Porsche and the German stock market crash

When German sports car maker Porsche listed on the Frankfurt Stock Exchange in a €75 billion initial public offering in September, Deutsche Börse chief executive Theo Weimer hailed a “historic day.” Weimer was right, but in a different sense than he had in mind.

Europe’s largest ever price by market capitalization will pass like a rare hurray amid the German stock market slump in recent years.

Less than a month after Porsche’s IPO, Linde, Dax’s largest member by value, announced in October that it would be delisted from the Frankfurt stock exchange. Instead, Linde will focus on the New York Stock Exchange, arguing that his listing in Germany had been a drag on his valuation.

Germany’s most flashy business success story, Mainz-based biotech group BioNTech, didn’t even bother to list in Frankfurt. The inventor of one of the two main covid vaccines chose Nasdaq for its 2019 listing. The decision was very rational, since US companies trade at significantly higher valuation multiples.

One of Germany’s great hopes in the technology sector, Wirecard, collapsed in 2020 in one of the biggest post-war accounting frauds in Europe, with its former CEO Markus Braun. currently facing trial in Munich.

Such blows have left the German stock market long on historic corporate names but short on dynamism and innovation. Of the 40 blue-chip companies listed in the country’s leading Dax index, 23 can trace their corporate roots back to the 19th century or earlier. Only two Dax companies, the real estate group Vonovia and the online retailer Zalando, were founded this century.

While the expansion of the Dax from 30 to 40 companies in the wake of the Wirecard scandal suggests more variety, the index is still dominated by a few large industrial conglomerates and their derivatives: Siemens (four companies), Volkswagen/Porsche (three), Mercedes (two), Fresenius (two) and Bayer (two).

The Dax’s long history of underperforming global stock markets began long before German industry lost its access to cheap Russian gas this year. In the past five years, the Dax has risen 6 percent, while the MSCI World Index has gained 18 percent in the same period. In the US, the S&P 500 Index rose 42 percent over the same period. Another telling benchmark is that, at €1.6 trillion, the combined market capitalization of Germany’s 40 largest listed corporations is a fifth less than Apple’s, which is valued at $2.1 trillion. .

There are many reasons for the relative decline. One is a dearth of innovation despite Germany’s engineering and manufacturing strengths. In the World Intellectual Property Organization’s 2022 innovation ranking, Europe’s largest economy ranks eighth, behind countries such as Switzerland, Sweden, the US and the UK.

It is not hard to wonder if an instinctive reliance on defending old business models might have hindered the development of many new ideas. Take the German auto industry, for example, which accounts for one-fifth of all Dax market value. These companies were slow to react to the switch to electric vehicles and lobbied against stricter emission standards. VW, and allegedly Mercedes as well, even tampered with emissions data as they struggled to meet regulatory limits.

Another problem is Germany’s two-tier corporate governance system: a board of directors that runs operations and a supervisory board that oversees executives. Under German law, half of the members of the supervisory board are employee representatives. This can lead to a more consensual approach to decision making in areas that could affect employment. In many companies, the chairman of the supervisory board is also a former CEO, who may be loyal to existing corporate strategies rather than new approaches.

And, in general, underperforming CEOs can resist shareholder pressure to resign or change strategy. Take Bayer, for example, which was able to embark on its ill-fated $63 billion acquisition of Monsanto in 2016 despite fierce shareholder opposition, and without bringing the deal to a vote at its annual meeting. In 2019, Bayer CEO Werner Baumann kept his job despite 55 percent of shareholders voting against ratifying management’s actions. He’s still there even though the company’s shares have fallen 43 percent since the deal was announced. Bayer’s €48 billion market value is still far less than what was paid for Monsanto.

Much more thinking is needed to rectify the decline of the German market, but improving corporate governance and shareholder rights would be a good starting point.

olaf.storbeck@ft.com

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