Philipp Holzmann AG History

Company History:

Philipp Holzmann AG is Europe's largest construction company, the second-largest international building contractor in the world (after France's GTM Enterpose), and a global leader in the design and construction of bridges and tunnels, industrial facilities, and public, residential, and commercial buildings as well as prefabricated housing, wooden structures, and building restoration work. As one of the most prominent construction companies in the history of German industry, Philipp Holzmann has played a central role in many of the world's major construction projects, completing structures in more than 70 countries worldwide since its founding. Typical Holzmann projects in the 1990s ran the gamut from high-rise banks, telecommunications towers, marinas, airports, and printing houses to cooling towers, warehouses, gasification plants, waste incineration plants, and the restoration of the U.S. Capitol building. In more recent history, Holtzmann helped construct such noteworthy projects as the 60-story One Peachtree Center in Atlanta and the tallest building in the world (upon completion), Malaysia's Petronas Towers. In 1995, Holzmann maintained branches and offices in 37 German cities and through its 60-odd subsidiaries and associated companies operated in nine foreign countries, with active construction projects from Mongolia to Mali.

Besides general construction work, which comprised 70 percent of Holzmann's total output or sales in 1995, Holzmann's secondary business activities (roughly one-fifth of its business output) are divided between its operations in the construction of transportation systems and the extraction of raw materials; its energy and environmental technology operations; and its services sector. Holzmann's transportation/raw materials group includes its marine, highway, and railway construction operations as well as its raw materials quarrying operations, sand and gravel pits, and raw materials mixing and batching facilities. Its energy and environmental technology group offers such services as waste and water treatment, flue gas cleaning, composting, soil cleaning, and groundwater remediation. Holzmann's services sector is involved in such services as providing integrated construction planning services, adding value to newly acquired real estate by erecting appropriate structures, arranging private financing for infrastructure projects, and managing facilities through technical administrative building services. Each of Holzmann's four sectors is in turn divided into four phases or "fields of activity": (1) design, planning, consulting, and research, (2) project development, (3) construction, and (4) management, service, operation, and maintenance.

19th Century Origins

Philipp Holzmann was founded as a small family enterprise by Johann Philipp Holzmann near Frankfurt, Germany, in 1849. A number of German construction firms that Holzmann would later acquire were also founded during and even before this period: stone facade producer Zeidler & Wimmel (acquired by Holzmann before 1980), for example, was established in the late 18th century and participated in the construction of Berlin's famous Brandenburg Gate; power station builder Steinmüller Group (acquired in 1989) was founded in 1855; and road builder Berneburg GmbH (acquired in 1987) was laying pavement well before the turn of the century. Holzmann's early growth was closely linked to the construction of the German national railroad system, but throughout the century it participated in the erection of several German architectural landmarks, including Frankfurt's Opera House (begun in 1873) and Munich's Palace of Justice (1892).

By the latter part of the 19th century, Holzmann was constructing railways and railroad terminals all over the world, beginning with the Wettstein Bridge in Basel, Switzerland, in 1877 and then in 1882 Amsterdam's Central Station railway terminal. In the 1880s, Holzmann performed the stonemasonry work for Berlin's historic Reichstag building and later completed the Baghdad Railroad in Iraq and the Dar-es-Salaam railway in eastern Africa. By the mid-1890s, Holtzmann was employing more than five thousand workers and had established one of the earliest examples of a corporate employee health insurance program. For its work on the Anatolian Railroad in Turkey, it was granted economic concessions to the lands surrounding the railroad between 1906 and 1914, which it used to develop irrigation projects for growing cotton for export to Germany. In 1906, Holtzmann began establishing subsidiaries in South America that in subsequent years undertook major power plant, bridge, sewer system, subway, and other civil engineering projects in Argentina, Brazil, Chile, Colombia, Peru, and Uruguay. Although originally founded as a sole proprietorship, Holzmann grew during the 19th century into a limited partnership, then a general partnership, and finally a GmbH (limited liability company) before officially becoming a joint stock corporation (Aktiengesellschaft) in 1917.

20th Century Innovations and Expansion

Before World War I interrupted Holzmann's international markets, Holzmann had constructed the first skyscraper in Buenos Aires; the port system for Buffalo, New York; and the New York barge canal. It invented the so-called Berlin method of cladding building foundation ditches around the turn of the century and at about the same time introduced a shield tunneling system using compressed air. It also continued to build many historically significant buildings, bridges, tunnels, and dams in Germany, from the Kathreiner House in Berlin and the Kiel Canal to the City Hall in Hamburg. Like many German companies, Holzmann suffered substantial losses in assets and manpower during World War II but within five years of the war's end had managed to resume its halted overseas operations. Moreover, its many construction projects within Germany during the 1950s and 1960s coupled with its own recovery from the devastating effects of the war contributed to the prolonged boom now referred to as Germany's "Economic Miracle." In the same postwar period, Holtzmann branched out from its traditional fields of commercial, civil, and marine construction into such new areas as road building and industrial prefabricated construction.

In the early 1970s, Holzmann expanded into the Arabian countries, and soon projects in Saudi Arabia were accounting for three-quarters of Holtzmann's international revenues. As the decade progressed, however, war and political turmoil in Iran and Iraq coupled with weak oil prices forced Holzmann's management to reconsider its heavy emphasis on the Middle East. In the mid-1970s, Holzmann consequently began scaling back its presence in the region while evaluating U.S. firms for a strategic acquisition that would open that vast market to its engineers. By 1980 Holzmann had reduced its Middle East operations to 56 percent of total foreign operations and a year later to 35 percent. In 1982 CEO Hermann Becker recalled for Business Week Holzmann's thinking during this period: "We began to worry; what happens if the market collapses, maybe for political reasons?... We started to diversify regionally and to look for markets with generally the same characteristics as our home market, mostly [those] free from political problems, where we could expect economic growth in the long term."

As early as 1973, Holzmann had participated in a small joint venture in Gary, Indiana, that convinced management that no extensive U.S. operations would be possible without a subsidiary on American soil. In its hunt for likely acquisition targets, one American firm stood out. Several years earlier Holzmann had been involved in a joint venture to construct a military training center in Saudi Arabia with J. A. Jones Construction of North Carolina--a state with which CEO Becker became familiar while imprisoned there as a German POW in World War II. Jones's 60-year history had ranged from the early construction of textile mills in North Carolina to the erection of housing projects for the U.S. government in the 1930s to military-related construction during World War II--including the Oak Ridge, Tennessee, diffusion plant used to produce uranium for the first atomic bombs. After World War II, Jones became involved both domestically and internationally in everything from constructing residential housing, industrial buildings, dams and powerhouses, nuclear power facilities, and highways to the ultramodern East Wing of the National Gallery of Art in Washington, D.C. Moreover, Jones had been involved in 80 percent of all construction performed for the U.S. armed services during the Vietnam war. By the time of Holzmann's acquisition, Jones had risen to become the 13th-largest builder in the United States.

The addition of Jones's operations did not come cheaply. Sizable down payments from Holzmann's Middle Eastern oil customers, however, as well as the large accumulation of reserves permitted by German tax law had left Holzmann flush, and for a lump sum of $75 million it bought up Jones and all its subsidiaries. In exchange for Jones's sophisticated international purchasing operations, American-style high-rise construction expertise, and experience constructing breweries, refineries, and chemical plants, Holzmann helped its American partner improve its civil engineering capacities and its ability to take on projects over $100 million in cost. It also convinced Jones to abandon its cost-plus bidding practice (in which the builder receives a relatively fixed two to three percent of a project's costs as profit) for the lump sum method (in which Jones's profit on a project increased the more it held down project costs).

Significantly, the Jones acquisition had been accomplished without the rancor that often accompanies corporate takeovers. Holzmann left Jones's management team in place and worked with them to smooth over early difficulties. Within three years Jones was accounting for more than one-third of Holzmann's total revenues ($1.35 billion of $3.33 billion). By 1981, the purchase had helped raise North America's share of Holtzmann's total operations to 56 percent, up from 38 percent in 1980, and increased the companies' total revenues by 55 percent over 1980. By taking over its parent company's purchasing operations, Jones was also managing approximately $25 million worth of Holzmann's purchases annually by 1982.

Holzmann continued its international expansion in the years that followed. It added Lockwood Greene Engineers in 1980-81; pursued a Mexican joint venture in the early 1980s; acquired the Steinmüller Group in 1989 to form the core of its Energy and Environment Technology sector; and added French builder Nord France S.A. between 1989 and 1991. Between early 1995 and the critical acquisition of J. A. Jones 16 years earlier, Holzmann was involved in no fewer than fifty expansionary moves, from partial share purchases and outright acquisitions to the launching of numerous subsidiaries and joint ventures.

Holzmann's later acquisitions did not all work out as splendidly as J. A. Jones, however. Nord France quickly turned into a financial quagmire, draining DM500 million ($232.2 million) from Holtzmann's coffers between 1989 and 1994, before turning the corner in 1995. Holtzmann's German holdings--from window manufacturer Zenker-Fenster to building technology subsidiary Scheu + Wirth AG and steel builder Stahlbau Lavis Offenbach--all had losing years as well. The setbacks, exacerbated by a slump in the worldwide construction industry in the early 1980s, prompted a German construction industry analyst to remark to the Wall Street Journal, "I don't know of any other German company that's had so much bad luck with acquisitions."

The 1990s and Beyond

The reunification of eastern and western Germany in 1990 promised to rescue Holtzmann from that bad luck by opening up lucrative new markets in infrastructure and other construction in the states of the former East Germany. In a small irony, it also enabled Holzmann to open its branch offices for the new eastern German states in the same locations they had occupied at the end of World War II. In its 1994 annual report, Holtzmann's management described its participation in the eastern German projects as not only a business opportunity but an "obligation" and vowed to continue committing a "disproportionate" percentage of its business activity to these internal projects. Reflecting this, Holtzmann's output within Germany rose from DM4 billion to DM9.1 billion between 1989 and 1990--DM4.1 billion of which was committed to the new eastern German Länder (states) alone. And while 53 percent of Holtzmann's business was devoted to German projects in 1990, by 1995 that figure had risen to 69 percent.

The booming growth of the Pacific Rim economies in the 1990s also offered Holtzmann new construction opportunities. By 1990, Asia was the second-largest market for transborder construction contracts in the world, generating $27 billion in contracts to foreign construction companies in 1990 alone. Holtzmann adopted a grassroots strategy of establishing local subsidiaries in Asian countries in order to capitalize on local expertise in construction markets and subcontracting networks. While public infrastructure projects have historically been a special forte of German construction firms, in the mid-1990s an increasing number of these projects involved a "build-operate-transfer" (BOT) arrangement. In these contracts (devised by the Turkish government in the 1980s) the construction firm not only performs the actual construction but also operates the finished facility until it turns a profit, then transfers it to the local government. Holzmann's involvement in a 1995 joint venture project for the construction of the massive Birecik hydroelectric dam project in Turkey exemplified the typical BOT contract. Like other major international builders, in the mid-1990s Holzmann also offered private financing arrangements for such public infrastructure projects in order to win contracts from governments leery of underwriting the full cost of huge construction projects.

Announcing that "South East Asia is the growth market of the future," Holtzmann explored the Hong Kong market in 1990 through a joint arrangement with Hong Kong contractor Hsin Chong to create a third company, Hsin Ching Philipp Holzmann Civil Engineering. In 1995, Holtzmann's decision in 1980 to recruit Chinese workers for an Iraqi office building project redounded to its benefit when China, which traditionally uses byzantine negotiation procedures and stiff financial requirements to discourage foreign business, awarded Holtzmann its first Chinese contract, for a resort in Zhaoquing City. By the mid-1990s, Holtzmann was operating in Thailand, India, and Malaysia and was exploring business opportunities in Vietnam, Myanmar (Burma), the Philippines, Laos, and Indonesia. In 1995, Asia accounted for 13 percent of Holtzmann's total foreign output, up from eight percent the previous year. In the mid-1990s, Holzmann also announced plans to revive the South American construction business it had maintained before World War II.

In the fall of 1994 Hochtief AG, Germany's second-largest construction company, announced its intention to increase to 35 percent the 20 percent stake it had acquired in Holzmann in 1981. Although the Wall Street Journal described the competition between Germany's two biggest builders as "fierce," they had in fact worked together on projects before and had reached their current stature by very different paths. Holzmann, for example, was more active in foreign markets than Hochtief (33 percent versus 25 percent, respectively, of total business activity in 1993) and was particularly strong in the world's largest construction market, the United States, while Hochtief was the leader in Australia. Hochtief was the smaller of the two firms but adjusted for size was the more profitable, and according at least to an industry analyst with DB Research GmbH its management seemed to "work more professionally" than Holzmann's. More importantly, while Holzmann's foreign orders had declined between 1989 and 1994, Hochtief's had grown, as had its reputation in such areas as airport construction.

To Holzmann, the long-term import of Hochtief's threatened share increase was unambiguous: a 35 to 40 percent share of Holzmann's stock would give Hochtief a majority of votes at Holzmann's shareholder meetings and effective control of the company. Holzmann reacted by raising more capital to fend off, some said, Hochtief's attempted hostile takeover. Publicly, it stated that although it was ready to work with Hochtief, particularly in foreign projects, it intended to remain an independent company. In January 1995 the Federal Cartel Office--Germany's arbiter in antitrust matters--announced it was denying Hochtief's bid to increase its stake in Holzmann from 20 to 35 percent. Hochtief appealed the decision, but the Cartel Office remained unmoved and rejected Hochtief's bid again in late 1995, claiming that the merger of the two companies would unfairly dominate Germany's construction industry, a vital component of the German economy. Holzmann hailed the decision as "an important event in the 145-year history of the enterprise and the decisive prerequisite for its independence." Hochtief appealed the decision to the Berlin court of appeals, with the first hearings scheduled for late 1996, and vowed to carry its case, if necessary, all the way to Germany's supreme court.

But financial misfortunes continued to plague Holzmann in the mid-1990s. A severe post-reunification construction slump, building projects running up 1995 operating losses approaching DM100 million, and unexpected losses in income from its office and commercial rental properties had forced Holzmann to renege on an earlier promise to pay shareholders a "good dividend" for 1995. Unfortunately, less than three months after this announcement, Holzmann disclosed that 1996 dividends were going by the boards as well. Write-downs and other costs of its property investments had created an unanticipated loss of DM460 million, and payouts to shareholders were simply impossible. Some industry analysts claimed that Holzmann's heavy losses had as much to do with poor management as an unpredictable property market, citing Holzmann's heavy investments in the Swiss-based property development group, Vebau, and its failure to readjust its properties' values down to market levels.

In the wake of these financial setbacks, Holzmann's chief financial officer resigned in May 1996 and was replaced with the finance director of Deutsche Babcock, a German power plant engineering firm hurting from the evaporation of modernization projects in eastern Germany. In answer to speculation that Holzmann was planning to acquire Deutsche Babcock to help in its fight with Hochtief, current chairman of the board Lothar Mayer frankly admitted that Holzmann was seeking "as much as possible" of Deutsche Babcock, a merger that if concluded would create a new German power plant, engineering, and construction megafirm.

With Germany's five-year reunification construction boom played out, Holtzmann confessed publicly in June 1996 that it faced "very difficult years" in 1996 and 1997, causing some to speculate that the company would cancel dividends for a third year in a row. In spite of its difficulties, however, Holzmann entered the late 1990s a still wealthy--if besieged and fallible--global giant. From the depths of a stagnant German construction market, Holzmann had nevertheless managed to post revenues of DM14.1 billion in 1995, an increase of eight percent over 1994, and continued growth in its Chinese, Thai, British, South African, Spanish, and U.S. operations offered additional cause for optimism. While the financial setbacks of the mid-1990s seemed to prevent Holzmann from conclusively escaping the threat of takeover, its ample DM1.7 billion in equity capital, its steadily expanding global markets, its technical expertise in executing complex construction projects, and, perhaps most important, its long history of resilient growth sustained its status as a dynamic leader in the international construction market.

Principal Subsidiaries: J. A. Jones Inc. (U.S.); Deutsche Asphalt GmbH; Philipp Holzmann-Held & Francke Bau AG; Stahlbau Lavis Offenbach GmbH; Imbau Industrielles Bauen GmbH; INTECH Verwaltungsgesellschaft mbH; Zeidler & Wimmel GmbH & Co.; Zenker-Fenster GmbH & Co. KG; Josef Möbius Bau-Gesellschaft (Gmbh & Co.; 50%); Holzmann Gleisbau GmbH; Philipp Holzmann Austria G.m.b.H.; Philipp Holzmann Bau Gesellschaft m.b.H. (Austria); Philipp Holzmann BauProjekt AG; Philipp Holzmann Iberica, S.A. (Spain); Nord-France-Gruppe (57.9%); Tilbury Douglas Plc (United Kingdom; 29.5%); Steinmüller-Lavis Structural Steel (Pty) Ltd. (South Africa; 68.5%); Philipp Holzmann U.S.A.; Holzmann Videocon Engineers, Ltd. (India); Philipp Holzmann Nederland B.V.; Holzmann (Malaysia) Sdn. Bhd.; Philipp Holzmann (Thai) Ltd. (49%); Jones Capital Corp. (U.S.); Rea Construction Company (U.S); Lockwood Greene Engineers, Inc. (U.S.; 80%).

Further Reading:

• Ascarelli, Silvia, "German Construction Rivals Tighten Ties: Hochtief Bets Bigger Will Be Better with Holzmann," Wall Street Journal, October 3, 1994, p. A15.
• ------, "Hochtief Intends to Boost Stake in Rival Holzmann," Wall Street Journal, September 20, 1994.
• Barham, John, "Dam Developers Wear Down Bureaucrats' Hostility to BOT," Financial Times, December 7, 1995.
• "Both Partners Work for Successful Marriage," Engineering News-Record, June 3, 1982, pp. 30-34.
• Deckard, Linda, "Land Purchase Clears the Way for Cologne Arena," Amusement Business, April 6, 1992.
• "Fields of Activities and Business Segments," corporate brochure, Frankfurt, Germany: Philipp Holzmann AG, 1995.
• Fisher, Andrew, "Holzmann Falls into Unexpected Loss," Financial Times, April 16, 1996.
• ------, "Holzmann Loss Shocks Market," Financial Times, April 17, 1996.
• J. A. Jones, Inc., "Reflections of the Past," corporate document, 1890-1980, Charlotte, N.C.: J. A. Jones.
• Lindemann, Michael, "Holzmann Move Fuels Talk of Babcock Merger," Financial Times, (London), May 15, 1996.
• ------, "Holzmann Reveals Further Losses," Financial Times (London), May 22, 1996.
• ------, "Holzmann Warning Gives Succour to Hochtief," Financial Times, (London), June 27, 1996.
• Maynard, Debra, "New Framework in the Making," Asian Business, December 1991.
• "Philipp Holzmann: Creating a Haven in U. S. Construction," Business Week, August 30, 1982, pp. 84-85.
• Sellmeyer, Sheri, "German Business Makes Its Mark," Business North Carolina, November 1988.

Source: International Directory of Company Histories, Vol. 17. St. James Press, 1997.