What Does A Knife Do When The Cutting's Done?

Mike Treschow revived Electrolux. Investors still aren't happy

Michael Treschow needs a second act. In his three years as CEO of Stockholm-based Electrolux Group, the world's biggest household appliance maker has undergone a radical restructuring. Faced with a bloated balance sheet and poorly managed acquisitions, Treschow has divested noncore assets worth $21 billion a year in sales, eliminated 14,500 jobs--10% of the Swedish company's workforce--and closed 27 plants and 50 warehouses. "Mike the Knife" is 57-year-old Treschow's nickname now, and in many ways it bespeaks a job well done. But what do you do with a knife when the cutting's all finished?

If Treschow isn't asking that question, a lot of investors are. They worry that Treschow may simply have run out of moves. Like other appliance makers, Electrolux is being hurt in the U.S. by higher interest rates, slower sales, and ongoing consolidation among the retailers who sell Electrolux products. North America accounts for 40% of Electrolux sales. And with Treschow's restructuring more or less complete, wringing out more cost savings isn't an option.

"BOMBED." Make no mistake about Mike the Knife's results: Electrolux' latest financials are sterling. On Aug. 11 it announced a 26% rise in first-half profits, to $442 million, on a 5% increase in sales, to $7 billion. But that hasn't curbed the market's fears. Electrolux stock "has bombed," as Treschow said in an interview, falling from a high of $246 in January to $135 on Sept. 4.

For many investors and industry watchers, Treschow has a clear path forward, and they wish he would take it. While Treschow is committed to new products and more cost-cutting, they believe acquisition is the smarter course. Analysts and investment bankers have been speculating for months that Treschow could spend up to $4 billion to acquire Maytag Corp., a rival appliance maker based in Newton, Iowa. Maytag, beset with sales and profitability problems, has seen its stock drop by half in the last 12 months, to $38. "Maytag is clearly the biggest prize out there," says Anders Trapp, an analyst at Enskilda Securities in Stockholm.

Treschow seems to be playing a cautious hand. He's not giving away his intentions toward Maytag. At least for now, Treschow says, his big push is toward Internet-savvy appliances that will take Electrolux from simple white boxes to high-margin, high-tech products. Electrolux and Ericcson now have a joint venture to supply networked apartments, with Net-connected appliances. In the works is Smartfridge, which allows consumers to surf the Net, replenish groceries, and watch TV via a screen in the door, and a robotic vacuum cleaner.

Nifty stuff. But in the long term, analysts say, a deal is the better option. Indeed, the logic for a Maytag takeover is compelling. Maytag has 20% of the U.S. market for household appliances; equally, $4.3 billion Maytag would benefit from Electrolux' global reach. A merger could also help boost Electrolux' margins: 6.2% for the first six months of this year, roughly half those of Whirlpool, General Electric, and Maytag, the top three in the U.S. Whirlpool, though, is not worried. Says Chairman and chief David Whitwam: "We're the largest appliance producer in the U.S. But even if the No. 3 and 4 players get together, they're still No. 3."

While Treschow is open to opportunities, he says he doesn't see Maytag as a necessary buy. He's confident that the $48 million he spent in June to buy back North American rights to the Electrolux brand will raise the U.S. profile just as well. He's also confident that there's more benefit to come from his cost-cutting campaigns.

There was a time when all this would have mattered little to Electrolux shareholders. Indeed, Treschow still enjoys strong backing from the Wallenberg family, which owns a 21% piece of Electrolux (and to whom Treschow is related by marriage). But the Wallenbergs are more insistent these days on owning stocks that climb, not drop. So they will expect Treschow to make his move.

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