Siemens could be candidate for Terminator treatment

Anybody who has seen the Terminator films will recall Arnold Scharzenegger’s catch phrase: “I’ll be back.” It would not be entirely surprising if Klaus Kleinfeld, the Siemens chief executive who has just been pushed out in an unseemly boardroom coup, could be thinking of uttering the same words.

After all, there could hardly be a better candidate for a big private equity firm to recruit to help mount a takeover of the German engineering conglomerate, which now seems ripe for such a move. Mr Kleinfeld has a good track record as a manager and clearly knows how much Siemens is really worth.

This is a perfect combination for a private equity group that could tempt Mr Kleinfeld with a juicy incentives package to join its ranks and take a stab at his old company. Heinz-Joachin Neuburger, the former Siemens chief financial officer, has already made the jump after losing out to Mr Kleinfeld for the top Siemens job and last year joined the original barbarians, KKR.

As for Siemens itself, it is fast turning into an ideal target for private equity and activist investors. The engineering giant is in a state of transition. It used to be a family controlled company, but the Siemens family shares have long been diluted, especially after the company embraced more Anglo-Saxon standards by scrapping the family’s multiple voting rights.

But it has not altogether completed the transition from family and German bank control to control by institutional shareholders. So who is in control? Clearly at the moment it is the supervisory board. In Germany such boards are split between representatives of shareholders and labour. On the capital side at least, these directors should be accountable to shareholders.

Yet recent events at Siemens suggest that some of these directors, all members of the same close club of German capitalism, have not been acting in the interests of all shareholders. This provokes all sorts of conflicts of interest. This is not only the case with the decision to sack Mr Kleinfeld, a chief executive respected by investors and the capital markets, but the subsequent attempt to poach a replacement from another blue chip company – in this case Linde – that can hardly afford to lose the manager who engineered and is now needed to integrate a transformational acquisition.

There could be no better cameo of what is wrong with German boards. Manfred Schneider, the Linde supervisory board chairman, sits on the Siemens board. There he supported Gerhard Cromme, the new Siemens chairman, and Josef Ackermann, the Deutsche Bank head, in their successful efforts to oust Mr Kleinfeld. But he is now blocking their attempt to recruit Wolfgang Reitzle, Linde’s chief executive.

The trouble is that this sort of behaviour will continue until activist investors start shaking up German boards.

This is why Mr Kleinfeld could be back – especially if the Siemens supervisory board fails to fix the problems it has created and fails to provide sound strategic guidance to investors. With private equity backing he could take over his old company, break it up and take it private. Fanciful as this may appear, the Siemens board richly deserves such Terminator treatment.

Health warning

As they rush around the country gathering votes in the final days of the French presidential election campaign, Nicolas Sarkozy and Ségolène Royal may be more concerned with their own health than the state of the domestic pharmaceuticals sector. But on their travels, they could do worse than study the “G5 agenda”.

The wish list from the G5, an informal club of the country’s five leading drug producers, deserves a hearing if only because it represents one of France’s – and Europe’s – most important innovative industries, with significant economic clout. That influence is under threat.

Many of their demands are sensible, including calls for greater investment and co-ordination in medical research, and a clearer strategy on national health priorities and how best to meet them. So are calls for better uptake of innovative medicines.

Protectionist ideas, such as guaranteeing the “sanitary independence” of France through national drug stockpiles and preferential access to national research by national companies, may be less necessary or desirable. Using the industry as a “tool in the service of French diplomacy” sounds troubling. Demands to place the health system under “real political control” risk subsuming to commercial lobbying what should be technical assessments of the clinical and cost-effectiveness of new drugs, whether to buy them and at what price.

Missing is the need for redoubled efforts to remove outdated or questionable medical therapies from reimbursement and to further discount the price of generic drugs relative to more innovative patented ones. But if France wants to maintain its leading role in global pharmaceuticals, the debate needs to be

Tricky call

The Indian regulator’s decision, expected today, on whether to allow Vodafone’s purchase of a controlling stake in Hutchison Essar to go ahead is a big one, for the British mobile phone company and for India. But Vodafone shareholders are right not to get jittery about the outcome, despite the risk that the original deal – the success of which depends on some aggressive forecasts of market share and margin improvement – may be adjusted.

The Indian watchdog has a delicate task. Even if it recommends waving the deal through unaltered, it could be accused of weakening foreign investment rules, because on some interpretations the purchase would breach limits on foreign ownership.

But even conditional approval would not significantly undermine Vodafone’s financial rationale for the transaction. The worst outcome for Vodafone would set aside the 15 per cent stake in Hutchison Essar held indirectly by Indian nationals and leave the UK with an economic interest in India’s fourth-largest mobile operator of 52 per cent, rather than the 67 per cent originally agreed.

Given the enthusiasm with which the British company has talked about its prospects in India, that would be annoying, but it would not upset the arithmetic of the deal. Vodafone would have a smaller stake in the potential growth of the market, but it would have spent less for it than the $11.1bn it agreed in February. The risk of being forced to pay much more to acquire the bulk of the indirectly-held stake remains low.

In theory, the portion would cost $3bn in the open market – as rivals have mischievously underlined – but Vodafone’s agreement to buy the Indians out for $430m reflects the fact that the stake is held, messily, through unlisted and indebted companies, with limited economic rights. All this should become clear today, assuming the regulator’s decision is not deferred again. But if it is anything less than approval, Vodafone should not rely on the Indian authorities to explain it. Its investors deserve a clear and unvarnished guide to the implications of whatever is proposed, direct from the company.

Jitters at Posco

Posco is scurrying to secure friendly shareholders, approaching domestic institutional investors as well as its customers. It agreed to swap a stake with Hyundai Mipo Dockyard and has asked Woori Bank and Nonghyup to buy some of its own shares.

The moves suggest the South Korean steelmaker is nervous about a potential hostile takeover threat, following a wave of consolidation in the global steel industry, which saw Mittal Steel’s takeover of Arcelor and Tata Steel’s acquisition of Corus. Posco’s concern is understandable, as the company’s strong price competitiveness certainly makes it an attractive acquisition target. The absence of a controlling shareholder and dominant foreign share ownership reaching 60 per cent could also make the company an easy target for a hostile bid. So the company could feel a stronger need for local friendly shareholders, especially after Carl Icahn’s $10bn indicative bid for a local cigarette producer, KT&G, last year.

But some say Posco is overreacting to an unrealised M&A threat. Arcelor Mittal, the world’s largest steelmaker, made it clear that it was not interested in taking over Posco. There has been no strategic or financial investor who has hinted at an intention to acquire the company.

Rather than spending millions of dollars on pre-emptive measures to bolster its defences, critics say, the company had better invest some of its strong cash flow in developing new growth drivers, as it is still susceptible to a steel price cycle. It may also consider some shareholder-friendly measures such as increasing dividend and buying back shares, if it is serious about winning shareholder support for management.

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