When in May 2007 Siemens AG (SIE), battered by corruption scandals, picked then little-known Merck & Co. executive Peter Loescher as its chief executive officer, investors responded by pushing the stock to a six-year high.
This weekend, they lost patience after Loescher’s expansion into green energy and expensive acquisitions led to a fifth profit-forecast cut. Supervisory board officials have asked for the 55-year-old Austrian native to be ousted at what was a previously scheduled meeting to sign off on results on July 31.
Loescher’s failure to meet a profit goal of 12 percent of sales underlines the challenges for his likely successor, Chief Financial Officer Joe Kaeser. Siemens’s 60 sub-units, manufacturing a wide range of products such as trains, gas turbines, medical scanners and factory automation gear, make oversight challenging for any executive trying to understand each market, prompting questions as to whether a focus on fewer businesses may help to boost profitability.
“We really believed this 12 percent margin target was achievable so it was a huge disappointment when they said they wouldn’t make it,” said Kristian Falnes, the chief investment officer at Stavanger, Norway-based Skagen AS, which owns less than 1 percent of Siemens shares. “Siemens is below peers at the moment.”
Siemens on Saturday said that the supervisory board will decide on the “early departure” of Loescher and the appointment of a new CEO at this Wednesday’s meeting. The company will probably appoint Kaeser, a 33-year company veteran, according to people familiar with the matter.
“Power struggles unnecessarily exacerbate the problems at Siemens,” said Union Investment fund manager Ingo Speich. “It’s without precedent that a supervisory board decision of this resonance is pre-empted by the company in a press release.”
While other German industrial champions have prospered during the European credit crisis thanks to their strength on export markets, Siemens has floundered.
Since Loescher, who was recruited by Chairman Gerhard Cromme, took over in July 2007, the shares have declined 22 percent. Volkswagen AG (VOW) has more than doubled in that period, while BASF SE (BAS), the world’s biggest chemical company, jumped 37 percent and Germany’s largest drugmaker Bayer AG (BAYN) climbed 51 percent.
Including a termination payment and pension contributions, Loescher will have earned as much as 75.7 million euros ($100 million) in his six years as CEO.
Today, Siemens gained as much as 2.3 percent. In case Loescher has to leave the company, he’s not going to demand the departure of Cromme, as speculated by some German newspapers, a company spokesman said. Tabloid Bild earlier today quoted Loescher as saying that “the well-being of Siemens and its employees is the most important thing for me.” The company confirmed the comments.
German Chancellor Angela Merkel sees Siemens as “a flagship of the German economy and that’s why it’s important to her that this global company returns to calm waters,” government spokesman Georg Streiter said today in Berlin.
A key element of Loescher’s growth strategy was the 2009 announcement that he would transform Siemens into a “green infrastructure giant”, heralding a drive into solar technology to promote Siemens as a partner for companies and governments keen to use more renewable energies.
That year he paid $418 million to buy Israel’s Solel Solar Systems and increased the stake in Italian solar thermal specialist Archimede Solar Energy to 45 percent. At the 2010 annual general meeting, the Harvard Business School MBA graduate, who at his first press conference said that Siemens needed to improve its marketing efforts, wore a green tie and called for a “green revolution.”
Yet by this June, with Chinese companies undercutting prices in the solar market and the European sovereign debt crisis stunting infrastructure investment, the company announced it would shutter the solar unit. It had racked up losses of more than 1 billion euros.
The market downturn in the solar industry was also compounded by poor planning. Since Solel was an Israeli company, it was more difficult to make sales in the Middle East and North Africa, a person familiar with the matter said in March.
Other acquisitions also disappointed investors. Loescher’s biggest deal was the $7 billion acquisition of medical diagnostics specialist Dade Behring, which he agreed less than a month after taking office. The asset failed to perform and Loescher wrote down the value, the first of several failed acquisitions on his watch that hurt his reputation.
“This expensive acquisition of Dade Behring was really questionable,” said Juergen Meyer, a fund manager at SEB Asset Management, which owns less than 1 percent of Siemens shares. “He wasted billions of euros on this, and responsibility for that decision rests with the CEO.”
While succeeding in reducing headcount and boosting operational profit, profit margins have lagged those of competitors. Siemens had a profit margin of 9.5 percent in 2012 when competitors ABB Ltd. (ABBN) and General Electric Co. (GE:US) had margins of 10.3 percent and 15 percent, respectively.
Even as profitability peaked at 12 percent in 2011, JP Morgan analysts complained of a lost year amid 400 million euros of charges in the particle-therapy unit, a 500 million-euro capital injection into the Nokia Siemens Networks telecoms joint venture and a 682 million-euro fine related to a nuclear-power venture with Areva SA. (AREVA)
Loescher’s response to criticism was to set ambitious targets.
He would increase sales by almost a third to 100 billion euros “within a few years”, the executive said March 2011, and he formed a new sector dubbed “Infrastructure and Cities” to better co-ordinate big metropolitan projects.
That sales target was later put on the backburner amid a global economic slowdown, with Loescher saying in November he would prioritize profitability over sales. The Infrastructure and Cities division’s 6.3 percent profit margin is the lowest of Siemens’s four sectors.
Still, Loescher’s renewable energy push helped to win market share, with the wind power division being responsible for 83 percent of all European offshore wind installations. At the same time, the power transmissions unit has been burdened by charges totaling 682 million euros since 2011 for delays in transmitting wind power to the grid.
The company will probably be hit by another 100 million-euro charge for faulty land-based wind turbines, according to people familiar with the matter. The provisions join 343 million euros in charges for delayed train deliveries to Deutsche Bahn AG since 2011.
“Siemens wins these huge projects, but then with deals such as the ICEs for Deutsche Bahn, it doesn’t manage them effectively and the costs increase,” Fairesearch analyst Heinz Steffen said by phone.
Predecessor Klaus Kleinfeld had in his two years as CEO succeeded in making all the company’s units meet or exceed their profit goals. While Loescher promised to continue the upward trend, he had a challenge on his hands to acquaint himself with Siemens’s breadth as his background was mainly in healthcare.
The company had ten divisions, which Loescher streamlined to fewer sectors, largely following a strategy developed by Kleinfeld. Still, each of the four sectors averaged about 20 billion euros in sales last year. That figure is more than the sales of the thirteen smallest companies by revenue in Germany’s benchmark DAX Index of 30 companies.
Within each sector, there remains a plethora of sub-companies, totaling 15 further divisions and 60 units.
While Finance Chief Kaeser with his 33-year experience at Siemens might be able to manage that complexity, the question remains whether a new CEO should focus on fewer businesses, said investor Falnes.
“Of course it’s a very complicated and difficult company,” he said. “If it’s too difficult, then maybe the right thing is to split the company into minor parts.”
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