performed very well, even during the pandemic.

"Risk-averse Europeans have embraced share trading during the coronavirus pandemic, encouraged by soaring stock markets, rising household savings and the popularity of low-cost trading platforms. The number of people in Germany who own shares directly or via funds rose by 2.2m to 12.4m last year — with the sharpest rise among those aged under 30, according to a recent report by the Deutsches Aktieninstitut, which represents German publicly traded companies. This is a significant shift for a country with relatively low levels of share ownership and where people are traditionally conservative with their money — often preferring to earn meagre interest on bank deposits rather than invest in shares."

To be sure, much of the growth in new investors has come from younger Germans (under 30 yrs old).  Some question whether these young traders will have  a long-term commitment to the market, or if they are just following a fad.  We've seen this also in the US with the rise of Robinhooda commission-free mobile app that has gamified stock trading. Young traders - driven by a Reddit sub-forum, have piled into questionable trades with little or no understanding of stock fundamentals. The concern is that many Robinhood users are more gamblers than investors and will abandon the market once they experience significant losses.  There is the same concern in Germany that the young users of Trade Republic or JustTrade are "Zocker" - gambling on risky trades and are bound to lose money.  But there is no such thing as risk-free stock trading, and most of these new investors will see the long-term benefits of having a portfolio of stocks:

Nur ein kleiner Teil der neuen Generation Börse fällt unter die Kategorie der Zocker. Sicher, der Großteil der jungen Wilden wird Anfängerfehler machen, aber man muss den Neulingen die Freiheit gewähren, auch schmerzhafte Erfahrungen zu machen. Wer mag von sich behaupten, bei seinen Investments stets fehlerlos gewesen zu sein? Auch maximale Routine an der Börse schützt nicht vor dramatischen Fehlgriffen – Stichwort Wirecard. Viel wichtiger ist es, daraus die richtigen Lehren zu ziehen. Der größte Lerneffekt tritt ein, wenn es um das eigene Geld geht.Nur auf diese Weise können aus Amateuren irgendwann erfahrene Investoren werden. Diese Trader bleiben langfristig. Die Zocker nicht. Sie werden sich verspekulieren und anschließend „den Markt“ dafür verantwortlich machen. Die Folge wird eine Art Selbstauslese sein, bei der am Ende deutlich mehr Aktionäre übrig bleiben als zuvor. Und das wird der deutschen Aktienkultur sehr guttun.

The Sad Demise of Commerzbank AG

Very sorry to read the latest news regarding Commerzbank,  Germany's second largest banking institution:

"The Frankfurt-based lender said late Wednesday that it expects to post a loss of about 2.9 billion euros ($3.5 billion) for 2020, reflecting lower asset values and the cost of cutting about 10,000 jobs. The loss exceeds the 2.7 billion euros that analysts had estimated, and stands in contrast to Deutsche Bank’s announcement Thursday of its first annual profit since 2014.

Commerzbank announced job-cutting expenses of more than 800 million euros and an impairment on goodwill of roughly 1.5 billion euros. The firm’s shares fell as much as 3.5% on Thursday and are down 84% over the past decade, the third-worst performance in the 33-company Bloomberg Europe 500 Banks and Financial Services index."

Last I checked, Commerzbank's shares were trading around 5 Euros - an embarrassing development for the once proud institution that was founded at the same time of the founding of the German nation. The bank was always known as Germany's primary lender to the Mittelstand - family owned businesses that are the backbone of the Germany economy.  Now the bank is severing relationships with many of its longstanding customers, sending out the following automated message:

"Von diesem Recht machen wir hiermit Gebrauch und kündigen Ihre oben genannte Kontoverbindung mit Wirkung zum 22.03.2021. Zudem kündigen wir zu diesem Termin die ggf. bestehenden Kartenverträge, Verfügungskredite, Verträge für das Lastschriftverfahren sowie etwaige weitere Produktverträge ohne feste Laufzeit."

I worked in corporate banking at Commerzbank in New York and Frankfurt for several years and reported to Klaus-Peter Müller, a dynamic manager and by far the best boss I ever worked for.  Müller was responsible for the bank's North American business at the time, and we successfully established profitable credit relationships with many of the US Fortune 100 corporations.  Müller was a decisive leader, but not arrogant: he was willing to listen to his direct reports and adapted well to the fast pace of New York banking.  I later left for rival Deutsche Bank, and Müller went on to become Commerzbank's CEO, where he engineered the takeover of Dresdner Bank.  The bank was hit hard by the 2008 Great Recession and was bailed out by the German government, which still holds a 15% equity interest. After Klaus-Peter Müller retired the bank never found its footing again.  It remained committed to money-losing branch banking, and, lacking a robust trading operation, was dependent on interest income.  The low/negative interest rate EU Central Bank policy has hastened Commerzbank's demise, while Deutsche Bank's prospects look brighter with its revived investment banking operations.  Now the strategy of the new CEO Manfred Knopf is to clean up the balance sheet in order to attract a takeover suitor.  The days of Commerzbank as an independent bank are numbered. 

 

 

Grenke AG - Wirecard Redux?

What is going on with exchange-listed companies in Germany?  High-flier Wirecard AG collapsed after its massive fraud was finally exposed - although warnings about the company and its stock were sounded months before by the Financial Times and other analysts.  Now the Baden-Baden based leasing company GRENKE AG is coming under scrutiny for its accounting and business practices.  The Wirecard debacle exposed the gaps in securities oversight in Germany; the banking and insurance regulator BaFin completely failed in uncovering the fraud until it was too late.  Evidently, BaFin has not exercised any oversight of GRENKE, although the group does own a bank.  That oversight has up to now been the responsibility of the under-resourced DPR (Deutschen Prüfstelle für Rechnungslegung).

Germany is one of relatively few countries to split accounting enforcement between a private-sector watchdog and the markets regulator. Since Wirecard’s collapse, the Finance Ministry says BaFin needs investigative powers, and the Justice Ministry canceled its contract with DPR, which will now expire at the end of next year. A key reason why BaFin wasn’t able to unearth the wrongdoing at Wirecard is that the regulator only directly oversees banks and insurers. Wirecard was classified as a technology company, even though it owned a bank. Grenke, which finances the leasing of computer and communications equipment, also owns a bank.

Grenke has commissioned KPMG to conduct a review of its finances, and, for the time being this seems to have assuaged investors: Grenke's share price has recovered somewhat from its recent losses.  However, the stock recovery may be short-lived.  The report by short-seller Fraser Perring and his firm Viceroy Research is pretty devastating.  Here is the introduction to the exhaustive report:

Grenke’sglobal expansion through the purchase of dozens of undisclosed related party  franchises is a fraudulent scheme perpetrated on a mass scale, designed to either hide fake cash or siphon off millions of euros to undisclosed related parties, or both. Grenke’s banking division has been a conduit for the proceeds of crime and money laundering, and could face the loss of its banking license. Grenke’s leasing model facilitates and encourages rampant fraud from resellers, resulting in bad debt, protracted legal disputes and the defrauding of small businesses, the government, and charities. Legitimate leasing of small ticket tech is becoming increasingly redundant, in outdated and fast diminishing business segments.

Before you dismiss Viceroy and Fraser Perring as a greedy investor looking to get rich on his short position in GRENKE AG shares, remember this:  Perring was one of first to sound the alarm on the fraudulant South African retailer Steinhoff as well as Wirecard AG. So far, Perring is batting 1000. 

Investors Burned as Rocket Internet Delists

I was never a fan of Rocket Internet as an investment.  In fact, I advised against buying the stock after its IPO  in 2014. Now the company's journey as a publicly listed company is ending as CEO Oliver Samwer announced that he is taking Rocket Internet private.

"Rocket Internet, the German startup factory infamous for copying other companies, said Tuesday that it will delist its stock, citing current greater availability of private capital than when it went public in 2014"

For investors who purchased and held the shares the journey has been a very bumpy ride. Rocket’s market value has fallen from its high of 6.7 billion euros ($8 billion) on the day of its IPO on the Frankfurt Stock Exchange to just 2.6 billion euros and is now offering investors 18.57 euros ($22.23) for each of their shares.  Its investment division, Global Founders Capital, and CEO Oliver Samwer, will retain their stakes of 45.11% and 4.53% respectively. It has also launched a separate buyback program to secure 8.84% of its shares from the stock market. Although the decision to delist makes sense, smaller shareholders will be burned, especially as Rocket is using its own cash for the buyback.

To be sure, some of Samwer's clone investments have been successful, even if they were not particularly original, including e-commerce firm Zalando, food delivery service Delivery Hero and meal-kit provider HelloFresh. But Rocket investors saw little benefit from these successes. Part of the problem is that Rocket would artificially inflate the value of its startup investments using a controversial metric - "last portfolio value" or LPV, which valued these startups based on their last financing round - and these valuations were manipulated since Samwer's Global Founders Capital or Rocket itself provided the investment round.  Jeremy Kahn at Fortune explains how the LPV metric was highly misleading:

The difference between Rocket's valuations and more conventional ones became apparent when investors compared Rocket's books with those of Swedish investment firm Kinnevik, which was once a big shareholder in Rocket and had coinvested in many of its startups. Kinnevik used far more conservative metrics to value these young companies. Its figures and Rocket's were often miles apart. For instance, the Swedish firm valued Westwing, an e-commerce retailer, at $304 million in June 2016; at the time, Rocket said the company was worth $576 million. Rocket's valuation of Home24, another home decor merchant, was seven times what Kinnevik thought the company was worth.

While Rocket Internet's progress - or lack of progress - has been a big disappointment to Rocket shareholders, Oliver Samwer and his brothers have done quite well: According to Forbes, Samwer and his brothers and co-founders Alexander and Marc are worth at least $1.2 billion each.

Wirecard Scandal: Mistakes were made

For the biggest financial scandal in years - the collapse of Wirecard due to massive fraud - there is plenty of blame to spread around: from the total lack of oversight by BaFin (Federal Financial Supervisory Authority) to the mind-boggling mistakes by the auditors Ernst&Young.  The business journalist Stephan-Götz Richter recently listed seven reasons for the collapse in Der Spiegel: Die sieben Fehler im Umgang mit dem Wirecard - Scandal.  One of the reasons Richter catalogs in particular resonated with me.  The German banking sector has been in free fall ever since the global financial collapse of 2008.  Deutsche Bank has been rocked by endless scandals and is now just a shadow of what it was 20 years ago.  Commerzbank remains crippled and is now in the hands of an American private equity group.  The Landesbanken were always a joke, and now are consolidating.  All this as financial institutions across Europe are beginning to face massive defaults due to the COVID-19 pandemic.  Compared to this wreckage Wirecard seemed like a savior - a leader in financial innovation that was growing at breakneck speed.

Mit anderen Worten: Dem Bankensektor droht in Deutschland ein schleichender Kollaps. Kein Wunder, dass man unter diesen Umständen geneigt war, sich kollektiv am Aufstieg von Wirecard wie an einer Partydroge zu berauschen. Aber diese Form der Ekstase führte zu dem für Partydrogen bekannten Ausgang.

("in other words, the German banking sector is facing creeping collapse.  No wonder that in this situation the rise of Wirecard was greeted with the collective exhilarating high of a party drug.  But this kind ecstasy has the usual outcome of all party drugs.")

By the way, the German banks only compounded their misery by lending to Wirecard.  Commerzbank alone has to write down $200 million in loans to the scandal fintech group:

The lender said Wednesday that it wrote off €175 million ($207 million) in the second quarter related to a large single case. While it didn’t name the case, a person familiar with the situation said it was Wirecard. The charge came on top of €131 million it took from the effects of the coronavirus pandemic.

“We will do lessons learned on cases like that,” said Commerzbank Chief Financial Officer Bettina Orlopp in an earnings call with analysts. She added that there needs to be a wider debate in Germany on how to interpret red flags in the future.

"Lessons Learned" indeed.  The banks in Germany have learned nothing since the global crisis of 2008.  With respect to Wirecard, all the pain could have been avoided if people had taken seriously the explicit warnings of the Financial Times.

Return of the Plagiarist - "KT" Guttenberg

Karl-Theodor zu Guttenberg was a rising star in German politics until it was discovered that he had plagiarized massive sections of his doctoral dissertation.  He left Germany in 2011 for the United States where he landed on Wall Street.  From time to time a "KT" has explored making a comeback in Germany.  Two recent events have made a comeback less likely in the near future.

Recently, Der Spiegel reported that Guttenberg had lobbied the chancellery in Berlin on behalf of Wirecard AG, the fintech company that defrauded investors of millions of euros. 

Guttenberg beriet den Dax-Konzern bei dessen Expansion nach China mit seiner Investment- und Consultingfirma Spitzberg Partners. Am selben Tag habe Guttenberg eine E-Mail an Lars-Hendrik Röller, den Leiter der Abteilung für Wirtschafts-, Finanz- und Energiepolitik des Kanzleramtes und den Persönlichen Beauftragten Merkels für die G7- und G20-Gipfel, geschickt.

Darin informierte er Röller laut dem "Spiegel" über den beabsichtigten Markteintritt von Wirecard in China und bat ihn um "Flankierung im Rahmen der China-Reise" Merkels am 6. und 7. September 2019. Nach der China-Reise antwortete Röller demnach Guttenberg am 8. September per Mail, "dass das Thema bei dem Besuch in China zur Sprache gekommen und weitere Flankierung zugesagt" sei.

Evidently KT's efforts bore fruit - Wirecard's interests were discussed at the highest levels during Angela Merkel's visit to Beijing - although it is not clear whether Merkel was personally involved.  In any case, Wirecard announced shortly afterwards that it had acquired a Chinese payment processing company.

Guttenberg later said he "shocked an horrified" after Wirecard's massive fraud came to light.  This is slightly ridiculous, since - as I wrote in December - there were many signs of irregularities in Wirecard's financial reporting.  The Financial Times had been sounding the alarm for well over a year.  '

KT Guttenberg has also been active in promoting an AI software start- up Augustus Intelligence. Little is known about this secretive company, where Guttenberg has a leadership position, but it does not appear to have any real product or customers.  The tech-journalist Sascha Lobo has written that Augustus Intelligence is a Palantir-wannabe.  Palantir is the data intelligence software company that is slated to complete its IPO this year with a $20 billion valuation.

Palantir steht wie kaum ein Unternehmen für die Privatisierung der Sicherheitsbehörden, für die Übernahme eines Teils staatlicher Hoheitsgewalt mit digitalen Mitteln. Über Palantir gab es Gerüchte, viele Produkte seien untauglich oder luftschlossig. Aber die Verheißung, mithilfe künstlicher Intelligenz endlich den perfekten Überwachungs- und Sicherheitsapparat zu schaffen, hat Palantir noch immer für Behörden und besonders die konservative Politik attraktiv erscheinen lassen.

Palantir is a dream platform for authoritarian regimes such a China, Russia, or Turkey - as well as for wannabe authoritarians such as the Trump administration.  Augustus Intelligence evidently wants to compete with its own "dictator-ware" offering.

Wirecard AG Scandal Damaging to German Capital Markets

Well, as I anticipated in my last blog post, the CEO of Wirecard AG, Markus Braun, has been arrested in Munich after authorities uncovered the fact that over $2 billion dollars on its balance sheet never existed. 

"Wirecard AG’s recently departed chief executive, Markus Braun, was arrested by police, days after the German payments company revealed a $2 billion hole in its books.Munich city prosecutors said he was arrested late Monday on suspicion of presenting false information. It was a swift turn of events for Mr. Braun, who was Wirecard’s largest shareholder and served as CEO for nearly two decades until resigning last Friday.The arrest is the latest rapid-fire blow for the company at the center of what appears to be Europe’s largest fraud in years. The company began to unravel last week when its auditors said that they couldn’t verify the money existed."

The shock waves from this scandal reverberate far beyond Wirecard and its investors.  It shines a spotlight on all DAX-listed companies and the effectiveness of financial oversight and governance of German corporations.  In particular it calls into question the value of the Deutscher Corporate Governance Kodex.  Germany's Finance Minister Peter Altmaier (CDU) expressed shock that such a scandal could happen in Germany:

„Wir hätten eine solche Situation überall erwartet – nur nicht in Deutschland. Deshalb müssen wir, wo notwendig, hart durchgreifen.“

„Der Fall Wirecard macht deutlich, dass die Deutsche Börse dringend eine Reformdebatte anstoßen muss“, sagte der Vorstandsvorsitzende der Vereinigung der Aufsichtsräte in Deutschland (VARD), Peter Dehnen, und er fügte hinzu: „Wir brauchen in Deutschland einen starken Kapitalmarkt, und deshalb wünschen wir uns, dass die Deutsche Börse mit ihrer neuen starken Führung im Stil der Nasdaq die Diskussion über Standards guter Unternehmensführung vorantreibt – gemeinsam mit Aufsichtsräten und Vorständen.“

It is true that Nasdaq may have a better track record than the DAX.  Back in September the tech start-up WeWork attempted to launch an IPO with a valuation of $49 billion.  After investors examined the prospectus the company was forced to withdraw the IPO.  Today the valuation of WeWork is more in the range of $2 billion. 

Wirecard AG: My Instincts Were Correct

Last December I wrote a blog post expressing concern about the high-flying fintech company Wirecard AG.  There were too many red flags, I thought then.  The Financial Times also believed there was possible fraud in the financial statements Wirecard was presenting to investors.  I have lived through many spectacular cases of fraud - Enron, WorldCom, Balsam AG, etc. -  and something about Wirecard smelled fishy.

Now, my concerns turned out to be justified.  The Wall Street Journal today reports: 

"The company said the auditor informed it that “no sufficient audit evidence could be obtained” on the €1.9 billion that was supposed to be held in trust accounts. The amount in question equals about one-quarter of the value of Wirecard’s balance sheet. Wirecard processes electronic payments for retailers, especially online, and provides related services and loans. It was seen as a great success in Germany’s corporate scene, with high exposure to rapid growth in Asian markets. In 2018, Wirecard’s market value eclipsed that of Deutsche Bank AG , the country’s largest lender. The €1.9 billion is meant to be held in accounts looked after by a trustee on behalf of Wirecard and payment-processing partners in some countries. Problems with obtaining evidence about these balances were raised by KPMG in a recent special report into allegations about Wirecard’s accounting practices, published in April."

Naturally, Wirecard management is claiming it is the victim here (!), which will surely enrage investors:

Der Konzern will nun Strafanzeige gegen unbekannt erstatten. Das Unternehmen sieht sich laut einem Sprecher als mögliches Opfer eines "gigantischen Betrugs": Es gebe Hinweise, dass dem Abschlussprüfer von einem Treuhänder oder aus dem Bereich von Banken, die die Treuhandkonten führen, "unrichtige Saldenbestätigungen zu Täuschungszwecken vorgelegt wurden".

Only question now is will Markus Braun end up in prison like the fraudsters at Enron, WorldCom, Balsam, etc. who came before him?

Wirecard AG - Something Isn't Right

For months questions have been swirling around the accounting practices at the high-flying fintech company wirecard AG. And investors have been whipsawed as the positive earnings reports have been countered by critical investigative reporting - especially from the Financial Times.  So wirecard's CEO Markus Braun brought in KPMG to conduct a thorough audit and investigation to clear up the matter once and for all. 

Earlier this week KPMG issued the eagerly-awaited report.  Unfortunately, it did not not have the desired result.  The 70-page report can be accessed here (pdf). KPMG's report is inconclusive, since many of the requested documents from wirecard's partners were not made available. Normally, revenue from partners would not be of great concern - if the accounting is transparent.  But in the case of wirecard more than half its revenues and up to 90% of its profits came through partner organizations.  KPMG was unable to confirm the validity of the numbers.

KPMG reported that some essential documents for its review arrived at the last minute, while many never arrived at all. Among the desired but absent information: original bank records detailing €1bn of payments.[...] In terms of the accounting, while KPMG found no evidence for manipulation, it cast doubts over several areas: how Wirecard calculated its cash reserves; how it booked the revenue generated by third-party business partners; about its know-your-customer procedures; its risk management; and about the willingness of staff to co-operate with KPMG.

So, in this key issue KPMG was unable to come to any conclusion:

"Hinsichtlich der Höhe und Existenz der Umsatzerlöse aus den TPA-Geschäftsbeziehun-gen zwischen der Cardsystems Middle East, der Wirecard UK & Ireland sowie der Wirecard Technologies und den jeweils relevanten TPA-Partnern kann KPMG als Ergebnis der durchgeführten forensisch geprägten Untersuchungshandlungen in Bezug auf den Untersuchungszeitraum 2016 bis 2018 weder eine Aussage treffen, dass die Umsatzer-löse existieren und der Höhe nach korrekt sind noch die Aussage treffen, dass die Um-satzerlöse nicht existent und in der Höhe nicht korrekt sind. Insoweit liegt ein Untersuchungshemmnis vor."

The senior management of wirecard tried to put a positive spin on the report:

"Wirecard selbst sehe sich durch den KPMG-Bericht hinsichtlich der Vorwürfe rund um mutmaßliche Bilanzfälschungen entlastet: In den vier Prüfbereichen des Berichts hätten sich für die Jahre 2016 bis 2018 nach wie vor keine substanziellen Feststellungen ergeben, die Korrekturen erforderlich gemacht hätten."

Investors, however, are not convinced that the report "vindicates" the company:  wirecard shares have lost nearly half their value over the past two days.