Veba Hasn't Lost Its Touch

After a stumble, Hartmann launches a new restructuring

It would have been a tough act for anyone to follow. After German conglomerate Veba launched a campaign to cut costs and improve financial transparency, its shares soared 180% between 1992 and 1996--gaining more than twice as much as Germany's DAX stock index. The market was thrilled with Chief Executive Ulrich Hartmann, a pioneer in bringing the concept of shareholder value to Germany.

Then, this year, some of the luster wore off. In February, Veba's fledgling telecom business took a hit when Britain's Cable & Wireless PLC pulled out of a partnership, leaving Veba to try to challenge giant Deutsche Telekom alone. The company posted lukewarm quarterly results. As the German mark softened, investors chased exporters such as auto and machinery companies, and Veba trailed the DAX.

But in recent weeks, Hartmann has proved that he hasn't lost his touch. Now that costs have been pruned, he is actively reshaping the conglomerate to unlock value and getting rid of noncore businesses to concentrate on proven moneymakers. He's also beginning the crucial job of diversifying out of Germany. "We are now in a new phase," he says. "A phase of focus and growth."

A COMMON STORY. The theme is reverberating throughout German industry. After spending the mid-1990s hacking costs, conglomerates are working to unlock the value hidden in their complicated structures. Daimler Benz shed its holding-company configuration and sold off money-losing divisions. Hoechst is pulling out of chemicals to focus on life sciences. Even Siemens, still in a broad palette of businesses, has sloughed off weak units in everything from pacemakers to defense electronics.

Veba, Germany's fourth-largest industrial company, won't reinvent itself radically. It will hang on to its five key divisions: energy, chemicals, oil, telecommunications, and transportation. "We are a conglomerate, and we will remain one," insists Hartmann. Nonetheless, he has cut the number of business units in the $44.6 billion company from more than 60 to fewer than 40, mostly by selling them off. And he has set new performance targets. Unit managers must achieve a cash flow return on investments of 8% to 12% after taxes, with each business unit held to a different benchmark.

Hartmann's latest move came on Dec. 4. In what Goldman, Sachs & Co. analyst Isabelle Hayen calls a "milestone restructuring," Hartmann finally tackled the unwieldy Trading, Transport & Services division. He will dump such unrelated business units as home-improvement stores and spin off Stinnes, a chemical distributor, in an initial public offering. The news boosted Veba's share price by nearly 8% in one day, to $62.

International expansion is key to this stage of Veba's evolution. Of the $18 billion Hartmann plans to spend in the next five years on acquisitions and internal growth, half will be invested outside Germany. Perhaps most important, Hartmann intends to cut Veba's heavy reliance on the slow-growing German market, from 70% of sales to 50% by 2002. Most of the management board will visit South America at the beginning of next year to scope out new business opportunities.

In October, Hartmann further boosted Veba's exposure to global market scrutiny by listing its shares on the New York Stock Exchange, amid gala celebrations. Eager to deliver for his new shareholders, Hartmann plans a radical realignment of Veba's electricity division--a cash cow that accounts for 60% of profits--that will take effect next year, to prepare for liberalization of the German power market in 1999.

In the past five years, Veba has cut costs by more than $1 billion and made its chemical and refinery businesses profitable. Return on equity went from 6.2% to 13.3%, and Hartmann aims for 15% by 2000. "We are never satisfied," he says. That's because he knows the market won't give him a moment's respite.

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