Financial Times - July 15, 2000
Shares soar on Schrõder tax victory By Haig Simonian in Berlin Published: July 14 2000 19:21GMT | Last Updated: July 14 2000 20:22GMT
Chancellor Gerhard Schrõder on Friday pulled off a stunning victory on tax reform, paving the way for a radical restructuring of Germany's corporate landscape.
Share prices in Germany's biggest commercial banks and insurance groups soared on the Frankfurt stock exchange as investors digested the prospect of further big deals in Europe's largest economy.
A beaming Mr Schrõder said: "This is a great day for Germany . . . and a good day for the image of Germany in the world."
The new rules will enable big German companies to off-load their cross shareholdings without being penalised heavily on capital gains tax.
Economists said passage of the tax reforms marked a watershed because Germany had gained a reputation in the 1990s as a high-tax, low-growth and institutionally rigid society. The effect could be that international investors see the euro-zone in a more positive light, leading to higher direct and portfolio investment and causing the euro to emerge from its prolonged period of weakness on foreign exchange markets.
Mr Schroder's victory in a vote in the Bundesrat, Germany's upper legislative chamber, followed intense behind-the scenes horsetrading, with the opposition centre-right CDU and CSU accusing the chancellor of "baksheesh behaviour".
Under the deal, eagerly awaited by the big names of German industry and US investment banks hungry for deals, corporate taxes will be lowered from 40 per cent to 25 per cent, excluding local trading levies, from next January. A year later, capital gains tax on sales of big corporate cross shareholdings will be abolished. This is likely to accelerate the corporate restructurings which have begun to transform the economy.
Mr Schroder offered two eleventh-hour concessions to five federal states,whose support was vital for the government's package to be approved.
The top rate of income tax will be shaved by a further one percentage point to 42 per cent in 2005, instead of 43 per cent.
A package of measures worth about DM2bn ($900m) a year will be passed to extend some of the tax advantages for big companies to Germany's millions of non-incorporated groups and sole traders.
Bernhard Vogel, a leading CDU member and a 30-year veteran of the Bundesrat, said he had never seen such misuse of the chamber.
Edmund Stoiber, the Bavarian leader vehemently opposed to the proposals, accused Mr Schrõder of "baksheesh behaviour" in brokering a deal.
Friday's vote was a severe blow to the CDU just as it was starting to recover from last year's slush fund scandal i nvolving Helmut Kohl, its former leader.
The party's new leadership had attacked the government on the tax package, which it claimed unfairly disadvantaged small and medium sized companies at the expense of big business.
Angela Merkel, CDU chairman, said the last-minute concessions on mittelstand companies reflected her party's influence. She criticised the government's approach and said the CDU had been prepared to reach a compromise after the summer parliamentary recess in September.
However, the CDU's failure to block the reform will call into question the competence of its new leadership. Criticism has focused on Friedrich Merz, leader of its parliamentary group, who personally directed the blocking strategy. Last night, Mr Merz acknowledged the vote was "a political defeat" but said he would not resign.
Additional reporting by Tony Barber in Frankfurt
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German companies ready for wholesale restructuring By Charles Pretzlik
Corporate Germany is bracing itself for an unprecedented wave of restructuring after the approval on Friday of the government's plans to abolish taxes on capital gains made by quoted companies selling shareholdings in each other.
The steps, which come into effect in January 2002, threaten to expose many of the totems of the German corporate landscape to domestic and foreign takeover.
"There is no doubt this will enhance overall structural change to a very large extent," said Hartmuth Jung, chairman of UBS Warburg in Germany and co-head of European mergers and acquisitions at the investment bank.
For years, many German companies have been insulated from the hostile environment of Anglo-Saxon capitalism by a network of cross-shareholdings. Such protection is now set to be stripped away as the new tax regimes makes it easier for large shareholdings to be sold.
The largest holders of stakes in industrial companies are Germany's insurance companies and banks that took them instead of cash on loans made during the post-1945 reconstruction. Originally seen as a way to provide industry with a stable shareholder base and a ready source of funding, these stakes have tended to be low-yielding and a drag on the banks' return on equity.
This is something they can ill afford as they themselves face intense competition and pressure from their own shareholders.
Deutsche Bank, Germany's largest bank, holds large stakes in such industrial groups as DaimlerChrysler, the car maker, Heidelberger Zement, the building materials group, and Metallgesellschaft.
Some shareholdings, such as Deutsche's 15 per cent stake in Holzmann, the construction company that nearly went bankrupt, have occasionally been a source of embarrassment.
Deutsche said: "We are pleased with the tax reform. It doesn't mean that we will sell everything immediately but it means a widening of the room for manoeuvre."
The estimated market value of Deutsche's main shareholdings is E23bn ($21.5bn). Similarly, Dresdner Bank owns shareholdings in such groups as BMW, the car maker, and Dyckerhoff, Germany's leading cement producer, which are estimated to be worth E15bn.
JP Morgan, the US investment bank, estimates that the unrealised capital gains on Deutsche's portfolio is E18bn, and E12bn on Dresdner's. Yet, any attempt to realise such gains could be subject to a 58 per cent capital tax.
Schroder Salomon Smith Barney, the US investment bank, believes Allianz, the German insurer, is the "kingpin of the whole restructuring story". It has an asset portfolio worth more than E40bn and has been invigorated by the arrival of a former Goldman Sachs banker, Paul Achleitner, as its chief financial officer earlier this year.
In the new tax regime bankers expect such groups as Heidelberger Zement, Linde, MAN and Metro to become vulnerable to takeovers from within or outside Germany.
Such companies as BMW, ThyssenKrupp, BASF and Bayer also appear on bankers' watch lists.
Not only will it be less costly to sell blocking stakes, but those that do will find themselves holding cash they can use to buy up rivals. In addition, German acquirers will be able to strip out unwanted assets more cheaply.
At the very least, bankers say, the changes promise to increase the liquidity of the German market, thus further promoting the development of an equity culture in Germany.
However, the tax changes do not come into effect for another 18 months and, although financial structures can be designed to allow them to be taken advantage of before then for equity-linked transactions, bankers believe this will be more difficult in M&A.
Other brakes on the process include the fact that some stakes are so large they can only be sold gradually. Other stakes could be seen as strategic, such as Allianz shareholdings in banks such as Deutsche and Dresdner.
Nevertheless, investment banks are licking their lips as what is in prospect. "Most of us have spent vast sums expanding our German expertise. We see enormous opportunities for us," one US banker said.