Within hours of Heinrich Hiesinger stepping down as ThyssenKrupp AG chief executive last week amid pressure from activist investors, the talk turned to “locusts,” Germany’s catch-all term for the evils of Anglo-Saxon capitalism.
A “locust-style” breakup must be resisted, ThyssenKrupp’s chief labor representative warned, no doubt in reference to Cevian Capital and Elliott Management Corp, who’ve been pushing for change. Blaming hedge funds for the unraveling of a once-mighty industrial conglomerate feels misplaced though.
If a business cannot consistently generate a return in excess of its cost of capital, it might as well pack up and go home. ThyssenKrupp has been failing to do that for years. Similarly, it’s reasonable to ask whether a company that spans submarines, industrial plants and auto parts has become too complex to manage. The recent poor performance of ThyssenKrupp’s industrial solutions division and the relatively weak margins of its elevators business — compared to rival Kone Oyj — suggest this is indeed the case.
Of course, the German giant’s problems run far deeper than its spread of assets. It’s important to remember where Hiesinger started out from when he took the reins. ThyssenKrupp’s former management team spent about 12 billion euros ($14.1 billion) on a pair of steel plants in the U.S. and Brazil, whose business model and construction was fundamentally flawed. Massive writedowns followed, leading led to roughly 7 billion euros of losses between 2011 and 2013 and almost forcing the company into bankruptcy.
It fell to Hiesinger too to revamp a culture benighted by price-fixing allegations and reports of directors living the high life. ThyssenKrupp used to have several hunting grounds. It’s a little rich to accuse activist funds of being locusts when this is the recent company history.
To his credit, Hiesinger also initiated a wrenching shift away from the company’s cyclical steel activities, culminating in the combination last week of its European flat steel business with that of Tata Steel Ltd.
Yet he resisted a full-scale breakup, arguing that there was an industrial logic to keeping the various businesses together. Unfortunately, that logic isn’t apparent in the company’s operating profit margins, which have averaged less than 3 percent in the past four years.
Indeed, even modest changes might unlock a lot of value. With its own stock-market listing, the elevator unit might be worth as much as the parent’s entire market capitalization. A breakup certainly looks more likely now Hiesinger is gone.
None of this is to decry his staunch defense of the German model of capitalism— which balances the interests of investors and employees. The strength of the country’s economy owes much to huge manufacturers such as Siemens AG, Daimler AG and Volkswagen AG, where workers have a powerful voice.
More than one-third of ThyssenKrupp’s employees are based in Germany, where most earn good wages and have decent pensions. There’s something to be said for that. Airbus SE’s threat to quit Britain in the event of a hard Brexit is a stark reminder of the dangers to a country of not fostering large industrial champions. The gig economy of Uber drivers and food delivery is hardly an adequate replacement.
But activist funds can be useful stakeholders too. The more patient investment approach of Sweden’s Cevian is hardly in the locust category, and all companies that want to be around for the long run need to earn their keep and take their shareholders seriously. Siemens, for example, has stayed a step ahead of the activists by separately listing its wind power and healthcare units — though admittedly with mixed results so far.
Germany should recognize that not all activists are out to wreck its industrial base. Hiesinger’s predecessors made a pretty good stab of that already.
Bloomberg
