Mannesmann: The Right Call?
Few German companies have transformed themselves as much with so little fanfare as the engineering conglomerate Mannesmann. In the past three years, Mannesmann has quietly divested 39 businesses with sales of $4.2 billion. It has moved aggressively into telecommunications, which now accounts for two-thirds of its profits. Unlike giants such as Siemens and Hoechst, which have trumpeted their restructuring plans, "we decided to work without big announcements," says Chief Financial Officer Klaus Esser, who will become CEO in May. "This gives us more flexibility and keeps critics off our backs."
Mannesmann's record speaks for itself. Net income is expected to surge 86%, to $537 million, for 1998, on sales of $27 billion, up 16%, estimates investment bank Paribas. As a result, the company's share price has soared 78% this year, to $103, compared with a 9.7% climb on the DAX blue-chip index. "Mannesmann is the paradigm of the German restructuring story," says Patrick Shields, strategist for Paribas.
OLD LINES. Now, the company is angling to become a leading player in telecommunications Europewide. In the past two years, it has spent some $2.1 billion to buy into upstart carriers competing against former state monopolies in France, Austria, and Italy. Starting next year, it will also offer services to multinational companies on the Continent through euro.map, a joint venture with Olivetti. The two partners plan to invest $240 million in integrating their fixed-line operations and aim to offer specialized business services as well as compete on price. Mannesmann is looking to expand further in both Western and Central Europe. "We are running after anything that's valuable," Esser says.
Mannesmann is already one of the most experienced players taking on former telecom monopolies. It has under its belt a decade of competition against Deutsche Telekom with its mobile-phone service, which was launched as the first alternative carrier in Germany and is now highly profitable. The cellular mobile unit earned $633 million on sales of $2 billion for the first half of 1998. The company also has a fixed-line telephone business through a controlling stake in Mannesmann Arcor, a joint venture with Deutsche Bahn that has a nationwide network of over 40,000 kilometers of telephone and data lines. Expected to break even in 2001, Arcor has nipped at Telekom in the long-distance market since competition was thrown open in January. It now claims a 2.8% share of revenues for fixed-line phones, and is aiming for a 10% stake. Mannesmann's experience competing with Deutsche Telekom could give euro.map an edge as it tries to become the No. 2 alternative carrier in other European markets.
But building a Europewide telecom business will be tough. Mannesmann and Olivetti must face strong contenders such as British Telecom, which has teamed up with AT&T to attack the Continental market. And the German-Italian partnership may have trouble competing on technology. They will be stitching together a patchwork quilt of old-style voice lines just when the challenge is to create a network capable of handling gigawatts of data for Internet and intranet traffic, video, and movies. In contrast to Mannesmann, MCI WorldCom Inc. is jumping straight to the data market by spending $1.8 billion in 1998-99 to string together massive fiber-optic systems throughout Europe.
"SPIRIT AND EXPERTISE." Mannesmann also faces uncertainties in the German telecom market that could affect profitability. On Nov. 30, German regulators will decide what price new entrants such as Arcor must pay to Deutsche Telekom to use its lines to connect to customers at home for local calls. Moreover, a price war is brewing as Telekom prepares to slash rates on long-distance calls, the area where it has already lost an estimated 20% to 30% of its market to newcomers. The former monopoly has hinted that it may slash prices by up to 50%. "The real question for next year will be the price structure," says Harald Stober, CEO of Mannesmann Arcor. Currently, a three-minute call during a weekday morning to a German city more than 50 kilometers away costs $1 with Deutsche Telekom and 69 cents with Mannesmann Arcor.
The decision to plunge into the telecom market fits the Mannesmann corporate psyche. The company was founded 108 years ago by brothers Rheinhard and Max Mannesmann, who invented a process for making seamless steel pipe. Mannesmann remained a steel company for 75 years. But in the 1970s, it set out to diversify through acquisition and has remained in motion ever since. Its targets: businesses with high growth and a hefty market share. In the 1980s, Mannesmann moved into engineering and automotive parts, still core areas today. This search for new businesses "brought a spirit and an expertise into the Mannesmann executive board to go for new things," Esser says.
That spirit prompted the company to enter the telecom business by bidding for a German mobile-phone license in 1989. "No one could imagine at the time what the decision would really mean," says Joachim Funk, the current CEO, who is retiring next year. Analysts predicted in the late 1980s that Germany would have a total of 2 million mobile-phone users by 2000, yet already there are nearly 12 million.
But in its constant search for acquisitions, Mannesmann also strayed into poorly performing areas. That hurt when global markets opened up in the early 1990s. So in 1995, shortly after taking over as CFO, Esser helped launch a massive restructuring plan that led to the unloading of units such as information technology. He devised a system for measuring performance based on return on assets rather than the return on capital pursued by most companies. His logic: It was easier for his engineers and salespeople to understand.
BIG PLANS. The goal is for the entire company to reach a 15% return on assets by 2000. Each of the company's 50 units is also developing a plan for achieving at least a 20% return on assets over the next several years. The Arcor telecom business, for example, is aiming for 30%.
Mannesmann executives insist they will not completely divest their engineering and automotive businesses. "We have ambitious strategic targets in engineering and automotive," Esser says. "There will be a time when 50% or more of our asset base is in telecoms, but we are not a telecom company." As long as the industrial businesses perform, investors will be patient. "I don't see the synergies, but I won't argue with a winner," says Oscar Castro, fund manager for Montgomery Asset Management in San Francisco, which has a $50 million stake in the company.
Still, investment banks are already starting to rate Mannesmann as a telecom play. Dumping the industrial businesses could boost the share price 20% overnight, argues one London-based telecom analyst. The promise of higher returns as well as a soaring share price might persuade Esser to push Mannesmann's streamlining even further.