Get on board or get out

Market forces drive deconsolidation at German companies

deconsolidation at german companies, siemens, healthineers
It's all about focus. Source: Reuters

Activist investors may seem rowdy and impertinent when they pressure a conglomerate such as ThyssenKrupp to split up into its component parts for faster growth and bigger profits. But they are just one form of market forces driving German companies’ deconsolidation.

Continental CEO Elmar Degenhart was responding to the revolution in the automotive industry when he announced this week that world’s second-largest supplier of auto components would split into three autonomous units.

But it was neither activist investors nor an industry revolution that compelled Siemens CEO Joe Kaeser to spin off the engineering giant’s prosperous healthcare unit. It was simply that the new Healthineers company spun off earlier this year could respond more nimbly in a high tech field with lots of competition. The fact that Siemens and its shareholders would get a rich payout for listing the unit’s stock was a bonus.

Leaner overhead and flatter management

And it’s just the beginning of deconsolidation in a country where cross shareholdings, blocking minorities and family control have been the norm, a safe path rewarded with stability, diversification and steady, if often very slow, growth.

“The trend towards breakups and more flexible organizations will continue to increase,” said Ralf Kalmbach, partner at the management consultancy Bain & Company. “Companies must become more open and faster in order to master the rapid changes in technology and markets.”

Companies need leaner overhead and flatter management to keep pace in a globalized environment, German leaders are coming to realize. Managers increasingly must get on board or get out. This is what ThyssenKrupp CEO Heinrich Hiesinger and board chair Ulrich Lehner discovered when they stubbornly defended the company’s conglomerate structure until they were forced to resign.

“If you as a board member are not prepared to think about changes in the company structure, this can cost you your job,” said Ingo Speich, portfolio manager at Union Investment. “There are high discounts on conglomerates in the stock market.”

Siemens’ Mr. Kaeser has been one of the most active in releasing the value in the Munich behemoth. In addition to the Healthineers listing, he merged the wind energy division with rival Gamesa and brought the combined firm to the stock market. Similarly, Siemens is planning to spin off its rail operations for a merger with French rail giant Alstom. Technology, markets and business models are shifting too quickly to direct these diverse operations from a centralized headquarters.

The benefits and risks of deconsolidation

Daimler wants to be in the forefront of this deconsolidation shift and plans to break up into three autonomous units — cars, trucks and financial services. Automakers are turning into mobility services, and this requires new business models. Smaller units make it easier to enter into partnerships.

Volkswagen for a long time operated under the dictum of family shareholder Ferdinand Piëch: The company would acquire new operations but never give up anything. But now VW is getting ready to spin off its truck units Scania and MAN as a newly renamed Traton.

Bayer had demonstrated in 2015 how the sum of the parts could be greater than the whole when it spun off its materials science division as Covestro. The stock price has tripled since it was listed separately on the stock exchange.

This doesn’t always work, however. When wholesaler Metro spun off its downmarket retailers to release value, the deconsolidation failed to add value, and both sides are now trading below their price at the time of the split. Deutsche Bank spun off DWS, which freed the fund management group from the restrictions of bank regulations, but shareholders have yet to see any benefit from the split.

Focus has become a bigger buzzword than synergy, and Mr. Kaeser wanted to get ahead of that trend rather than be carried along by it. It should be a lesson to ThyssenKrupp as it seeks to fill its power vacuum. Interim CEO Guido Kerkhoff wants to keep the hodgepodge of company businesses even though there’s little synergy between elevators, steel and auto parts. Activist shareholders like Cevian and Elliott Management will be pushing him in a different direction.

Several Handelsblatt reporters contributed to this article. Darrell Delamaide adapted it into English for Handelsblatt Global. To contact the author:

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