Industrial Icon in Trouble

Europe's No. 2 engineering company, ABB (ABB ), is struggling to survive after management's shock third-quarter profit warning drove its share price down by almost two-thirds on Oct. 22 and a further 21% on Oct. 23. The automation-to-power technology group, which admits it has underestimated the scale of its financial and operational problems, has failed to cut costs and slash debt as much as new CEO Jürgen Dormann had predicted.

Analysts say that ABB's short-to-midterm cash-flow outlook is dire and that, given the slumping world economy, demand for its products is unlikely to revive before 2004. The biggest worry is that the group's customers may defect for fear ABB may not be around to service their purchases. To make matters worse, ABB faces bigger-than-expected asbestos insurance liabilities in the U.S.

Dormann, who denies ABB is close to collapse, says he hopes to limit those liabilities, possibly by filing for Chapter 11 protection for its U.S. subsidiary, Combustion Engineering. He also says market rumors that the group needs to refinance $3.7 billion of debt due to be repaid over the next 12 months are unfounded. But investors fear that U.S. courts could rule that asbestos claims extend beyond Combustion Engineering to the parent company. And they are worried that, despite Dormann's promises, the group's cash-flow problems will force it to refinance its debt. "Management has lost investors' trust," says Christopher Watts, an analyst at Frankfurt's private Bank Metzler.

By David Fairlamb in Frankfurt

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