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Siemens takes radical step to avoid fate of US rival – Sky News

It is one of Europe's biggest and most important manufacturing companies – an €87bn giant that, in terms of stock market valuation, is dwarfed in its native Germany by only SAP, the software company and Allianz, the insurer.

However, if plans unveiled today by its management come to fruition, Siemens will be just that little bit smaller in future.

The electrical engineering and electronics conglomerate, which employs 377,000 people around the world including 15,000 in Britain, is proposing to spin off its gas and power unit into a separate company.

As demergers go, this is a big one, with the newly spun-off business employing 80,000 people and enjoying annual sales of €30bn.

Siemens will not retain a majority stake in the business but, in a nod to recent concerns expressed by the German government over the ability of foreign companies to take over big German companies, will own a stake sufficient to block any would-be bidders.

The business will be sufficiently big to join its erstwhile parent in Germany's blue-chip DAX 30 index.

The move is the latest effort by the management of Siemens, a 171-year old stalwart of German industry, to reduce the risk of it being targeted by activist investors.

Conglomerates such as Siemens are deeply unfashionable among investors because they are seen as too unwieldy and too complicated to run and incapable of reacting as quickly to industry changes as rivals focused on just one or two activities.

Some of Germany's biggest conglomerates have accordingly been breaking themselves up, such as Thyssenkrupp, the steel making to lifts to car parts combine.

In the case of Siemens, this has been a piecemeal process going on for some time, with the company spinning off Osram, its multinational lighting business, as long ago as 2013.

That year also saw Siemens sell its telecommunications business to Nokia of Finland.

More recently, in a deal blessed by the French and German governments, it has sought to merge its rail division with the French train maker Alstom.

The enlarged business, described by French president Emmanuel Macron as "Airbus on rail", would have rivalled CRRC of China as the world's biggest train maker - but, to the fury of Berlin and Paris, the merger was blocked by the European Commission.

It has also spun off its renewables division Siemens Gamesa - its 59% stake in the Madrid-listed business will be owned by the newly-demerged gas and power company - and also spun off its healthcare division into a company called Healthineers.

Image: Siemens employs 15,000 people in the UK

Its remaining stake in the home appliances business BSH has also been sold to Bosch, its joint venture partner.

Yet this demerger is the biggest and most radical step so far undertaken by Siemens.

And intriguingly, according to its chief executive, Joe Kaeser, it appears to have been motivated by a determination not to befall the fate of its US rival, GE.

The latter, a bellwether of American manufacturing just as Siemens has been in Europe, has seen its share price battered in recent years as investors fell out of love with the conglomerate model while successive managements - it has changed its chief executive twice in as many years - struggled to revive its fortunes.

Mr Kaeser was quite specific about this today.

Without explicitly mentioning GE, he told reporters in Munich: "We know that some competitors and rival CEOs had to experience what happens when you run out of options.

"We wanted to remain proactive and anticipate the transformation."

It is also striking that Mr Kaeser has opted to demerge the gas and power division of Siemens.

This is a business that has been struggling for some time amid a drop in demand for gas turbines following the so-called 'Energiewende' - a dash in Germany away from fossil fuels and towards renewables that has created an excess of power production that has brought down wholesale energy costs (but not household energy bills) and crushed the profits of power generators.

Siemens has cut costs and jobs in the division aggressively during recent years but not sufficiently to stave off a 76% drop in profits, to €377m, during the most recent financial year.

Siemens takes radical step to avoid fate of US rival - Sky News
Image: US rival GE has been struggling to revive its fortunes

Ironically, GE too has been grappling with difficulties in its power division and for similar reasons, although it has not yet resorted to the radicalism Siemens has.

Mr Kaeser added: "We know we cannot stand still.

"This is simply the best solution from a Siemens investor standpoint.

"If you take a business which earns disproportionately and retains an over-proportional share of capital, and you take that out of the capital equation, the numbers will be very different."

The market seems to agree with that assessment.

Shares of Siemens, which had fallen by 11% during the last year, have jumped by more than 5% today.

Gael de-Bray, Head of European Capital Goods Research at Deutsche Bank, told clients: "This is a major transformational move.

"The move towards a more focused portfolio should…create value for shareholders by reducing Siemens' conglomerate discount."

He pointed out that, before the announcement, Siemens had been valued by the stock market at a 23% discount to the value that might be ascribed to the sum of its individual parts were they to be sold off separately.

Once the demerger has been completed, which is expected to be in September next year, Siemens will consist of two divisions - smart infrastructure, which will provide homes and cities with digital networking technology sometimes referred to as 'the internet of things' and digital industries, which will support clients as they seek to automate their businesses.

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The shake-up, given the tacit blessing of German unions, will doubtless cause uncertainty to many Siemens employees around the world, including the UK, where it has a gas and power business, based in Newcastle-upon-Tyne, servicing power plant operators such as Drax and E.ON.

The company has admitted that, between now and 2023, some 10,400 jobs will be lost in efficiency savings but, over the period, it also intends to create some 20,500 jobs.

As well, presumably, as preserving those of the board as they seek to keep activist investors at bay.

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