IPO for Siemens' Auto Electronics Unit?

The German conglomerate offers high-tech safety equipment in its VDO division, and talk of a possible spin-off has boosted its shares

The traffic on a sunny day recently was typical for an autobahn in the German hinterlands. The road is two lanes wide in each direction, with no speed limit. In the right lane, trucks lumber along at 50 mph. In the passing lane, Mercedes land yachts zoom along at 90 mph (145 kph), impatiently flashing their headlights at anyone who—like me—would prefer to drive a leisurely 70 mph or so.

Luckily, I'm in a BMW 5-series wagon fitted with state-of-the-art driver-assist and safety technology by Siemens' VDO auto electronics unit. When I'm in the slow lane, a laser range finder mounted above the rearview mirror automatically tracks the truck in front of me, maintaining a constant distance.

If I want to pass the truck, the car lets me know if the way is clear. A warning light glows red if there's a car in my blind spot or coming up fast in the passing lane. And if I start to drift into the left lane—or off the road altogether—sensors cause the steering wheel to vibrate and shake me out of my torpor.

Good News for Investors

The technology is some of the latest on offer from Siemens VDO, the auto electronics unit of Munich conglomerate Siemens (SI). VDO's technology has suddenly become more relevant, and not just to auto buffs. Siemens announced Jan. 25 that it is likely to spin off a minority stake in VDO in an initial public offering. Analysts, who expect the IPO to take place in the second half of 2007, value the unit at anywhere from $8 billion to $13 billion.

For investors, the spin-off comes as good news. It signals Siemens Chief Executive Officer Klaus Kleinfeld is serious about making the company more profitable and competitive (see, 1/18/07, "Siemens' Culture Clash"). And the flotation could raise Siemens' overall value. As a sprawling conglomerate, Siemens is probably valued at less than the sum of its parts—it's a diverse, General Electric-like (GE) collection of divisions whose products include trains, lighting, X-ray machines, and equipment for power plants.

Siemens plans to hold on to a majority of VDO, but the separate listing will give a clear indication of the division's true worth, possibly boosting Siemens' market capitalization. "The IPO could free up value," says Theo Kitz, Siemens analyst at private bank Merck Finck & Co. in Munich.

Depending on Good Products

Indeed, optimism about the VDO deal, plus Kleinfeld's restructuring program in general, helped fuel a 4% rise in Siemens shares Jan. 30. The stock is up more than 10% since Siemens announced the VDO plan as well as better-than-expected quarterly results on Jan. 25. "The group does seem more willing to change the portfolio for more growth," Merrill Lynch (MER) analysts said in a Jan. 30 note to investors, in which they also upgraded Siemens shares to "buy" from "neutral" (see, 1/25/07, "Whiplash for Siemens Investors").

Fundamentally, VDO's value will depend on the quality of its goods. The company, whose first product was a speedometer introduced in 1920, is the biggest maker of dashboard instruments used by virtually all major manufacturers. It is also the market leader in electronic systems to activate airbags, and in 2001 was the first to sell so-called piezo fuel injectors for diesel engines, which are more precise than conventional alternatives and thus more fuel-efficient.

The innovations have helped make VDO one of Siemens' best-performing divisions. The unit earned $870 million on sales of $13 billion last year, a profit margin of 6.7%. That's not as impressive as the 12.9% margin earned by Siemens' top-performing medical equipment division, but it's good by the standards of the auto parts industry, where other players such as Visteon (VC) and Delphi (DPHI) have nearly collapsed in recent years. "VDO is one of Siemens' pearls," says Kitz.

Affordable Safety

Auto parts quickly become commodities, though, so it's crucial that Siemens stay on the cutting edge. The company faces tough competition from German rivals Bosch and Continental, which also are working on driver-assistance technology, some of it already available in top-of-the-line cars such as the Mercedes (DCX) S-Class.

Siemens' goal is to push down the price of high-tech safety equipment closer to mass-market levels. That's already starting to happen. The lane-departure warning system will be available this year on cars in the $50,000 range. Siemens won't disclose the names of the manufacturers. Far from being a luxury, this technology is a lifesaver.

Perhaps even more impressive are imaging systems that help drivers see better in the dark. My test BMW has a night-vision camera hidden in the grill. A "heads-up" display installed in front of the steering wheel projects a rectangular image of the road ahead onto the windshield. Even when the headlights are dimmed, the view of the road ahead is surprisingly detailed.

Knowing Your Limits

Even more high-tech is an infrared camera, also hidden in the grill. Because the camera is sensitive to heat rather than light, it is good at detecting people or animals, whose images also are projected onto the inside of the windshield. Siemens spokesman Enno Pflug demonstrates by walking around in front of the car as it is parked near VDO's research and development center in the Bavarian city of Regensburg. Software in the infrared system recognizes him as a living creature, and highlights his image in orange.

The night vision technology won't be available until next decade. But beginning in 2008, VDO will offer a system that recognizes road signs and displays the current speed limit on the inside of the windshield. The reminder is particularly helpful in places like Germany, where it's easy to lose track of the continuously changing speed zones.

Valet Parking

Siemens R&D people still have some work to do. During my test drive, the system to prevent the car from drifting off the road or into another lane initially didn't work. To fix it, I had to pull off the highway while an engineer rebooted the onboard computer. Obviously, such bugs have to be worked out before these systems go on the market.

When my test drive was almost over, Siemens demonstrated one last feature. I drove the BMW slowly past a row of parked vehicles, until a display screen in the middle of the dashboard found a big-enough spot and instructed me to stop. Then the computer parallel-parked the car. All I did was brake or move forward according to voice instructions from the computer.

For the untold millions of people who suffer from parallel-parking anxiety, this could be the best innovation of all—and one of the products that will make VDO shares worth a look when they hit the market.

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