Daimler does it, Continental wants it and now ThyssenKrupp is required do it, too. For companies, splitting up seems to be the new miracle cure that maximizes the well-being of shareholders. It’s all the rage throughout the business world these days.
Wherever you look, business units are being carved out and listed on the stock exchange, corporations are run more like a “fleet of ships” rather than a lumbering tanker — to paraphrase Siemens CEO Joe Kaeser — or one company simply becomes two companies. E.ON, RWE, GE, Hewlett-Packard and Siemens are just a few examples. The “pure player” — a company focused on its core business — is regarded everywhere as the most promising corporate structure.
There are ostensibly weighty arguments for zeroing in on one industry. First, the parts of a company are worth more individually than together. Daimler Trucks and Mercedes-Benz Cars, for instance, could achieve a higher market capitalization as listed companies than as divisions of Daimler today. Furthermore, investors can make more targeted investments. Right now, anyone who buys ThyssenKrupp stock invests in steel, steel trading, elevators and car parts all at once.
Thirdly, specialized companies may find it easier to refinance. This was the rationale behind breaking up German energy companies E.ON and RWE. Now that they’ve been freed of the burden of coal and nuclear power, the renewable energy firms attract more money. This leads to the fourth argument: A pure-play company can flourish better than a diversified group. This is because the latter allows less efficient allocation of capital in its individual business areas.
Activist investors are indifferent to the interests of customers and employees
As logical as the arguments may sound, though, they are not universally applicable. In other words, not every corporation that operates more than one business unit is a good candidate for a break-up. There are often enough synergies between a company’s divisions. Research and development spring to mind. ThyssenKrupp CEO Heinrich Hiesinger, for one, has said exactly this. His firm’s elevator and components divisions benefit from inventions and developments from within the rest of the group.
The most dangerous thing about the current spin-off frenzy, however, is that financial interests are often the primary motivation. And they are often the interests of investors who don’t think much of the corporate values we care about here in Germany. As they import to Germany the demands that emanate from the shareholder value theory, they undermine the stakeholder approach.
Typically, US activist investors are indifferent to the interests of customers and employees. They care about maximizing yield and turning a quick profit. By the time divisions are sold to competitors, plants shut down or employees are made redundant, the investor is already gone and investing his ample profits with the next target.
This scenario is fairly realistic. When a corporation is broken up, there is a great risk that not all former divisions will be better off afterwards. Often it is only a matter of getting rid of the weak or cyclical business and leaving it to fend for itself, come what may. That is exactly what Mr. Hiesinger is not doing at ThyssenKrupp, and he deserves great credit for that. He spent a long time searching for a sensible, sustainable solution for the steel division — and he has also taken employees’ interests into account, with far-reaching consequences.
In the worst case, it ends in downright mud-slinging
Equity investor Cevian Capital, ThyssenKrupp’s second-largest shareholder, is not one of those unscrupulous investors that are only looking for a quick buck. The Swedish firm usually invests in the long term and thus acts with greater foresight. However, the self-styled “active ownership investment firm” is in essence doing what its counterparts do. The first step is to secure a shareholding. Then, the investor exerts pressure on the companies — at first behind the scenes and later in the public eye. In the worst case, it ends in downright mud-slinging. The confrontation between German executive Klaus Kleinfeld at Arconic and the Elliott Management hedge fund is a case in point.
We shouldn’t fool ourselves: Activist investors are becoming the norm in the German corporate landscape. They coerce companies into splitting up because it promises fast profits. Since every successful case further bolsters investors, there will undoubtedly be many stories cases like ThyssenKrupp vs Cevian.
If we want to defend our stakeholder value approach in Germany, it is therefore important that companies stand their ground when shareholders try to force them to adopt a questionable strategy. Otherwise, activist investors will soon assume total control of Germany, Inc.
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