Thomas Middelhoff or how to earn money with a bad business model

Thomas Middelhoff was the CEO of the now insolvent German retail conglomerate Arcandor formerly known as KarstadtQuelle. Thomas Middelhoff has a good sense for timing. He left Arcandor in March 2009 just 3 months before the company had to file for bankrupcy in June. What made his stint at Arcandor so remarkable was not that he turned around the business of Arcandor but his ability to benefit personally from his position at Arcandor.

I am following the Arcandor business case for a while and I have written about the failure to innovate its business model in the past. So a recent  article of Süddeutsche on Arcandor grabed my attention.

The German daily Süddeutsche Zeitung reports (in German) that Middelhoff is by far better of than his former employer Arcandor and its employees that have lost their jobs. Süddeutsche Zeitung cites a confidential report of the auditors from Deloitte that acted on behalf of the German Federal Financial Supervisory Authority (BaFin).

Middelhoff opens his accounts to Süddeutsche Zeitung

Middelhoff had strong ties with the former German private bank Sal. Oppenheim that lost its independence in the aftermatch of the crisis of Arcandor. Mr. Middlehoff and his wife had loans of Euro 107 million with Sal. Oppenheim. With this loan, Middelhoffs financed their participation in a real estate fund of Josef Esch. Süddeutsche writes that in the wake of the insolvency of Arcandor Sal. Oppeheim wrote down the Middelhof-loans by 37.4 million since the financial situation of the Middelhoffs were “inadequate” and that the bank needed more collateral.

Confronted with the report Middelhoff revealed his financial situation to Süddeutsche. And here it becomes interesting. We can learn a lot from Middelhoff if you believe greed is good.

Prior to his assignment at Arcandor Middelhoff was already well-off. At Bertelsmann, he received a bonus of Euro 40 million from late Bertelsmann’s owner Reinhard Mohn for selling their share in AOL Europe for exorbitant price. Later, Middelhoff got a compensation of Euro 20 million for having to leave Bertelsmann due to a dispute with Reinhard Mohn.

Due to his good contacts with Arcandor’s majority shareholder Madeleine Schickedanz he started to work in June 2004 for KarstadtQuelle, the predecessor firm of Arcandor, first as chairman of the supervisory board later as the CEO. Here, he had the chance to rebuild the business model of department store Karstadt and of the dated mail-order house Quelle AG.

Budybody Middelhoff or financial engineering cannot fix your business model

Well, he was very busy as a manager but not with fixing the core problem of the dated business model but with M&A and financial engineering. He acquired parts of the touristic group Thomas Cook and sold the department stores to external investors. And the sales of department stores become a bommerang to Arandor since its rent payments climbed substantially for its stores. And the dated business could not generate suffient cash to pay for the higher rent. The sale of the property was a relief in the short term, but death in the mid term.

And who were the investors. “By chance” one of the investors was Middelhoff’s financial advisor Josef Esch. Actually, the Middelhoffs were invested in exactly these Oppenheim-Esch fonds that bought parts of the department stores.

Honi soit qui mal y pense or you scoundrel, when you think badly of this.

The Süddeutsche states: “What helped the private person Middelhoff harmed the CEO Middelhoff”. Actually, the prosecutors in German started an investigation into the opaque business practices of Mr. Middelhoff and so the last word of justice will be with the courts.

Even better – consulting for the financially stricken Sal. Oppenheim

You might think that this is already a good business for somebody who led a firm into insolvancy. Just wait. Sal. Oppenheim who financed parts of Arcandor and some months later lost its independence due to Arcandor’s bankrupcy offered Middelhoff an advisory contract for Euro 4 million a year. The remarkable agreement was disbanded after a few months. But as the duration of the contract was three years with an option for another year, Mr. Middelhoff got compensation of Euro 10 million from Sal. Oppenheim according to Süddeutsche Zeitung.

That is quite a remarable renummeration for somebody who failed as the CEO of Arcandor.

Take-aways from the Middelhoff story

  • Look at the management less for what they announce but what they achieve.
  • Do not be dazzled by financial engineering or corporate strategy moves! If the business model is broken, you have to fix or sell it. Financial tricks do not help you but can even harm the future of your business.
  • Culture and values are an important part of any business model. If you as a shareholder accept behavior like this, you cannot expect your employees to follow the management in a dire situation.
  • A bad business model is a bad business model. Use your common sense! Management is not a magic science but all about creating and exciting customers that are willing to pay. If you do not understand the business model, stop investing in it.


  1. Great advice to investors.

    At present in the US a lot of financial engineering is occurring through “consolidation of the industry.” Yes, there is a short-term financial benefit, but the underlying business model often remains broken and the task of growing earnings that much harder from a higher revenue level. Consolidation works only when the business models are good, but excess supply keeps returns from being adequate. Pharmaceutical companies is an example of a consolidating industries where the emerging giants still had broken business models. Do you have other examples?

    1. Big pharma is good example. Take Pfizer. They call themselves a research-based company. For research they spent 15.7%. Sounds a lot but they spent 29.7% on selling, informational and administrative costs with an income margin before tax of 21.7%. So the profit margin is larger than what they spent on R&D.

      So Pfizer is actually a marketing and sales firm with a R&D arm. And the problem is that the sales and marketing activities are expensive and their R&D pipeline is not sufficient to support the SG&A costs and therefore they try to spread their costs on a larger range of drugs. So they merge instead of fixing the underlying expensive and in the long run unsustainable business model.

      Other industries were I see similar problems is the IT industry. Look at all the M&A activities of Oracle. Oracle is not driven by better customer service but implementing a draconic license management as they do in the moment with the service charges at Sun. Or look at Dell and their acquisition of Perot Systems.

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