The cost of control

Melanie Stern is section editor of Families in Business.

Going public was not an option for Bertelsmann's Mohn family. In the nick of time the family managed to hold onto control of their media powerhouse. Melanie Stern reports on Bertelsmann's buyback and what could have been Germany's biggest IPO

There are not that many family businesses that are publicly traded, have a professional non-family management and board, and a founding family whose name is in the press as many times – or maybe more than – the CEO's. Bertelsmann's Mohn family are the exception; led by family spokesperson and head of the Bertelsmann Foundation, Liz Mohn, the family makes no secret that they intend to remain the ones in charge of the German media powerhouse.

And they are willing to pay for the privilege. In late May, when investment giant Groupe Bruxelles Lambert (GBL) looked like it was about to float its 25% stake in the firm, the Mohns agreed to buy back the stake for €4.5 billion, including GBL's 2006 dividends. Reports said the deal was done over dinner between Liz Mohn and GBL patriarch Albert Frere, following an unsuccessful board meeting, and as Frere's stake was valued by analysts at between €3.5 billion to €5 billion, Ms Mohn paid over the odds to cut the Belgian Baron out of the picture. Struck just days before the clause that would have forced Bertelsmann's ascension to the public markets to go live, the Mohn family narrowly avoided being dragged to market against their will. Allegedly, the €4.5 billion offer was the first put on the table.

They had already taken action to prevent such a crisis by creating the Bertelsmann Foundation in 1977, primarily to serve philanthropic interests, but crucially to transfer the family's shares to the foundation, preserving the family's grip over their business for future generations. Liz Mohn has stated several times that she and her family are devoted to long-term contribution to civic interests, so this improved financial muscle is meaningful for the family's objectives in more ways than one.

Liz Mohn spelled out how important this was for her and the family's vision of the future: "I am happy about the buyback. It guarantees the independence of the company and its lasting and sustained development. It secures the greatest possible freedom for the executive board to manage the business." It may have helped their cause that GBL is also family-controlled, led by septuagenarian Baron Albert Frere. Frere probably understood why the Mohns were at pains to avoid floatation. GBL still has links with Bertelsmann. Andre Desmarais, part of the powerful Canadian Desmarais family that co-owns GBL with the Freres, and co-CEO of Power Corporation of Canada, sits on Bertelsmann's board.
 
Investors are said to be taking increasing interest in buying up shares in family firms – the kind of staunch, long-term ­management approach Liz Mohn espouses is a way for investors to tap into a bit of patient capital, providing the backbone for a well risk-diversified portfolio. But most families still prefer to rely on huge cash reserves, bank loans or private equity firms for growth capital, rather than risking diluting their power with the public markets. The Mohns know their company has built-in value: among its formidable holdings is the world's biggest trade book publisher Random House, 75% of magazine firm Gruhner + Jahr, 90% of RTL, and 50% of the world's second largest record company, Sony BMG. Its music division, though guardian of a back catalogue of artists ranging from Beyonce to Elvis, has struggled to make money in the download age and its BMG Music Publishing arm is up for sale. The proceeds are earmarked to help pay the €4.5 billion loan Bertelsmann took to buy out GBL by 2008. "Bertelsmann has proven time and time again during its long history that it has the ability to expand internationally and build market-leading positions," says CEO Gunter Theielen. He, the Bertelsmann board and the Mohn family have long had a close and effective partnership, and a mutual vision. That mutual vision could have been weakened if GBL had gone ahead with the floatation of its stake – and public scrutiny of Bertelsmann would have hit fever pitch as the IPO would have been one of the biggest in Germany's recent corporate history.