Siemens plays down move for Alstom but makes other deals

Profound changes in global energy business behind sweeping reorganisation at Siemens

Assembling a gas turbine at Siemens in Berlin: the company is trying to reposition itself to take advantage of growth in the energy sector. Photograph: Michele Tantussi/Bloomberg

Assembling a gas turbine at Siemens in Berlin: the company is trying to reposition itself to take advantage of growth in the energy sector. Photograph: Michele Tantussi/Bloomberg

 

The head of the German electronics and engineering giant Siemens said last week that the company would not be strong-armed into acquiring the power units of its French rival Alstom, displaying notably less ardour for a deal than was shown by its rival General Electric.

But Joe Kaeser, the Siemens chief executive, also acknowledged that the global energy business was undergoing radical changes that helped prompt the company to announce a sweeping reorganisation that included eliminating a layer of management and shifting the headquarters of its own power units to the United States, where GE is based.

During its most recent quarter, Siemens reported a 12 per cent increase in profit and a flurry of activity, including the acquisition of the turbine and compressor units of the British company Rolls-Royce and a joint venture with Mitsubishi Heavy Industries of Japan to supply equipment and services to producers of steel and other metals.

While adopting a pose of studied coolness toward Alstom, Kaeser announced a widespread reorganisation of Siemens that reflected huge shifts in the energy market and the balance of power in the world economy. GE’s bid for Alstom also reflects these changes.

Countries around the world are reacting to global warming by trying to increase production of solar and wind energy. Countries are trying to make their power distribution networks more efficient and more flexible, creating a market for so-called smart grids. Big suppliers like GE and Siemens are trying to position themselves to take advantage of growth while also defending against new competitive threats, such as an aggressive push by Chinese companies into renewable energy.

In addition, strife in the Ukraine has underlined Europe’s dependence on Russian natural gas, while the fracking boom in the United States has shifted the centre of gravity in the oil and gas industries. Kaeser said that Siemens would move the headquarters of its energy units to the United States and hired Lisa Davis, an American who is an executive vice president at Royal Dutch Shell, to run them.

“The US is the place to be for oil and gas,” Kaeser said, “and all the roads in the US lead to gas.” During a news conference in Berlin, Kaeser deflected numerous questions about Siemens’ interest in competing with GE to buy units of Alstom that make equipment to generate and transmit electricity. GE has offered $13.5 billion for Alstom, which analysts say would strengthen the American conglomerate’s position in markets like China and India, and in wind power.

“It might turn out to be a significant advantage to have gained access to Alstom’s customer base,” Roberto Pozzi, a vice president at Moody’s who follows the companies, said in an email.

But GE has met with interference from the French government, which has asserted what it sees as its right to broker any deal. After initially seeming to favour a deal with Siemens, the French last week instead pressed GE for better terms. Kaeser said that Siemens would carefully study whether it would make sense to acquire Alstom. But he added: “We will not be pushed by someone.” Kaeser did not say who might be doing the pushing, but he may have been referring to political pressure for an intra-European deal that would swap Alstom’s power businesses for Siemens’s train unit. Alstom and Siemens compete in producing high-speed passenger trains.

“You can rest assured that we are pretty cool about the process,” Kaeser said, indicating that the company would not be drawn into a bidding war. “We are not transferring the old Roman gladiators into modern Paris,” he said. The German government denied that it was meddling in the negotiations over Alstom, but acknowledged that Kaeser and Chancellor Angela Merkel had discussed the issue, Reuters reported. Kaeser, who took over as chief executive less than nine months ago, has been trying to address concerns that Siemens is too unwieldy and not profitable enough. The reorganisation announced will abolish a layer of top management and give more freedom to individual business units, Siemens said.

“The second quarter showed that we still have a lot to do to improve our operating performance,” Kaeser said, though he added that the company would still meet its financial targets this year. From January through March, which is Siemens’ second financial quarter, sales fell 2 per cent to €17.5 billion, or about $24.4 billion, from a year earlier as an increase in revenue from China was not enough to compensate for a decline in Europe and in the company’s energy division.

Alstom, which reported its annual results last Wednesday, said its sales were flat at €20.3 billion in its latest financial year, which runs from April to March. Net income fell 28 per cent to €556 million in the latest period, while new orders fell 10 per cent to €21.5 billion. Alstom did not provide quarterly figures.

At Siemens, new orders slumped 13 per cent to €18.4 billion in the latest quarter, compared with the same period in 2013, when the company received large orders for trains and offshore wind parks. Those orders a year ago skewed the comparison in the most recent quarter, Siemens said.

Net profit rose 12 per cent to €1.2 billion because of an increase at the unit that makes medical scanners used to diagnose illnesses. Profit from the energy division slumped by more than half, to €255 million before taxes, as Siemens absorbed the cost of delays in completing a high-voltage transmission system in Alberta, Canada, the company said.

The company also had to absorb the cost of replacing defective bearings in offshore wind turbines, an example of how the shift to renewable power generation presents risks as well as opportunities to Siemens. Profit in a division that provides public infrastructure like trains increased to €325 million before taxes after barely breaking even a year earlier. The division, known as Infrastructure and Cities, avoided charges that burdened profit a year earlier.

Siemens reaffirmed that it expected net profit per share to rise 15 per cent in the current fiscal year, to €5.08. The company said it would soon begin a €4 billion share buyback that it had previously announced. As part of the reorganisation, Siemens will eliminate the four sectors – energy, infrastructure and cities, health care and industry – that had formed the top layer of the organisation. The aim is to reduce internal bureaucracy and make it easier for individual units to react to changes in the market, Siemens said.

Siemens also said it would pay £785 million, or about $1.3 billion, to acquire most of the energy business of Rolls-Royce, the British company that is separate from the maker of luxury automobiles. The units being acquired make turbines and compressors used by the oil and gas industries and in power generation.

In addition, Siemens said it would spin off a unit that makes hearing aids in an initial public offering. Kaeser said Siemens planned to expand a division that supplies equipment for liquefying and transferring natural gas, a business that has taken on new importance against the backdrop of the conflict in Ukraine.

The European Union draws about 30 per cent of its gas from Russia, but the United States plans to begin issuing permits next year for the export of liquefied natural gas with an eye to competing for the European market.

When Davis takes up her position as head of the energy businesses on August 1st, she will be the only woman serving on the management board at Siemens. The government led by Merkel’s has been pushing for passage of a law that would require publicly traded companies to have women fill at least 30 per cent of the board seats.

Some analysts have warned that GE’s acquisition of Alstom would weaken Siemens’ advantage in markets like China, where it has operated for decades. Kaeser acknowledged the threat, but also said that GE might be doing others in the industry a favour by reducing the number of competitors.

“If someone pays for consolidation,” he said, “then everyone else doesn’t need to.”

New York Times Service

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