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Interview with Harald Sachs, who played the role of tax consultant as the merger of METRO Cash & Carry, Kaufhof, Asko and Deutsche SB-Kauf was planned and carried out.

"TOP SECRET"

 

The birth of METRO AG in 1996 was well thought out. Following a long phase of growth, the mood amongst German retailers turned gloomy at the beginning of the 1990s. It forced all companies to search more intensely for ways to boost their efficiency. At the time, METRO Vermögensverwaltung GmbH & Co. KG (METRO VVKG) was in an unusual situation: In 1995, METRO VVKG not only held all shares in the METRO Cash & Carry business in Germany, but also owned a majority stake in the listed companies Asko, Kaufhof and Deutsche SB-Kauf. It made sense to consider the advantages of merging these companies. After thoroughly weighing the issues involved, the companies' supervisory boards and management boards concluded that earnings would increase by more than DM 400 million each year if the companies were merged. The idea was to bring together all four companies under the umbrella of a new company called METRO AG, which would be listed on the stock exchange in place of Kaufhof Warenhaus AG and thus become part of the blue-chip DAX index.

Important announcement

Harald Sachs, who was head of the tax affairs department of Asko Deutsche Kaufhaus AG in Saarbrücken at the time, played the role of tax consultant as the merger was planned and carried out.

Interview with Harald Sachs

Mr Sachs, on 9 October 1995, METRO announced that it would restructure its investments. How surprised were employees by this decision?

Only a few of them seemed to have been let in on the secret. On the evening of 8 October, I received a call from my boss. He asked me to come to a hotel in Düsseldorf. He told me that Erwin Conradi, who was Chairman of the Board of Directors at METRO Holding in Switzerland, had an important announcement to make. Around 600 managers of METRO Cash & Carry, Kaufhof, Asko and Deutsche SB-Kauf were invited to attend.

He didn't tell you what the announcement was about, did he?

No. Of course, I asked him, but I didn't get an answer. It was top secret.

And the secret was revealed one day later.

Exactly. Erwin Conradi explained how the merger to create a listed group would be carried out, and a new management team was introduced. Co-CEOs were planned – Wolfgang Urban, the head of Kaufhof Holding, and Klaus Wiegandt, the chairman of Asko.

How did people react?

A lot of them were uneasy. After all, they understood that the change would result in job cuts. For every function, there were at least two people filling it. And I doubt whether everyone in the conference room knew whether he or she was ranked No. 1 or No. 2. 

Completion in record time

Did work really begin on the day after the merger plan was announced?

And how. Work groups were formed for various issues. We generally met in Düsseldorf with various lawyers, auditors and tax experts. It took about six months to put together the final merger reports. It was an unbelievably exciting time and definitely one of the more interesting phases of my career.

And one of the most work-intensive periods as well. Did you have any free weekends after the announcement?

I worked on just about every weekend. And I was frequently in the office until very late in the evening – but that is hardly unusual for such a deal. But it was a whole lot of fun.  Because legal regulations enabled us to exercise certain voting rights and the main shareholder generally accepted our proposals.  

The merger process was completed relatively fast.

A little more than nine months passed between the announcement on 9 October 1995 and the registration of the merger on 19 July 1996 – that was certainly a possible record at the time.

What were the biggest problems you faced?

In particular, corporate law experts had to make sure that challenges expected to be filed by outside shareholders would not hold up the registration of the merger and thus its validity.

Microphones in a conference roomOn 9 October 1995, Erwin Conradi met with 600 managers in a Düsseldorf hotel and informed them about the consolidation plans. The creation of METRO AG was completed in just nine months, a possible record time.

What arguments did Erwin Conradi use to make his case for the merger?

The primary objective was to tap synergies in such places as purchasing and logistics. The management structure was to be streamlined as well. And there were also considerations about using more favourable tax models on behalf of the Group.

Why did the merger occur at this particular time?

The consolidation in retailing had really picked up speed at the time. Larger and larger alliances were being formed. It made sense for METRO to merge investee companies to bundle their purchasing volume, if nothing else. In 1994, tax laws governing the treatment of loss carry-forwards in company mergers were also changed.

METRO share as an attractive security

Could loss carry-forwards at Asko and Deutsche SB-Kauf be used faster under the same umbrella with Kaufhof and METRO Cash & Carry?

Much faster. As separate entities, the companies would have taken years and years to use their loss carry-forwards of about DM 2 billion. Under the merger plan, this was to occur in about two years.

The bull and bear at the Frankfurt Stock Exchange The METRO share was dragged down by high unemployment and difficult economic conditions in the mid-1990s: in its first year, the share’s price fell slightly.

As a listed company, METRO AG gained the opportunity to use the capital market to get the money it needed to finance its accelerated expansion outside Germany. Did this consideration play a role as well?
 
First of all, the METRO share was to become an attractive security. To achieve this goal, a good story for the capital market was needed. METRO Cash & Carry was particularly well-suited to tell this story because its sales concept had already demonstrated its ability to be rolled out internationally. At the time, the company was already doing business in 18 countries. The alliance also had other formats that had been successful outside Germany, including Praktiker.

How did the market react to this story? The METRO share was slow getting out of the starting blocks. At the end of 1996, the price of the ordinary share was DM 124. Its issuing price was DM 136.

Retail stocks had a hard time during the second half of the 1990s. The economy limped along, and unemployment was high.

What was the mood at Asko like when it was announced that the company would merge with other METRO investments?

It was a totally new situation for us at Asko. We were used to being the ones who did the merging. Earlier, we made a number of acquisitions, particularly in the do-it-yourself, hypermarket and furniture areas – just like Kaufhof with its investments in such companies as Media Saturn and Vobis. Both companies were then placed under the same umbrella. As a result, employees kept a close eye on one another and frequently speculated about who would take on which job in future.  

The name "Asko" disappeared during the merger process. This certainly was not a pleasant event for some of the long-time Asko employees, was it?

I think that this was not such an important issue to employees in the stores. They identified with their company and not with the holding. It was different in the headquarters. Jobs and functions were at stake here. METRO AG was designed to be a small, really efficient management holding company.

How many former Asko employees still work at METRO?

I think there are three of them. We started with about 60 in 1996.

How long did it take for a METRO culture to form?

It did not happen so quickly. But a new METRO corporate culture developed as the years passed.
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