Adolf Merckle
– One Step Too Far
It is hard to imagine exactly what thoughts were going through 74-year-old Adolf Merckle’s head on Monday evening, 5 January 2009. Telling his wife Ruth that he was ‘going into the office for a while’, Merckle instead walked to the railway line near to his home, waited for the next train, and calmly stepped in front of it. It was a tragic end to an incredibly successful life.
Merckle was one of Germany’s most successful and wealthy businessmen. In 2007, Forbes magazine reported he was worth US$12.8 billion, making him one of the wealthiest people on the planet. Under two years later, he would be dead.
Merckle was born in Dresden, Germany, in 1934. His grandfather had started a pharmaceutical business, called Drogen und Chemikalien en gros, in 1881 in Aussig, then part of the Austro-Hungarian Empire. His son Ludwig took over in 1915. Aussig was incorporated into the Third Reich in 1939, but after the Czech takeover in 1945 there was a German exodus, and the Merckles ended up in the small town of Blaubeuren in the state of Baden-Württemberg, in the south-western corner of Germany.
Adolf Merckle studied law in Germany and France, worked as a lawyer in Hamburg, and took over the pharmaceutical business founded by his grandfather in 1967. At the time it employed 80 people and had an annual turnover of DM4 million. Merckle was ambitious, and in 1973 he founded a business called Ratiopharm, Europe’s first manufacturer of generic pharmaceuticals. It specialized in the production of well-known medicines whose patents had expired, meaning the company could offer the effective drugs at a cheap price. Business was good. Within a year of launching, revenues had increased tenfold. From offering 18 products in 1973, it now offers some 750, and the Ulm-based company operates in 35 countries and had a global turnover in 2008 of €1.9 billion.
In 1994 Merckle set up Phoenix Pharmahandel, a wholesale pharmaceuticals supplier. He did this by merging companies in Hamburg, Berlin, Mannheim, Nuremberg and Cologne, and at a stroke gained a 30 per cent market share. It is the largest pharmaceutical wholesaler in Germany, and the second largest in Europe, with about 20 distribution centres across the country delivering drugs to around 12,000 independent pharmacies. This is the sort of deal that only someone who lives, eats and breathes their business can do. No MBA graduate or experienced and professional CEO could have achieved this unless they had an entrepreneur’s flair, drive and understanding of their business. This is what real vision looks like – Merckle should have been proud.
Yet this sort of genius also sowed the seeds of its undoing. Merckle will have believed that only he could have achieved this remarkable feat, but it cuts both ways. When times were tough, Merckle will have believed that only he could get himself out of the situation. So perhaps his thoughts that Monday evening were clear: all or nothing.
Merckle knew he was getting deeper and further into trouble. He had always been the master of his own destiny, fêted by the German and European business community. It was he who had built up this incredibly successful 100,000-employee conglomerate. He had made himself the fifth-richest man in Germany; nobody had done it for him, no advisor, no friend, not his wife, nor any colleague had achieved it for him. He was the master of this business.
Merckle bore witness to some incredible times in Germany’s history. He was born just a few years before the Second World War, which was to be a devastating period for the country’s economy. Yet from the ashes of defeat, Germany was reborn and rebuilt, becoming Europe’s largest economy. Today it is the fifth largest economy in the world, although the burden of the 1990 reunification with East Germany has put a massive strain on the country, and it has expended considerable funds to bring Eastern productivity and wages up to Western standards. Its biggest problem is unemployment. While the overall rate hovers around 10 per cent, it rises to 30 per cent in some municipalities. Germany’s export-orientated economy has also caused problems as weak global demand impacts on the country’s businesses. These were just some of the issues Merckle had to contend with.
In 1997, Adolf Merckle handed over the day-to-day running of the business empire to his son, Ludwig. But Adolf could not let go, and he remained in the background and pulled the strings. His business ambition didn’t stop at pharmaceutical businesses. He had stakes in myriad other firms, from a maker of grooming vehicles for ski slopes, to a sugar refinery, to one of Germany’s oldest foundries. One of his biggest investments was in HeidelbergCement. Adolf’s wife, Ruth Holland, was part of the Ulm cement dynasty Schwenk/Schleicher. The family have been shareholders in HeidelbergCement since 1911, and have been represented on the company’s supervisory board since 1965. The Merckle family invested heavily in HeidelbergCement, a business that employs some 60,000 people at 2,600 locations in around 50 countries.
The core activity of HeidelbergCement is the production and distribution of cement and aggregates, the two essential raw materials for concrete. That is great when the world is busy building skyscrapers and new houses, less so in the teeth of a credit crunch and a global downturn in property prices.
In September 2007 the German business acquired rival Hanson plc, once one of Britain’s most famous companies, making HeidelbergCement one of the largest companies of its type in the world. The £8 billion deal was the beginning of the end for Adolf Merckle. Financed through debt and on the verge of a global economic downturn that would hit the property sector particularly hard, in retrospect the deal looked doomed. But that would not be the end of Merckle’s woes. If anything, it was only the entrée.
Doing a major deal just as the walls are closing in is a common characteristic for entrepreneurs on the edge. Yet often, the deal that is supposed to get the person out of the mess ends up being the deal that destroys the company – and the person.
While he was a God-fearing, conservative businessman, Merckle was a man of many faces. He could be jolly and friendly, but also merciless and puritanical. In a Manager magazine article, Merckle was once said to collect companies as others collect clocks, and he ran his business as if he lived in the 19th century. A former manager told the magazine that Merckle was ‘greedy, envious and held grudges’. This greed was to be his undoing.
With credit drying up, Merckle turned to the money markets and attempted to gamble his way out of trouble through various investments. It was not the first time Merckle’s risk-taking instincts took over, but it would be the last. He made a speculative investment based on his belief that Volkswagen shares would fall. He did this using so-called contracts for difference, and by short selling. But on 26 October 2008, Porsche announced it had secured stock and options equivalent to about 75 per cent of Volkswagen shares. The share price suddenly rocketed in two trading sessions, from €210 to just over €1,000, briefly making the auto maker the world’s most valuable company by market capitalization.
It is estimated that Merckle took a €400 million hit on the shares, and his total losses ran to an eye-watering €1 billion. (In a piece of cruel irony, Porsche announced on Monday 5 January 2009, around the same time that Merckle was taking his own life, that it had acquired slightly more than 50 per cent of Volkswagen shares, and planned to buy 75 per cent of Volkswagen during the course of the year.) Clearly Merckle’s deal was the wrong deal to do. But he was a brilliant, highly talented negotiator, someone who understood people and who had built fabulous wealth and success by doing things that he believed were the right things to do. Why give up on that faith in his abilities now? And in any case, would Merckle have taken advice even it were offered?
This amazing lack of commercial nous is pervasive among failing entrepreneurs. It is like a final flourish of virility before the curtain finally comes down. Merckle’s judgement went from bad to worse. Did he really trust the Porsche family to sell him shares he needed to short VW? Did he not realize he was revealing his hand to a potential competitor and business adversary? Was he really in such a mess that he had to take this risk?
At a stroke, the 30 creditor banks financing the deal, including the likes of Commerzbank, Deutsche Bank and Edinburgh-based RBS, became nervous and demanded more security. Merckle, so long the man with the Midas touch, was starting to lose it. Former banking friends and allies became agitated about their exposure and turned their backs. Merckle’s business empire was on the verge of being broken up. The prospects for his 100,000 employees suddenly looked bleak.
It was a bitter blow, and one compounded by the problems Merckle was having with the rest of his business empire. HeidelbergCement had debts of €12 billion, and his investment vehicle, VEM Vermögensverwaltung, owed up to €5 billion. Merckle himself could understand how he was being singled out.
In a rare interview with the leading German daily newspaper, Frankfurter Allgemeine Zeitung, Merckle complained about being compared with a hedge fund. ‘The dealing we are now being criticized for we have for decades successfully accomplished,’ he said:
They were solidly calculated so that all our partners – businesses and also the banks – could profit from it. Yet now we are being thrown in the same pot as hedge funds, for what was a growth strategy for very respectable businesses. And our business partners also knew that.
Yet Merckle was acting like a hedge fund – and not like one that employed 100,000 staff. He continued to try to bluff it out. ‘It is an unforeseeable situation,’ he said, ‘that despite our collateral, we have no access to credit.’ Despite talking about how he and his business had survived previous stock market crashes, the reality was that Merckle was busy asking his local government in Baden-Württemberg for a bailout for his company. The news of his attempt to secure state aid went down badly.
‘It is hard to believe that Merckle asks the taxpayer to redress his speculative mistakes,’ wrote the Frankfurter Allgemeine Zeitung. ‘Such a demand provokes rage. Every homeowner who cannot pay back the mortgage risks compulsory auction, regardless of whether her financial difficulties are her own fault or not.’
This case is not dissimilar to the claims made by fraudulent Wall Street financier Bernard Madoff to his investors the weeks before his house of cards collapsed. While it is not suggested that Merckle conducted his affairs in an illegal or fraudulent manner, it is worth noting that similar words and phrases are often used by legitimate entrepreneurs and those who are knowingly committing crimes. It is a very fine line.
As it happens, even his old friend Günther Oettinger, the minister president of Baden-Württemberg and the man who had recommended him for the Order of Merit, turned on Merckle. With Merckle requesting state help to save jobs, Oettinger called him a stockmarket gambler and refused to help.
The last weeks of Merckle’s life were spent wrangling with a consortium of banks for a bridging loan that would tide over his investment vehicle, VEM. Realistically, though, it became obvious that Merckle would have to sell part or all of Ratiopharm, widely regarded as the family jewels.
So who was Adolf Merckle and what sort of man was he? Merckle’s high-stakes stockmarket gambling was at odds with his conservative, patriarchal image. This was a man who cycled to work on an old bike, who travelled second class on the train and who drove an old Mercedes. He was a man who spent time hiking, in the Andes and Himalayas, and avoiding the limelight. Happily married with four children, Merckle was considered a classic Swabian – that is, someone from the south-west region of Germany, mockingly seen as tight-fisted. The joke among Germans is that an evening’s entertainment for people from Baden-Württemberg is staying home and counting their money. It is true that Merckle had a long-running dispute with the tax authorities – it was even reported that he attempted to have a small fishing town, where he had a house, declared a tax-free zone.
But Merckle also endowed universities, supported a museum and had a collection of more than 4,000 works of art hanging on the walls of his various enterprises. He was fêted by politicians and sought out by bankers for his acumen. In Blaubeuren, he was seen as a man without airs and graces, ready to help out at village fêtes and generally known as Papa Merckle. The family was well respected locally, and in Blaubeuren there is even a street, Ludwig-Merckle-Straße, named after a family member.
Yet while he was lauded among his peers, it is fair to say that Adolf Merckle was not universally loved. ‘Hardly a single other German corporate dynasty acts in such unpredictable and relentless way as the Merckle clan from Blaubeuren,’ reported Manager magazine. While Merckle might have taken that as a compliment, it was not meant to be.
Yet Merckle did not set out to become the most popular businessman in Germany, even if he did become one of its most successful. Ultimately, in 40 years, Merckle’s business empire became a world player with a turnover of more than €30 billion, employing more than 100,000 people. And while his worth dropped from US$12.8 billion in 2007 to US$9.2 billion in December 2008, he remained one of Germany’s five richest men.
But it was not enough. ‘The distress to his firms caused by the financial crisis and the related uncertainties of recent weeks, along with the helplessness of no longer being able to handle the situation, broke the passionate family businessman, and he ended his life,’ the family said in a statement after his suicide.
Merckle was a Lutheran, which is a branch of Western Christianity that comes from the beliefs of 16th-century German reformer Martin Luther. It is big on predestination, meaning Lutherans believe all Christians are predestined for Heaven, which must have comforted Merckle on his walk to the railway line. Yet attitudes to suicide remain blurred for non-orthodox Christians, and it was completely outlawed (regarded as a religious sin, actually) until relatively recently. Today there is slightly more compassion for those committing suicide, and while not accepted, it is at least understood.
Apart from religion, though, the violence and selfishness of his suicide must have had a devastating impact on those around Merckle, particularly his family, whether he left a note or not. While suicide is often a desperate last act, it is hard to see why Merckle did not have alternatives.
Merckle’s motto was ‘Mir ist fremd, etwas aufzugeben’ or ‘It is alien to me to give up anything.’ In the end, he gave up everything.
SOURCES
Bloomberg, 6 January 2009
Forbes magazine, 3 August 2007
Frankfurter Allgemeine Zeitung, 10 December 2008
Evening Standard, 6 January 2009
HeidelbergCement, www.heidelbergcement.com and www.heidelbergcement.com/uk/en/hanson/home.htm
Independent, 9 January 2009
New York Times, 7 January 2009
Ratiopharm, www1.ratiopharm.com/ww/en/pub/home.cfm
Sunday Times, 11 January 2009
The Times, 8 January 2009