Siemens Proves Prudence Is a Virtue

It's healthy, while fast-growth rival ABB is in a shambles

In the early 1990s, analysts and investors used to goad Siemens (SI ) CEO Heinrich von Pierer to fashion the company into something much more like its Swiss-Swedish competitor, ABB (ABB ). Emulate ABB CEO Percy Barnevik, they said, and concentrate on growth. Focus on your most profitable businesses and sell the rest.

Luckily, the affable Bavarian took the advice with a grain of salt. Barnevik is long gone. And ABB? It's struggling to convince investors it can survive. Siemens, in contrast, looks set to emerge from the downturn battered but intact. The Munich electronics giant, which competes with ABB in businesses such as power-distribution equipment and factory automation, is expected to report a profit of about $250 million in the quarter ended Sept. 30, on sales of $21 billion. Siemens is burdened by losses in units that supply the telecom industry. And it still falls far short of matching the long-term performance of General Electric Co. (GE ), its great U.S. rival. But the German company is doing a lot better than ABB, which on Oct. 24 reported a $183 million loss for the quarter on sales of $5.5 billion. "We have our challenges, but there's no sense of crisis," says Rudi Lamprecht, a member of Siemens' management board.

That's a surprise, because Siemens has long been criticized for slowness, lack of focus, and excessive caution. For years, von Pierer has taken heat for refusing to sell boring divisions such as power generation and bet the company on hot-growth areas like mobile phones. But Siemens' strength may have been its stubbornness. While putting more pressure on management to perform and selling off marginally profitable units, von Pierer refused to stray too far from the 155-year-old company's tradition of prudence. "They moved against the trend of the times," says Adrian Hopkinson, who follows Siemens for Westdeutsche Landesbank in London.

In contrast, ABB aimed for quicker returns. So in 1999, it got out of making equipment for power generation, once the company's main business. Instead it focused on equipment for distributing and transmitting power, which at the time had higher growth rates. In retrospect, selling a century-old family heirloom was a mistake, says Piero Morosini, a professor at business school IMD International in Lausanne, Switzerland. It turned out that many of ABB's best managers, the people who understood how the company worked, were in power generation. The loss of such expertise permanently damaged ABB's culture, says Morosini, who has written a case study of ABB.

The two companies also had radically different attitudes toward debt. In the late 1990s, Siemens raised billions by spinning off its semiconductor and components businesses at the peak of the tech boom. No huge acquisition followed. Company debt is now $1.8 billion, a manageable sum for a company with annual sales of $83 billion.

Analysts complained at the time that Siemens was squandering opportunities for growth. They applauded while ABB made some 160 acquisitions under Barnevik, who ran ABB from 1988 to 1996. Debt wasn't the only liability ABB acquired in the process. U.S.-based Combustion Engineering, acquired in 1990, faces asbestos-related claims that may exceed the subsidiary's book value of $812 million, ABB says. That wouldn't be enough to crush a healthier company. But ABB's $5.5 billion debt load has forced a costly reorganization and undermined confidence in the company's future.

Is the moral here that unwieldy conglomerates aren't so bad after all? It's more complicated than that. The third player in this drama is GE, the U.S. conglomerate whose high-growth, high-return record neither ABB nor Siemens has matched. GE's potent mix of manufacturing, media, and finance has powered a total return on its shares of 363% since 1992. In contrast, total return for Siemens equity is only 117%. GE wins even though its shares have trailed Siemens' of late. Von Pierer has yet to meet the GE challenge. But it's his company that still has a shot at doing so--not that erstwhile highflier, ABB.

By Jack Ewing in Frankfurt

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