Splitting Companies

Divide or Rule

  • Why it matters

    Why it matters

    A number of large German companies are thinking to restructure under a corporate umbrella. But there a dangers: the firms could end up dissolving altogether.

  • Facts

    Facts

    • Both Siemens CEO Joe Kaeser and ThyssenKrupp CEO Heinrich Hiesinger are pursuing the strategy of ‘divide and rule’.
    • German chemicals and healthcare giant Bayer decided against restructuring as a corporate group and is in good shape today: it is in the process of taking over American seed manufacturer Monsanto in a deal worth €60 billion, or $66 billion.
    • Chemicals and pharma group Hoechst disappeared from the market after a restructuring led to its break-up.
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    Audio

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Siemens Bilanz Pressekonferenz 2016
Siemens CEO Kaeser has plans to divide his firm into multiple autonomous subsidiaries under a corporate umbrella. Source: Picture Alliance [M]

Siemens CEO Joe Kaeser has a vision: The German industrial and electronics giant needs to be divided into a fleet of ships that can be steered to success more quickly than a giant, cumbersome ocean liner.

Meanwhile, another top manager, ThyssenKrupp CEO Heinrich Hiesinger, has moved a step closer to his goal of turning around his troubled steel business. After completing the sale of its loss-making American subsidiaries last week, he is now planning to spin off ThyssenKrupp’s steel business into a joint venture with Indian rival Tata.

The top managers have a lot in common. Not only do they have common roots – up until six years ago Mr Hiesinger worked at Siemens – but both Mr. Hiesinger and Mr. Kaeser are pursuing a common strategy: Divide and rule. Both are banking on the idea an increase in autonomy will allow individual divisions to become more efficient and profitable. As a result the whole group will flourish, so the thinking goes.

The concept of running conglomerates as holdings and granting their individual business units greater freedom for the benefit of the whole is nothing new. Others have tried it – and also failed. Or put differently: the corporate bosses scrapped the holding strategy.

Chemicals and healthcare group Bayer, for example, flirted with transforming its headquarters into a management holding a couple of years ago, intending to group the chemical, pharma and plant protection businesses beneath the holding umbrella. There was considerable potential even within the chemicals unit for making business segments independent, as was demonstrated when subsidiaries Lanxess and Covestro spun off to become publicly-listed in 2004 and 2015 respectively.

Having ‘a little bit’ of a say is just not good management. It is better to decide to either divide or rule.

This could have taken place under a holding. But Bayer instead decided to say goodbye to these subsidiaries and bury the holding idea. Even so, the corporate group is in a good position today: it is in the process of taking over American seed manufacturer Monsanto in a deal worth €60 billion, or $66 billion.

German telecoms giant Deutsche Telekom also pursued a strategy of establishing smaller, but more flexible, speedboats beneath the umbrella of a parent company based in Bonn. T-Mobile, T-Online, and T-Systems were earmarked for this structure. T-Online even enjoyed a stint on the stock exchange. But all that is now a thing of the past. Only its U.S.-based mobile communications business, which Deutsche Telecom acquired in 2001, is enjoying a certain autonomy via its listing on the NASDAQ.

Any such plans were fueled by a shareholder-value-philosophy spilling from the United States to Europe at the turn of the millennium. According to investment view, the ultimate measure of a company’s success was the extent to which it enriched its shareholders. To this day there is a widespread view among financial investors that sections of a company are worth more individually than the company as a whole, which has led to the strategic approach of organizing a company like a financial holding in the first place. That way, any available capital could be targeted specifically at the profitable business units – and the starvelings were easier to sell off, or so the theory goes.

The danger with this approach is that a conglomerate can end up disintegrating while its individual parts become candidates for takeovers. That is how chemicals and pharma group Hoechst has disappeared from the market. Not every manager thought this strategy was worth pursuing. As a result, the pure shareholder value ideology gradually lost its followers and their holding fantasies weakened. Moreover, managers were forced to realize that dividing up businesses also meant synergies were being lost.

Perhaps it’s only at first glance that ThyssenKrupp’s steel works appear to have nothing in common with the elevator and plant and equipment constructors in the group. Perhaps, indeed, the industrial division could stimulate innovation in materials science research, even beyond its own needs.

Similarly, on the face of it medical engineers at Siemens – strangely named Healthineers – seem to have no common interests with the company’s traffic engineering unit Mobility. But looking at the subject of digitalization – housed in Siemens’ Digital Factory division – it quickly becomes clear the tanker concept could, after all, have its advantages.

Corporate boss Mr. Kaeser is clever enough to give no reasons to fear the company would enter a traditional financial holding structure. There will continue to be headquarters, whose aim it will be to identify possible synergies between the individual business units. Meanwhile, Mr. Hiesinger says even after consolidation ThyssenKrupp will remain in part ownership of the steel business. In short, the corporation plans to pull itself out of the steel business gradually and in a controlled manner. But not completely.

In this way, the holding idea no longer appears as dreadful as it once did under a more radical model. But a problem remains: Those who shy away from transitioning to a purely financial holding are attempting a difficult balancing act between holding on and letting go. Having ‘a little bit’ of a say is just not good management. It is better to decide to either divide or rule.

 

The author is Handelsblatt’s chief companies and markets correspondent. He can be reached at fockenbrock@handelsblatt.com

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