Michel de Rosen, a member of ABB's board, compares Jürgen Dormann, CEO of the Swiss-Swedish engineering giant, to Cincinnatus. Feeling duty-bound to save Rome from barbarians, the legendary fifth-century B.C. farmer-general reluctantly accepted his fellow senators' bidding and assumed absolute power. But once he had repulsed the fierce Aequi tribe from the east and the Volscians from the southeast, Cincinnatus freely gave up military dictatorship and returned, happily, to his beloved farm.
Similarly, in September 2002, Dormann, who had been the chief executive of German pharmaceuticals giant Hoechst, acceded to his fellow ABB board members' pleas to step in as CEO of that company and rescue it from imminent peril. A few years earlier ABB had rushed headlong into Eastern Europe, stumbling into one pothole after another, while also heedlessly pursuing Asian megaprojects. Worse, in 1989, ABB had had the bad luck to buy Combustion Engineering, which turned out to be one big asbestos pit brimming with American liability lawyers. Earlier this year the Stamford, Connecticutbased company faced approximately 200,000 asbestos-related claims.
ABB had lost $729 million on $14 billion in revenues in 2001 and would bleed a further $783 million in 2002 as sales faltered. The company's share price, meanwhile, free-fell from Sf43.24 ($26.15) in February 2000 to Sf1.61 in October 2002.
Dormann promptly disposed of a grab bag of ill-fitting subsidiaries and refocused ABB on its core power and automation businesses, slashing 45,000 employees and $900 million in costs and staving off the immediate threat of insolvency. Although ABB lost $767 million last year, mostly because of massive restructuring charges, in this year's first half the company earned $90 million -- its first consecutive quarters of profit in two years. The feat is all the more impressive in light of continued hefty write-offs from the revamping effort. From the end of July 2003 through late September 2004, the company's share price surged 120 percent, to Sf7.71.
His rescue mission seemingly accomplished, the 64-year-old Dormann indicated in February that he would stay on as chairman but relinquish the CEO title in January 2005. The board has agreed, but not without regret. "Like Cincinnatus, Jürgen could stay on if he wanted to," observes board member de Rosen, the CEO of U.S. biotechnology company ViroPharma.
Dormann, however, deems it time to return to the plow -- or, in his case, to hiking in the Swiss Alps. "We need a younger chief executive who can start planning where this company will be in a decade," he tells Institutional Investor in an interview at ABB's campus-style headquarters in Oerlikon, the industrial Zurich suburb. In fact, Dormann played a pivotal role in picking his successor: Fred Kindle, 45, who turned around Swiss engineering firm Sulzer much as Dormann did ABB and, before that, Hoechst.
"Fred will take over an ABB that has moved from survival mode to growth mode," Dormann says. "But we've still got to bring costs down and focus on operational efficiency to hit our margin and growth targets. For that reason, it was important to bring in a battle-tested executive like Fred." He adds that he plans to devote half of his time to ABB "if it is needed" in 2005 but scale back to just one quarter the following year. "It's important to keep my distance once Fred takes over," explains Dormann. "I'm sure he will drive the company in the right direction."
Nevertheless, many investors will be sorry -- very sorry -- to see Dormann depart the CEO's office. They worry that although ABB may have dealt with the most urgent menace -- default -- other problems linger, like barbarians milling about the gate. For a start, ABB's Combustion Engineering subsidiary, once a major builder of power plants, could conceivably face an onslaught of lawsuits from workers exposed to asbestos at its plants. In July 2003 a bankruptcy court in the state of Delaware approved an innovative plan by ABB to presettle with the asbestos claimants and cap the damages at $1.3 billion as part of a bankruptcy filing by Combustion Engineering. But as of mid- September, a federal appeals court was still deliberating over that settlement, which could very well wind up being appealed to the U.S. Supreme Court (see box, page 132).
Putting aside that ticking time bomb, there are some other loose ends to the ABB comeback saga. Even after the restructuring, the company remains seemingly more complex to operate than its giant power transmission systems. It trades in 100 countries, encompasses 63 separate companies and provides some 112 products or services -- everything from beer-bottling equipment to propellers to the transformers that supply Hollywood studios with electricity (as the company bragged in a recent ad). Peter Voser, the CFO who played a critical part in Dormann's efforts to pull ABB back from the brink, is decamping this month to Royal Dutch/Shell Group. Overall, ABB suffers from a mediocre operating margin of just 6.2 percent (5.6 percent, if you count restructuring costs), compared with, say, 12.2 percent for rival Schneider Electric of France.
"Although Dormann has done an excellent job so far, he has not gone far enough," contends Stockholm-based corporate raider Christer Gardell, a former McKinsey & Co. partner who has strong-armed several Swedish companies -- construction group Skanska and forestry outfit AssiDoman among them -- into restructuring. "The way to create further value would be a sale of the automation operations to better-capitalized rivals like General Electric, Schneider or Emerson Electric."
Pessimistic investors fear that further wrenching restructuring is in store. Dormann insists that "we can achieve our goals without any further restructuring, although there will be normal ongoing attention to costs." Board member de Rosen, who sits on the committee that nominated Kindle as CEO, concurs: "We do not think that ABB's future is to restructure again." All the same, he readily concedes that "one of the reasons we hired Kindle, who has already changed one company, is because we wanted someone who had done it and would do it again if needed."
Other investors appear to be reassured by the transition to the Kindle era. (The CEO-designate actually started at ABB in September in an understudy role as deputy CEO; he has declined to give interviews until he assumes the top post in January.) Christian Frenes, a buy-side analyst at Citigroup Asset Management, an investor in ABB that is based in Stamford, Connecticut, reasons that Dormann has "eliminated many of the troubling issues dogging this company" and that "if they stick to their knitting, we are very confident that they can hit their growth and margin targets." Frenes goes so far as to suggest that ABB, after "years of mismanagement," has the potential to become one of the world's best engineering companies.
Such a fortuitous outcome -- though by no means assured -- would embellish Dormann's already iconic reputation while certifying Kindle as that rare wunderkind with staying power (see box, page 130).
WHEN JÜRGEN DORMANN MOVED up from CFO to CEO at Hoechst in 1994, the story goes that he delivered a "where we're headed" speech that put the company's 170,000 employees on notice that henceforth Hoechst would be less bureaucratic and more profit-driven -- in short, much more responsive to its put-upon shareholders. The German press promptly bestowed the nickname "Mr. Shareholder Value," and it stuck, because Dormann lived up to it at Hoechst and later at ABB.
The tall, thin, surprisingly soft-spoken executive is in some ways an improbable change agent, who has had to be unusually harsh, by European standards, in dismissing masses of employees. At Hoechst he eventually reduced the company's ranks by two thirds through layoffs and asset sales.
Born in Heidelberg to a well-to-do family, Dormann, in typical youthful German fashion, browsed through history, music and literature studies at universities in Basel, Berlin, Cologne and Würzburg. Eclectic curiosity remains one of his distinguishing traits. Dormann briefly considered majoring in physical education -- he was an accomplished long-distance runner and field hockey player -- but decided to earn a master's in economics at the University of Heidelberg. Now he exercises by hiking every weekend and swimming daily near his villa in the tony Zurich suburb of Küsnacht, where he lives with his wife of 40 years, Lisbeth. The couple have four children and seven grandchildren.
The cerebral Dormann likes to wade through sociology, economics and philosophy tomes on weekends. His favorite author is Goethe. He has a strong interest in ethics and is especially enamored of sociologist Max Weber and existentialist philosopher Karl Jaspers.
Dormann's old-line merchant family, whose roots in Bremen go back five generations, exemplified Weber's Protestant work ethic, and his mother's family of craftsmen and social democratic union members, based in the Rhineland-Palatinate, instilled in him a strong sense of duty.
After graduating from Heidelberg in 1963, the young economist signed on with Frankfurt-based Hoechst, Europe's largest chemicals producer, as a management trainee. He rose steadily through a succession of sales and marketing jobs and in 1980, at 40, was honored by being named the first nonchemist ever to head Hoechst's key corporate planning department. He decided that the company should expand aggressively in the world's biggest chemicals market, the U.S., where it had only a token presence.
Made chairman of American Hoechst Corp. in 1985, Dormann went on the next year to engineer the takeover of New Yorkbased Celanese Corp. for $2.8 billion. Renamed Hoechst Celanese Corp., the U.S. operation was soon contributing one quarter of Hoechst's worldwide sales. In 1987, Dormann was rewarded with the job of Hoechst CFO.
Well before he became CEO seven years later (upon the retirement of Wolfgang Hilger), Dormann concluded that Hoechst needed to slim down. By the time he took over, the company had bulked up to 180,000 employees, and it encompassed 120 businesses in 100 countries making products that ranged from cosmetics to copy machines. Performance was beginning to sag under the pressure: Hoechst's operating margin of 4.7 percent in 1994 was among the worst in its industry.
From the moment he took charge, Dormann zeroed in on Hoechst's highest-margin businesses and began to jettison the rest. In 1995 he arranged to hive off graphite manufacturer SGL Car-
bon to shareholders through a stock market listing -- the first deal of its kind in Germany -- raising more than Dm2 billion ($1.3 billion). Other divestitures followed, including the $2.7 billion sale of Trevira, a maker of polyester fibers and packaging resins to Mexican industrialist Isaac Saba and Wichita, Kansas based oil and chemical conglomerate, Koch Industries. Over six years Dormann disposed of chemicals businesses that had accounted for fully 75 percent of Hoechst's revenues, though only half of its profits.
Meanwhile, he emphasized the more promising areas of pharmaceuticals and genetic engineering of agricultural products, building them up through a series of strategic acquisitions -- most notably, the 1995 purchase of Dow Chemical Co.'s drug unit, Marion Merrell Dow, for $7.2 billion.
Less than a decade later, however, the company would abandon its life sciences thrust, selling the agricultural division to Bayer in 2002 for $6.7 billion. Dormann admitted that the political and economic hurdles to GM food were too daunting.
In an equally momentous but much more successful move, Dormann merged Hoechst with French drugmaker Rhône-Poulenc in 1999 to form a European pharmaceuticals powerhouse: Aventis. He became chairman of the management board -- effectively CEO -- and Rhône-Poulenc chief Jean-René Fourtou was named vice chairman. Dormann stepped down in March 2002, becoming nonexecutive chairman; Fourtou resigned from his management position at the same time and, along with Dormann, became a member of the supervisory board. Igor Landau, who had been head of Aventis's pharmaceutical operations, succeeded Dormann as CEO, but it turned out to be something of a temporary job. In April of this year, Aventis agreed to merge with France's Sanofi-Synthélabo to form Sanofi-Aventis. Landau, who had resisted the deal, was dismissed from his job in August by a new supervisory board and replaced by Gérard Le Fur, who in turn will be supplanted as CEO by Sanofi's current chief, Jean-François Dehecq. Dormann, who will be on the board of Sanofi-Aventis, grudgingly went along with the merger. He would have preferred that Aventis hook up with Novartis, because of the Swiss drugmaker's newer drugs and better U.S. distribution, but the French government drove off Novartis as a suitor by making it clear that a foreign bid for Aventis would be deemed contrary to the national interest.
All told, as CEO of Hoechst for five years and of Aventis for three, Dormann, through a combination of organic growth, takeovers and spin-offs, boosted net profits by 82 percent and more than tripled the value of the investments of the shareholders who were with him from day one as CEO. He engineered what many consider the most radical and successful corporate restructuring in German history. The New York Times pronounced it "breathtaking alchemy."
IF ALL CONTINUES TO GO WELL, ABB might just turn out be a bigger restructuring triumph for Dormann than Hoechst was. When he stepped in as CEO, the company had barely two months of liquidity left. How could so highly regarded an enterprise, a pillar of both the Swiss and Swedish economies, have found itself in such a predicament? Sometimes, just as it takes a forceful leader to clean up a horrific corporate mess, it can take a no-less-forceful leader to create that mess.
ABB's troubles can be traced back to the imperious reign of its first chief executive, the charismatic and indisputably brilliant Percy Barnevik. Holder of a Stanford University Ph.D. in business, he had come to the attention of Sweden's most prominent business family, the Wallenbergs, during a dazzling 11-year career at one of their companies, Sandvik. Barnevik had revitalized the North American operation of the metal alloys processor with brash U.S. management techniques and a hard-charging personal style that the Wallenbergs cannily concluded would be just right for shaking up another of their enterprises, the venerable but stodgy electrical engineering conglomerate Asea.
Designated Asea CEO in 1980, Bar-
nevik promptly dumped low-profit blast furnace and utility operations, slashed headquarters staff and emphasized power and automation operations. In eight years he jacked up sales fourfold and profits tenfold. Then in 1988 he put together an $18 billion merger between Asea and Switzerland's largest engineering group, BBC Brown Boveri, to form Asea Brown Boveri, or ABB. The deal joined two esteemed companies with histories that stretched back to the 19th century. Charles Brown and Walter Boveri were the first to transmit high-voltage AC power, in 1891; Asea basically carried out the electrification of Sweden in the early 1900s.
More -- many more -- mergers ensued. The Barnevik blueprint for endless growth through relentless acquisitions yielded breathtaking results. During his tenure as CEO of Asea and then ABB, from 1980 to 1996, he acquired more than 200 companies around the globe that did everything from basic engineering to writing insurance to structuring financial deals. ABB's revenues almost doubled, to $34.6 billion, while net profit more than tripled, to $1.2 billion, during his eight years at the controls. Investors clambered onto this gravy train: ABB's share price rose an average 19.8 percent annually.
Barnevik, never a modest, retiring sort, didn't discourage comparisons between himself and General Electric Co.'s fabled Jack Welch. In March 1991 he was described as "one of the luminaries of global business" by the Harvard Business Review in a glowing Q&A introduction. Gushed the magazine, "Barnevik is moving more aggressively than any CEO in Europe, perhaps in the world, to build the new model of competitive enterprise: an organization that combines global scale and world-class technology with deep roots in global markets."
The CEO of ABB told audiences of businesspeople and analysts that he was fashioning a "knowledge" company that could tap its core expertise in traditional areas to exploit new opportunities. Why not, he asked, capitalize on ABB's extensive experience with the risks of major engineering projects to, say, insure such ventures by others?
Barnevik had an undeniably sharp eye for deals, and for a while his model worked splendidly. Yet ABB grew ever more complex with each acquisition and every foray into a new business domain. By the mid-1990s the company had 215,000 employees in 1,400 "profit centers" scattered all over the globe. These were supposed to fit neatly into what the company described as a matrix of parallel local and global chains of command. In truth, ABB's organizational structure verged on chaos; operations became harder and harder to audit and control. "It was a disaster waiting to happen," says ViroPharma CEO de Rosen, who was not yet a member of ABB's board.
In October 1996, Barnevik, who had turned 55, stepped down from the CEO job to run the formidable Wallenberg investment company, Investor AB. He did, however, stay on at ABB in more than spirit in the role of chairman. The CEO position went to the company's power distribution chief, Goran Lindahl, who was an electrical engineer by training but was considered a gifted marketer. "My priority is to promote the top line; then the bottom line will also grow -- sell, sell, sell," he told a reporter after a short spell in the job. Whatever merchandising skills Lindahl possessed, he was no master juggler on the order of Barnevik, who had been able to keep hundreds of companies in the air simultaneously. No sooner had Lindahl settled into the CEO suite of ABB's five-story headquarters in Oerlikon than the 1997 Asia crisis broke upon the company.
ABB had eagerly bid on virtually every gargantuan Asian power project to come down the pike. By early 1997 some 25 percent of the company's $35 billion in sales were emanating from Asia, compared with 15 percent seven years earlier. Along with supplying eight giant generators for China's Three Gorges Dam, ABB had entered into a $5 billion contract, its largest ever, to construct a 2,400-megawatt power plant and transmission system at Bakun in the Malaysian state of Sarawak on the north coast of Borneo. The Asian financial crisis delayed or scaled back many of the region's big projects, and some were canceled outright. One such was the privately financed Bakun hydroelectric complex.
The Asian setbacks, as well as the pall that the widening crisis cast over the rest of ABB's markets, including Eastern Europe and Latin America, prompted the company to take an $886 million restructuring charge in 1997. Profits tumbled 54 percent, to $572 million.
Meanwhile, Eastern Europe, where Barnevik had expanded aggressively after the Berlin Wall fell, was turning out to be much less of a bonanza than he had imagined it would be. Electricity demand cratered as decrepit industries closed or restructured. Currency devaluations, state-imposed caps on utility charges and political roadblocks that stalled projects undermined ABB's local revenue growth and pinched its margins.
Instead of addressing the unfolding crisis, the CEO tried to transform the engineering firm into a New Economy enterprise by investing lavishly in e-commerce software and setting up Internet-based systems to let ABB's clients evaluate, select and order its products online. Lindahl insisted that these initiatives would be the moneymakers of the future. Today they have all been scaled back, sold or shut down.
Investors were becoming alarmed. Martin Ebner, the sui generis Swiss corporate raider, started agitating for a wholesale shake-up of ABB. As the holder of 9.7 percent of the company, he was able to install Dormann on the ABB board in 1998. Nevertheless, the company's most influential shareholder, the Wallenberg family, protected Lindahl from the mounting ire of major investors. The family believed that by defending the CEO, it could stave off Ebner or another brash acquirer and prevent the breakup of ABB. Through an alliance with Swiss billionaire Stephan Schmidheiny, the Wallenbergs exercised control of ABB through a convoluted ownership structure that involved two holding companies and four classes of shares with unequal voting rights. Under pressure from Ebner, this system was scrapped in June 1999; the holding companies were merged into ABB, and new shares with equal voting rights replaced the old stock. Even so, the family continued to exercise inordinate influence at ABB since the family holding company's chairman, Barnevik, was also chairman at ABB.
"We had already begun refocusing this company when Barnevik was chairman and Lindahl was chief executive," Jacob Wallenberg tells Institutional Investor. An ABB board member and vice chairman of his family investment company, Wallenberg cites as proof the sale of ABB's sluggish power-generation and railroad-engineering businesses in 1999 and 2000, respectively. "ABB never faced fundamental problems," he insists. "It was mainly a liquidity crisis brought on by a slowing economy, a collapsing stock market, a poorly timed share buyback and the asbestos lawsuit that forced the management shake-up and an acceleration of the company's restructuring."
In January 2001, Barnevik, aware that profits were proceeding pell-mell toward a cliff, replaced Lindahl with Jorgen Centerman, 48, a career ABB employee who had been running the automation engineering division.
By late 2001 the company was well on its way to reporting a loss of nearly three quarters of a billion dollars. The crack in the dam was now too wide for even the Wallenbergs to ignore. With the family's grudging concurrence, the ABB board pushed out Barnevik that November and, ten months later, in September 2002, Centerman.
ABB's rattled board asked Dormann, who had stepped in as chairman after Barnevik's ouster, to succeed Centerman as CEO. It didn't take all that much persuading to get Dormann to take the job. As he explained at the time, "The way I was raised and trained, you don't run away from a challenge."
A company capable of machine-
tooling parts to fit together within millimicrons had finally found a round peg for a round hole. "Dormann immediately instilled an atmosphere of focus and serenity," says board member de Rosen. As a veteran restructurer, Dormann understood the urgency of the situation. ABB was close to broke. Within three months of accepting the job, Dormann, working closely with CFO Voser, had arranged a $1.5 billion emergency credit facility from Barclays Capital, Citigroup, Credit Suisse First Boston and HVB Group. The terms were harsh: For the first time in its history, ABB had to put up collateral, pledging assets worth $3.5 billion.
Still, the money gave ABB precious breathing room. At the same time, Dormann began unloading money-losing divisions. Out went oil- and gas-field engineering and Swiss building engineering, then, with a great heave, there followed insurance and structured finance. Since November 2002, ABB has gotten rid of ten major businesses, bringing in almost $4 billion.
Those funds have further bolstered the company's once-parlous financial condition. It's a measure of ABB's improved prospects that in December of last year it was able to sell shareholders on a $2.5 billion rights issue. Although the deal doubled the company's outstanding shares, it hardly dented the stock price. The rights issue was combined, moreover, with a E650 million ($777 million) Eurobond and a fresh, unsecured credit facility from the same banks, this time for $1 billion. Gratifyingly, ABB got away with paying bond investors the kind of rates usually reserved for investment-grade companies.
Standard & Poor's rates ABB a notch below investment caliber and assigns it a "positive outlook." The company's total debt has declined from $7.9 billion before the December rights issue to a more manageable $6.2 billion. ABB now has three times the cash it needs to cover the $1.6 billion of debt coming due this year -- quite a contrast to the situation just two years ago when it had no cash and faced $4.7 billion of expiring debt.
The divestiture spree leaves ABB with two, as opposed to nine, core divisions. In power technologies, based at headquarters in Oerlikon, the emphasis is now on power transmission equipment -- the cables and transformers and towers that shunt electricity around for utilities and companies. The power side accounts for 41 percent of ABB's sales. The automation technologies division, headquartered in Norwalk, Connecticut, makes drives, motors, assembly lines and robots for every conceivable industry and hauls in 54 percent of ABB's revenues. The remaining 5 percent of the company's sales come from the few remaining operations that Dormann has on the block, notably its German construction unit and petrochemical engineering.
ABB has forecast sales growth of more than 5.3 percent for automation and more than 3.3 percent for power for both 2004 and 2005. Hitting these numbers, however, will necessarily involve amassing share in their currently torpid markets, which are expected to grow less than 3 percent annually over the next two years, according to ABB's own reckoning.
Simultaneously, Dormann has set stiff margin targets for the two divisions. By the end of 2005, he vows, the power division will be registering an operating margin of 10 percent, or 4 percentage points better than the power business of its closest competitor, Siemens. For automation, the goal is 10.7 percent, which compares with an industry average of about 11 percent. Don't put too much stock in such comparisons, however: A number of the costs, such as research expenses, that other companies book at the division level are recorded at ABB in an unusual corporate cost center, somewhat skewing operating margins upward.
That said, at the end of this year's first half, margins for power and automation were 7.4 percent and 9.1 percent, respectively. These margins are under pressure from low-cost Japanese automaters like robotics expert Fanuc and U.S. power-equipment exporters such as Honeywell and Emerson Electric Co., which have been reaping the rewards of a cheap dollar. One margin booster for ABB: Power and automation factories, which once produced the full range of goods in their sectors, now specialize, making for more efficient manufacturing.
Some investors are dubious about Dormann's ambitious goal of increasing both market share and margins. "Usually, you've got to sacrifice margins as you seek to expand your business, or accept lower growth as you selectively choose deals that can help your margins expand," suggests Christoph Niesel, who runs the E1.2 billion Europa fund at Frankfurt's Union Investment. "I don't see how ABB can achieve one target without sacrificing the other."
Dormann is unfazed by the skeptics. "First-half results show that we are on track to hit our targets," he maintains. "In the first half we showed significant growth in all markets." He adds that ABB still has "sufficient unnecessary complexity" to permit cost reductions and thus "help us drive our margins up at the same time that we increase sales." Automation's first-half margins are up one fifth from 7.5 percent for the same period a year ago. Power's margins, however, have slipped a few basis points.
Increasing both sales and margins is a neat trick at the best of times, but ABB's CEO believes that it can be done creatively. "I've simplified the corporate structure to make people more accountable and to put us on the path toward hitting our margin targets by encouraging people from the bottom up to talk about how they can increase efficiency and bring down expenses," he explains.
The CEO's cost-cutting scheme has been codified in the Step Change program. (Dormann chose the name because it describes picking up the pace during a hike.) Overseen by Gary Steel, head of human resources, Step Change asks employees to identify overlaps, unnecessary costs and other inefficiencies in their
areas. "We have a total of more than 1,490 projects that have already saved us $900 million in expenses and synergies, and more will be coming through," boasts Steel. Step Change has produced such initiatives as outsourcing many technology needs to IBM Corp., getting rid of desktop computers at ABB's Swedish headquarters (someone pointed out that everyone used laptops) and closing the executive committee's dining room, at a saving of $280,000 a year.
Other costs are proving more intractable. Take the $400 million in annual expenses for ABB's corporate cost center. In mid-July the center was being used as an all-purpose ledger to contain certain expenses for ABB's loss-making petrochemical engineering operations -- the oil-field engineering end of which was sold to a consortium of private equity investors, including Candover Partners, 3i and JPMorgan Partners, for $925 million last October, though the deal wasn't consummated until July 12. The center also holds ABB's remaining German construction operations, which are still on the block.
ABB has pledged to slash these costs to $130 million by 2005. "It will be mostly in 2005 when we get the cut in corporate costs," CFO Voser conceded to II before he bolted for Royal Dutch/Shell. "We have to finish our disposal program before we can do the detailed homework to take costs out on this level."
Nudging up margins and market share simultaneously may well prove critical to ABB. Otherwise, Dormann and Kindle could find that they have to sell one of the company's prize divisions. At least, that's the scenario put forth by raider Gardell. He asserts that "in a sluggish global economy characterized by sharp competition, the way to create shareholder value from here on out at ABB is to split it into two companies, one focused on power and one focused on automation, in preparation for a sale."
Gardell says that he contemplated investing in ABB and pressuring it to do a spin-off a little more than a year ago, when the company's market capitalization was Sf6.9 billion. Today it's Sf15.9 billion, making an unfriendly approach too risky, he adds. Nonetheless, he calculates that if ABB disposed of its automation division and focused purely on power, it could be worth Sf11.00 a share, or 43 percent more than at present.
Dormann dismisses selling automation as an idea that "doesn't make any economic sense." He explains that "with the technology we have and our market position, we can grow faster than the competition in both our businesses, providing more long-term shareholder value than an unnecessary, culturally disruptive sell-off." Nevertheless, he says, beyond the next three to five years, "who can say what is possible?"
Following a hard act
ABB's CEO-designate, Fred Kindle, 45, was born and raised in Liechtenstein, where his father was a corporate executive. He excelled at the Swiss Federal Institute of Technology in Zurich, and after graduating in 1984 he returned home and landed a job with the principality's premier construction company, Hilti Corp. But Kindle felt a bit confined in cramped Liechtenstein and left after two years to pick up an MBA from the Kellogg School of Management at Northwestern University. From Chicago it was on to Zurich to work for McKinsey & Co., advising the consulting firm's construction and engineering clients for four years before being hired by one of them -- Sulzer -- to head marketing for a key subsidiary making equipment for the petrochemicals and plastics industries.
Historically a maker of pumps and turbines and long a symbol of Swiss engineering excellence, Sulzer went overboard on diversification in the 1990s, becoming a supplier of everything from specialized textile machines to hip-replacement parts. The idea was to offset the wrenching business cycle in engineering. But it was too much too fast. The inevitable mess, postbubble, got dumped into Kindle's lap: He was promoted from chief of Sulzer's industrial engineering subsidiaries to CEO in February 2001 to handle the cleanup.
He promptly shed four peripheral businesses, including the group's troublesome prosthetics operation, Sulzer Medica, which was spun off to shareholders in July 2001. To accomplish this Kindle and the subsidiary's CEO had to negotiate a $725 million settlement to lawsuits over defective artificial limbs built well before Kindle's tenure as Sulzer CEO; the spin-off covered most of the cost of the claims.
Kindle slashed Sulzer's costs by 40 percent, all the while fending off a hostile bid by Swiss corporate raider René Braginsky. Last year the company made a profit of Sf41 million ($33.1 million), compared with a paltry Sf2 million in 2001.
For the ABB job, Kindle beat out 50 other candidates recruited by headhunter Egon Zehnder; insiders make it clear that he was the personal choice of ABB chairman and CEO Jürgen Dormann.
"What ABB needs is much less a high-profile visionary than a quiet, hardworking guy like Kindle who won't clash with Dormann but who won't flinch if further restructuring is necessary," says Braginsky, who sold his roughly 20 percent stake in Sulzer soon after his bid to take the company over failed in 2001. "Kindle is a low-key team player who achieved much of what we wanted to do at Sulzer, and he may prove the perfect complement to a chairman like Dormann who wants to distance himself from the business while still keeping a hand in."
What will Kindle do at ABB? He has refused to give interviews until he formally becomes CEO this January. But the short and sweet answer to that question is this: whatever is necessary to restore the company to robust health -- just as he did with Sulzer. -- D.L.
ABB's asbestos headache
Packed away behind walls, ceilings and pipe casings, cancer-causing asbestos insulation was an invisible killer. For ABB, asbestos posed another hidden danger.
In 1989, when the company's then-CEO, Percy Barnevik, announced that ABB was acquiring Stamford, Connecticutbased power-plant builder Combustion Engineering, the economic rationale was clear-cut. The $1.6 billion deal gave ABB a major presence in the world's largest power market. Combustion Engineering's potential liabilities from workers exposed to asbestos at its plants were dismissed as minor and immaterial.
Combustion Engineering had stopped using the fireproof magnesium silicate substance as power-plant insulation in the late 1960s, well before asbestos had been proved to be a carcinogen. Barnevik and Combustion Engineering CEO Charles Hugel reasoned that this would limit the liability. In any case, ABB and Combustion Engineering, and the remainder of the power industry, felt that if any of the handful of asbestos lawsuits prevailed in court, they would be covered by standard liability insurance.
Those assumptions turned out to be off by several billion dollars: Claims vastly exceeded liability coverage ceilings. By late 2002 asbestos liabilities were threatening to bankrupt Combustion Engineering's parent, ABB. Analysts and investors became aware of the full scope of the asbestos problem when ABB listed its shares on the New York Stock Exchange in 2001 and revealed in a 20-F filing that it had set aside a reserve of $430 million to cover asbestos claims and related defense costs -- with no guarantee that it would get back any of the money from insurers.
At the time, ABB was facing 90,000 asbestos claims in American courts. Almost all were by former plant workers. Although ABB had sold Combustion Engineering's power-generation equipment to France's Alstom in 2000 for $1.2 billion, the asbestos liabilities remained with ABB's Stamford subsidiary, which amounted at this point to a mere corporate shell holding $800 million in real estate.
ABB shares, which had peaked at Sf43.24 ($26.10) in February 2000, went into a slow slide that turned into a steep plunge on October 22, 2002. That was the day after ABB disclosed that the mounting pile of reserves it had set aside to cover claims and legal expenses -- $940 million at that stage -- would not be nearly enough. With $4.7 billion of loans for past acquisitions coming due imminently, ABB found itself with no cash to spare, setting off a liquidity crisis. Investors feared the claims and the debt together would bankrupt the company. On that bleak October day, ABB's share price plummeted 62 percent, to Sf2.05, and ended the month at an all-time low of Sf1.61.
Since then ABB's stock has risen nearly fivefold, bolstered by recovering earnings, a new financing package and -- not least -- an innovative prepackaged bankruptcy plan for Combustion Engineering. It seeks to cap ABB's asbestos liabilities at $1.3 billion.
Developed by U.S. class-action lawyer Joseph Rose of tobacco settlement fame, the ABB deal was announced in January 2003 and approved by the U.S. District Court of New Jersey in Newark in July of that year. It creates a trust overseen by three court-appointed administrators to assume Combustion Engineering's present and future asbestos liabilities. This permits ABB to put its ill-fated subsidiary into bankruptcy and, in theory, to shield itself from further asbestos claims. ABB is funding the trust with Combustion Engineering's real estate plus $350 million in cash and approximately $150 million in ABB stock. More than 90 percent of the claimants have agreed to the terms.
But opponents say the settlement raises issues of fairness. By cutting off claimants' access to ABB's cash and assets, they say, it is inequitable to workers who may develop asbestos-related health problems in the future (even though the trust makes provision for eventual claims). A group of 280 claimants challenged the district court's approval of the settlement. They were joined by a number of insurance companies (not just Combustion Engineering's), which fear that the unusual settlement might set a precedent for other asbestos cases, leaving them on the hook for claims indefinitely.
In June the federal Third Circuit Court of Appeals in Philadelphia heard the appeal; its ruling is expected this fall. If the court affirms the settlement and the accompanying prepackaged bankruptcy -- as most observers expect -- the plaintiffs are likely to try to take their case to the Supreme Court. The highest U.S. court might just be intrigued by the legally and socially fraught issue of whether corporations can handle asbestos claims by establishing a trust in a prepackaged bankruptcy.
Were the settlement ultimately to be thrown out, ABB might again face open-ended asbestos liabilities. But the threat to its solvency wouldn't be nearly as grave as in 2002. Having refinanced its debt and completed a $2.5 billion rights issue, the company has three times the cash it needs to cover its $1.6 billion of debt due this year. Subtracting that debt payment plus some $1 billion for reinvestment in the business leaves roughly $2 billion in cash to meet what analysts estimate to be about $150 million to $200 million in annual asbestos claims.
"With the magnitude of future asbestos claims unknown, it's impossible to definitively say that the company's solvency couldn't be threatened again by suits, but it is a long shot," says London-based UBS capital goods analyst Michael Hagmann. Analysts speculate that a total rejection of ABB's plan by the appeals court would result in only a 10 to 15 percent drop in the company's stock price.
By the same token, if the circuit court approves the plan and the Supreme Court turns down a further appeal, investors shouldn't anticipate a big jump in ABB's share price. As Hagmann notes, "Most of the good news has already been factored in." -- D.L.