Fiscal fourth-quarter profits, excluding extraordinaries, sent the stock soaring, but the new CEO says the bar must be set higher
The new chief executive of German engineering and electronics giant Siemens (SI) answered reporters' questions patiently and amiably at a press conference in Munich on Nov. 8, confirming his image as a man who will be more courtly than his sometimes brash predecessor, Klaus Kleinfeld. But Peter Löscher also revealed that he's not all Mr. Nice Guy.
When a Finnish reporter asked a question Löscher found repetitive, the former No.2 at U.S. pharmaceutical company Merck (MRK) fixed the unfortunate journalist with a cold stare. "I have already attempted to answer that with perfect clarity," Löscher said, in a tone that created several long seconds of stony silence in the hotel conference room.
Löscher, who took over at Siemens in July (BusinessWeek.com, 7/2/07), after Kleinfeld resigned under pressure, presented financial results on Nov. 8 that sent company shares soaring 8%. But he said he's dissatisfied. "We have to set the bar higher," he told reporters in his best CEO-speak.
How high? In the past, Siemens' Med Div., which makes medical imaging machines, might have garnered kudos for the 13% profit margin the unit attained in the quarter ended Sept. 30, Siemens' fiscal fourth quarter. But Löscher pointed out that General Electric (GE), where he was top executive from 2004 to 2006, earns a better margin. "How is it that GE's medical division is at 17% and we're at 13%?" Löscher asked. "We want to be the best." He already has raised the unit's target profit margin to 17% and plans similar increases for other units.
Siemens actually reported a $107 million net loss for the quarter because of a $1.5 billon tax charge related to the sale of the company's VDO auto parts unit to Germany's Continental (CONG.DE). But, excluding one-time factors, group profits for the quarter more than doubled, to $2.9 billion, on sales of $29 billion, as Siemens benefited from worldwide demand for power plants, manufacturing equipment, and other infrastructure-related products.
Löscher, the first outsider to run Siemens, also plans organizational changes to make the company, in his words, "leaner, clearer, and more effective." iBeginning in January, Siemens' eight business units will be consolidated into three: energy, industry, and health care. The move, which was widely expected, also will reduce the size of Siemens' management board. Löscher said he will name the heads of the new groups and provide more details of the reorganization on Nov. 28.
This latest makeover of one of Germany's signature companies comes as Siemens tries to cope with a corruption scandal involving nearly $1.9 billion in questionable payments since 2000. The money was used to win contracts in several countries, including Russia, Nigeria, and Libya, Siemens concedes. The affair already has cost Siemens some $2 billion in fines, back taxes, and legal and consulting fees, Chief Financial Officer Joe Kaeser said at the press conference. The costs included a top-to-bottom examination by law firm Debevoise & Plimpton of all the company's contracts with outside "advisers" who in some cases were conduits for bribes.
Curiously, the scandal has an upside for Löscher: It has exposed the inadequacies of Siemens' existing internal structures and will help break down the resistance from midlevel managers and regional chiefs that has often frustrated Löscher's predecessors. "We want the whole subject to have a positive side," Kaeser told reporters.
Löscher also showed that he wants Siemens to orient itself more toward shareholder interests, something that's not always taken for granted in Germany. The company announced on Nov. 8 a plan to buy back nearly $15 billion worth of its shares by 2010—the largest such buyback in German corporate history. The move should help boost the value of the remaining shares. "We have a duty to our owners. That's obvious. There's no need to say any more," Löscher said.