Friday, April 9, 2010

Siemens Confessing to Bribes Proves Blessing to Shareholders in CFO's View


Joe Kaeser was six months into his new job as chief financial officer of Siemens AG in November 2006, and already, he had a list of accomplishments to show for it.

The executive had helped to arrange a joint venture between Siemens and Nokia Oyj that combined their telecommunications- network units, guided Siemens in completing its largest U.S. bond offering and converted the company’s financial statements to international standards.

What Kaeser, 52, a Siemens employee for his whole working life, didn’t know was that he was about to face his toughest challenge yet, Bloomberg Markets reports in its May 2010 issue. On Nov. 15, 2006, police raided Munich-based Siemens’s corporate offices as part of a probe into alleged bribery and kickbacks that would eventually spread to 12 countries. Chief Executive Officer Klaus Kleinfeld stepped down in 2007 after the company’s board indicated it wouldn’t renew his contract. He wasn’t charged with wrongdoing.

Siemens, a manufacturing bellwether whose products range from power turbines to medical scanners and whose operations span the globe, ended up pleading guilty to violating provisions of the U.S. Foreign Corrupt Practices Act and paying $1.6 billion in fines to U.S. and German regulators.

‘Dark Chapter’

Kaeser was never charged with wrongdoing. As a member of Siemens’s management, he was initially under suspicion, he says. After an independent investigation conducted on behalf of the Siemens audit committee found he had no involvement in the scheme, he was able to help review and fix the company’s books going back to 1999.

“That was quite a rough time,” Kaeser said in a Feb. 9 interview at the company’s New York office.

“It was a very dark chapter of Siemens history,” he says. “Looking back now, I probably would feel compelled to say it was a blessing for Siemens that it got caught then and that this company had the opportunity and the chance to turn everything around and close that one for good.”

Shareholders approved a settlement between the company and nine former executives in connection with the probe in January. Under the deal, the executives, including former CEO Kleinfeld, would pay the company damages for failing to halt a culture of using bribes in order to win contracts, largely ending the ordeal for Siemens. Two former managers are scheduled to stand trial in a Munich court next week over allegations of breach of trust and aiding bribery.

Kaeser’s challenge now is to bolster profits at the company as the global economy recovers from the worst recession since the Great Depression.

Revamp Under Loescher

Bavarian-born Kaeser, who joined Siemens in 1980 in the company’s components group, works closely with CEO Peter Loescher, a former Merck & Co. manager who became the first outsider to head Siemens when he was hired in 2007 following Kleinfeld’s departure. Loescher, 52, changed Siemens’s structure to focus on three main divisions -- industrial, health care and energy -- and replaced half of the company’s top 100 executives.

The restructuring reduced costs, enabling the company to increase so-called sector profit, or pretax operating earnings, at the three units in fiscal 2009, although revenue and orders fell amid the downturn. “That actually would suggest that the moment our business recovers and grows, we will get a lot of incremental margin dropping to the bottom line,” Kaeser says.

Siemens’ shares have benefited as the cost-cutting moves helped to bolster profits. The company’s stock climbed 71 percent in the 12 months ended April 7 to 75.06 euros, outpacing the 44 percent gain in Germany’s DAX index in the same period.

Signs of Recovery

Kaeser says he’s uncertain about when a sustained recovery will take place, particularly in manufacturing. “There are signs of hope, but there is no consistent picture of what the industrial world will do going forward,” he says.

Siemens executives were similarly cautious even after announcing that profits exceeded analysts’ expectations for the first three months of fiscal 2010. The company affirmed its guidance for sector profit from the three main divisions of 6 billion euros ($8.2 billion) to 6.5 billion euros for the full fiscal year, which will end on Sept. 30.

Kaeser said in February that Siemens may revise its profit targets when it releases results for the second quarter, at which time the outlook for the company’s industrial businesses may be clearer. He says Siemens expected to learn more about customer demand at the Hannover Messe, an international trade fair being held in Hanover, Germany, from April 19-23.

“We do expect that we’ll get a lot of insight on what our important customers are going to do, are going to intend in the next 12 to 18 months,” Kaeser says. Siemens will announce its earnings for the March quarter on April 29.

Return to Growth

Even if demand picks up this year, Kaeser says it’s unlikely that revenue will return to pre-recession levels anytime soon. “Our viewpoint of our global business is that it takes years until we are back up at levels of 2008, where we came from -- probably 2011, if not 2012,” he says.

When growth does resume, Kaeser says, the geographical mix will be different, driven by demand from China, India and Brazil rather than Europe and the U.S., as in the past. Siemens is addressing this changing reality by reviewing its operations and workforce.

In January, Siemens announced about 2,000 job cuts in Germany, where it started its business 163 years ago.

“This is in the industrial area, drive technologies as well as industrial solutions, where we know that it ain’t coming back,” Kaeser says. “And if it comes back, it’s going to be in India or China.”

More Cuts

Siemens in March said it would eliminate an additional 4,200 positions at its SIS computer-services division. The reductions come on top of more than 20,000 job cuts last year, which trimmed the company’s global head count to about 402,000. A third of that total is in Germany.

Kaeser says Loescher’s changes in 2007 helped the company weather the downturn but that long-held policies also played a part. These include never using short-term financing to fund long-term assets, a strategy that shielded the company when money markets froze in 2008. Most of its 15.8 billion euros of long-term debt matures in 2014 and beyond, according to data compiled by Bloomberg.

“We’ve always been extremely stable and rigid on that matter, and it paid off massively,” Kaeser says.

Euro Zone

Siemens has no bonds due this year. In 2011, two issues totaling 3.55 billion euros will mature, according to Bloomberg data.

Kaeser also credits European monetary union with helping to keep the region together during the financial crisis.

“I feel very positive about it because if you hadn’t had the euro in the last 18 to 24 months, it would have been a big challenge for European leaders to keep everyone together,” he says.

With credit markets now stable, Kaeser says the company may choose to refinance some debt this year while rates are low rather than risk a rise in borrowing costs in 2011. “I don’t want to be caught flat-footed a year from now with fiscal or monetary actions that negatively affect our company,” he says.