Think small

From VW to Siemens, German businesses join spin-off boom

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Bullish on breakups. Source: Arne Dedert / dpa

The days of multi-industry conglomerates are over, at least for now, and investors are pushing companies to split up and unlock the share value slumbering in their business divisions.

It’s a global phenomenon that has – finally – taken hold in Germany. Everywhere you look, companies are spinning off segments and taking them public. March saw the flotations of Siemens healthcare business Healthineers and Deutsche Bank asset management unit DWS. Auto components group Bosch has sold its starter and generator business to a Chinese consortium, while retailer Metro divested its electronics chain Media-Saturn in 2016.

More deals are in the pipeline. Both VW and Mercedes-Benz maker Daimler are getting their trucks and buses business into shape for an IPO. Tire and car-parts maker Continental is thinking about a breakup that would see a partial IPO of its combustion and electric drive technology business to make it more independent and nimble. Siemens is preparing to merge its train business with French rival Alstom. Deutsche Telekom’s IT subsidiary might one day be divested.

The thinking behind the trend is simple: Investors believe that the sum of the parts is greater than the whole, and that companies need to strengthen their narratives by specializing. On the stock market, conglomerates are often traded at a discount compared to rivals that focus on a single industry. Sometimes activist investors, such as Cevian at ThyssenKrupp or Paul Singer’s hedge fund Elliott at machine maker Gea, push for divestments.

“In the coming 24 months, some 85 percent of German managers plan to sell off parts of their companies,” said Carsten Kniephoff, a partner at consultancy EY. The willingness to spin off businesses has never been this high, according to a study by EY. The percentage is almost double as high as it was in 2017.

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EY’s “Global Corporate Divestment Study” shows that almost 90 percent of managers are no longer prepared to allow a business division or subsidiary to be weak in its market. “That too is an extremely high percentage. Managers prefer to sell businesses in which they can’t be among the market leaders,” said Mr. Kniephoff.

The global number of divestments totaled more than 10,000 last year, up from 6,800 in 2010. “Stock market investors want clear business models, and having multiple business divisions yielding different returns is becoming increasingly problematic,” said one financial manager in Frankfurt, Germany’s banking capital.

The spin-offs aren’t just about offloading underperforming businesses or focusing on core activities. Executives see them as a means to accelerate growth. German executives are bolder nowadays than they were in the aftermath of the global financial crisis, when there was a lot of blue-sky thinking about strategy but little concrete action.

Right now, investors are focusing more on revenue growth, said Birger Berendes, head of M&A for Germany, Austria and Switzerland at Bank of America Merrill Lynch. “Companies aren’t lacking profitability. That’s rarely been higher. That’s why company managers must look at possible strategic transactions to drive their own growth,” he said.

Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. Robert Landgraf is deputy finance editor for Handelsblatt. To contact the authors: koehler@handelsblatt.comlandgraf@handelsblatt.com

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