ABB Investors Seek Frugal CEO to Solve $10 Billion Puzzle
ABB Ltd. (ABBN) investors, reeling from Chief Executive Officer Joe Hogan’s announcement last month to step down, want a more frugally-minded replacement to integrate the $10 billion worth of U.S. acquisitions he left behind.
Hogan’s three-year spending spree added motors and low-voltage gear to the world’s biggest supplier of power grids. While the deals boosted profitability and helped ABB’s shares to outperform German rival Siemens AG (SIE), they’re also absorbing management time. That’s prompted ABB to offer a bonus program to executives for meeting integration targets.
“I would be happy with a quieter guy who integrates what they have bought, rather than another guy who again wants to grow the company $5 billion to $10 billion with acquisitions,” said Bernhard Signorell, CEO of ABB shareholder 3v Asset Management. “Hogan definitely filled a gap in the U.S., but I don’t feel that there is a big gap for acquisitions anymore.”
Hogan, who took over almost five years ago during the 2008 financial crisis, expanded ABB by buying motor-maker Baldor Electric Co. and low-voltage gear maker Thomas & Betts Corp., purchases that helped counter a decline in spending on power grids in Europe. The company now needs to deepen the integration of these purchases to market new offerings through its global operations with 145,000 employees.
ABB may choose its new CEO in mid-June and Ulrich Spiesshofer, the head of ABB’s Discrete Automation & Motion unit, and Henkel AG Chief Kasper Rorsted are favorites to succeed Hogan, Swiss magazine Bilanz reported last month without saying how it got the information. A Henkel spokesman later said that Rorsted won’t join ABB.
Other senior ABB executives include division heads such as Power Systems’ Brice Koch, Power Products’ Bernhard Jucker, Low Voltage Products’ Tarak Mehta and Process Automation’s Veli-Matti Reinikkala.
ABB said May 10 that Hogan, the first American to lead the Zurich-based company in its 120-year history, will step down for “private reasons” and will continue in the role until a replacement is appointed. He didn’t resign because of ill health and there was no conflict with the board or chairman, said spokesman Antonio Ligi, declining to give further details.
Hogan, who joined ABB following more than 20 years at General Electric Co. (GE), will probably have left his succession well-prepared, according to Noel Tichy, Professor of Management & Organizations at the University of Michigan. Succession planning is a key element for GE’s management, he said.
ABB has said it will look internally and externally for a new chief. Gilles Bey, an ABB shareholder and portfolio manager at Valiant Bank AG in Bern, said investors are expecting an internal candidate to succeed Hogan.
“Hogan’s acquisitions were good for ABB because they brought in new technology and diversification for the business,” he said. “I would prefer someone who consolidates Hogan’s acquisitions if it’s an internal appointment. The internal people don’t have the experience to make acquisitions like Hogan did.”
ABB’s margin based on earnings before interest, taxes, amortization and depreciation rose by 1.1 percentage points to 15 percent in the first quarter while sales increased by 9 percent to $9.7 billion, the company said April 24. Thomas & Betts power fittings, connectors and switches contributed 7 percent to operating earnings.
A week later, German rival Siemens cut its full-year forecast after quarterly earnings missed analyst estimates and said revenue fell 6.7 percent to 18 billion euros ($24 billion).
ABB shares rose 0.1 percent to 20.30 francs in Swiss trading as of 9:54 a.m., valuing the company at 49 billion francs ($53 billion). The stock has risen 8 percent this year, while Germany’s Siemens dropped 1.5 percent.
ABB runs the risk that executives passed over for the top job will leave the company, Tichy said.
“My strong bias is to always go inside if you have the talent, also because the track record of outsiders is pretty sketchy, although Joe is one of the exceptions,” he said.
Spiesshofer, a former consultant at Roland Berger and A.T. Kearney before joining ABB as head of corporate development in 2005, oversaw the integration of Baldor and the agreed $1 billion acquisition of California-based Power-One Inc. (PWER), Hogan’s most recent deal.
Fewer China Orders
Power-One will give ABB inverters that allow solar power to be fed into grids and the deal is an example of how Hogan has been bringing new technology to the Swiss company. ABB is looking to tap a market forecast to grow by more than 10 percent annually, driven by a need for affordable energy and declining costs of producing solar power.
Hogan’s successor also needs to continue a revamp of the power systems unit, said James Stettler, an analyst with Canaccord Genuity Ltd. in London. ABB faces lower orders from China State Grid Corp., its largest customer, as local rivals make technological advances and make inroads into the Swiss company’s market share, he said.
Power Systems should extend the restructuring of its engineering, procurement and construction businesses announced in December to contracts for high-voltage power connections, which depend on China, the analyst said.
For ABB’s new CEO, “a main priority will be the integration of the recent acquisitions,” said Richard Frei, an analyst at Zuercher Kantonalbank. “Then cost savings are still an issue. Additionally, the restructuring of Power Systems is ongoing,” he said.
While Hogan’s overall reign at ABB is seen as a success, the new CEO now has to make his predecessor’s strategy work.
“The company is in damn good shape after where it was five years ago,” saidTichy. “But it’s halfway up Mount Everest and all kinds of stuff can happen on the rest of the climb.”
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