ABB: Centerman out - Dormann pushes re-structure

Last week, (just after I had clicked the latest eNews out into cyberspace) ABB surprised everyone when it replaced CEO Joergen Centerman with Chairman Juergen Dormann. Why Centerman made an abrupt departure was not disclosed - Dormann insisted that the reasons were "pretty complex". One ABB insider shrugged, "The Swedish social-experiment called ABB has failed. I still wince at the thought of all the management-concept discussions that we had to suffer through."

ABB is still in the throes of a restructuring phase which is expected to cost $ 500 million and was started last year. This has cut 12,000 jobs and supposedly streamlined operations, aiming to give the company a consumer-oriented strategy. The revamping was expected to be finished in December.

Under Dormann, ABB's disposal/restructuring program will pick up speed. For years ABB has tried to help their products & services by providing financing (to customers who don't have the capital), while also doing a value-add based on that financing. When a sizable order was placed with ABB, the typical follow-up question was, "would you like financing with that?" (ala the McDonald's mantra; "would you like fries with that?").

But ABB is NOT a bank, and over the past few years they've clearly demonstrated this by losing their shirts. Also, auditors are beginning to look more closely at "creative financing packages".

Jurgen Dormann has a long and successful history of shedding non-core business elements. ABB's financing arm fit this category, so it was sold to GE for $2.3b as part of an effort to shrink the hole in the ABB balance sheet; the cash inflow will reduce debt of $5.2b to $ 2.9b. Next up will be the Oil, Gas & PetroChem business.

Mr. Dormann said the company is on track to dispose of its Building Systems unit and real estate in Switzerland. But ABB isn't considering selling any large units or even whole divisions in addition to that.

Pinto Point: Centerman was always in over his head and he couldn't pull off the turn-around that was expected. The general impression is that Dormann is straight forward and very results-oriented. He'll quickly get rid of ABB's old matrix structure and Byzantine-like organization. The management survivors had better get their acts together, and fast - or Dormann will eat them for lunch.

ABB surprised everyone last week by posting a loss of $13 million for Q2, prompting a 23% fall in its stock price. Profits for 6-months fell to $ 101m from $266m for the year-earlier period. First-half sales declined to $10.9b from $11.1b and orders fell to $11.9b from $12.6b a year earlier. Profit dropped 41% to $368m from $626m. Debt rose sharply, to $5.2b, from $4.1b at the beginning of the year.

ABB averted a financial crisis earlier this year and has suffered a series of embarrassments surrounding current and former top executives and their pay. It said today that the loss was caused in part because of cost overruns at two projects in its oil, gas and petrochemicals division that it did not identify.

Much of the problem was traceable to asbestos-related litigation in the US, stemming from industrial boilers made in the 1970's by Combustion Engineering. ABB bought CE and then sold it, but retained responsibility for the liabilities. Asbestos claims against the company rose 10 percent in the quarter, raising concerns that ABB will have to add to its reserves.

ABB CEO Jörgen Centerman has been struggling to restore confidence. He insisted that if you look at the underlying performance, nearly every single parameter is moving in the right direction. Positive signs included 10% increase of new orders, and 8% rebound in sales from Q1. Mr. Centerman said the second half of the year was looking stronger; earlier this week, ABB landed a $1b Russian order.

Over the last year, ABB has eliminated 10,900 jobs, at a cost of $106m. Like Invensys, ABB expects asset sales to help meet its target for reducing debt. The financial unit has reportedly been sold.

The process control parts & pieces ABB acquired (Bailey, AccuRay) continue to decline. ABB is still suffering from the legacy of unsolved Elsag-Bailey problems, such as the acquisition of Hartman & Braun. Rumors are rife about some product lines or segments of Bailey and others being on the block - but it's too early to tell whether this still only second-guessing.

Good luck, Jorgen Centermann! In these trying times, you'll need it!

ABB had their Annual General Meeting on March 12, 02, with a review of past sins and outline of strategy for the year. Following are highlights:

New chairman Juergen Dormann said that ABB needs to concentrate on its core businesses of automation and energy, and will sell non-core assets.

Dormann insisted that there had clearly been too much power in the hands of one man (Chairman Percy Barnevik) for too long. "Barnevik knew the company like his trouser pocket. He could keep the parts together and aim it towards the goals. After Barnevik became chairman at the end of 1996, making Goeran Lindahl the CEO, the company lost its bearings. Lindahl's drive to make ABB into a 'knowledge' group had confused many ABB employees and was a mistake."

Dormann noted that ABB had lost its focus and market value had fallen by a third in two years to $10 billion. He said, "That means that we have to clear up our portfolio of activities, to find alliances for specific areas of business, or to sell activities that are not core. Our message is simple. We have to concentrate on our real and only core competence, that is energy and automation technology."

Pinto comments:

The latest victim of Enronitis may be ABB, now in the midst of an ugly public dispute with ex-CEO and Chairman Percy Barnevik, once considered the Jack Welch of Europe. ABB's board of directors said it would press Barnevik to pay back some of the $80 million pension benefits he received after his resignation as CEO in 1996 (he stayed on as chairman until 2001). ABB is also pushing Goran Lindahl, Barnevik's successor who stepped down as CEO in 2000, to pay back some benefits.

After several quarters of disappointing performance, problems seem to be piling up at ABB. The company had once prided itself on using US-style multi-nationalism to become a model European business. This past week (Feb. 13 2002), a top-level feud became public, even as ABB announced an additional $1.4b in write-downs after taking a charge of nearly $500m just a few months ago.

Percy Barnevik is respected for having brought ASEA and Brown Boveri together in '87-'88 and then nearly doubling the combined business of the two, with share price rising over 20% per year during his eight years as CEO. However, since he moved to Chairman in '97 and gave up the CEO role, ABB has been on a downward slide. Over the past 18 months, ABB shares collapsed more than 80% and debt climbed sharply (now $11.7 billion), increasing $4.3 billion in the past three quarters alone. This caused Barnevik to go from near-hero status to being viewed as the ABB destroyer; now he has quit and his company is really in a mess.

ABB has deep-rooted problems. (See ABB blahs - JimPinto.com eNews Feb. 21, 2001). With its earlier acquisition of Combustion Engineering, ABB has 90,000 asbestos-related lawsuits pending in the U.S. The new CEO, Jorgen Centermann, is trying to fix major structural and organizational issues, which is likely to take 3-4 years. There is a lack of new products in the pipeline. While projected cost savings may materialize, revenue growth is likely to be disappointing.

More and more people will be trimmed, but that does not improve the ABB chances to survive. Look for swift amputation of diseased limbs and ugly tails and expect more write offs. The organization chart is bizarre, with a multi-dimensional reporting structure and consequent lack of crisp responsibility. Meanwhile several good managers, salesmen and engineers are exiting ABB like rats off a sinking ship....

ABB has just posted a 76% drop in first-half profit. The Swiss-Swedish group has announced that it will slash 7% of its 163,000 global payroll (12,000 people) over the next 18 months. This will bring annual savings of $ 500m ($40K average per employee).

Management has "not yet finalized where the cuts will be" - which probably makes worldwide employees feel like they are ALL being considered. ABB is "hoping to achieve a third of the job reductions by natural wastage"; does that mean when the good people (the ones who can easily find other jobs) leave? Will the cuts (of those who don't leave voluntarily) come at the bottom, middle or top?

Recently appointed ABB president and CEO Jörgen Centerman said the group is scaling back its performance targets, cutting its earnings expectations. Centermann says sensibly, "I want to break away from the image of ABB having high targets and not meeting them."

The mounting problems at ABB have some investors wondering whether the electrical-engineering giant - long considered one of Europe's best-run companies - has lost its way. ABB stock has fallen more than 50% over the past year and the bad news has kept the shares sliding in recent months, despite a stock-buyback program.

Analysts have been speculating recently that ABB would cut jobs after rivals such as Emerson Electric Co. and Rockwell International Corp. announced layoffs and lowered profit forecasts due to the slowing world economy.

One ardent eNews reader asked, "Has the whole Automation Industry gone mad? Or did all the CEO's go to the same "How to restructure" seminar earlier in the year?"

Pinto Prognostications :

ABB is a good company, the second-largest in industrial automation (after Siemens) struggling with decline of the worldwide automation business. As well, they are digesting Elsag Bailey and other relatively unhealthy previous acquisitions, made unwisely without a balanced market perspective.

They are now paying the piper for outdated business planning methods and marketing vision with a rear-view mirror.

Following my eNews discussion of ABB (No. 34, 21 Feb. 2001) suggesting that ABB would fall into "GAAP-goop", Deutsche Bank has just published a note (dated 30 March 2001) entitled "Mind the GAAP". Deutsche Bank downgrades ABB "courtesy of the greater transparency of US GAAP" and cuts their 2001-2003 earnings forecasts by 30-34% to reflect "the considerable non-operating gains which have been recorded by ABB over the last three years."

The DB report, written by Mark Cusack, "focuses primarily upon the results of a detailed review of the 2000 accounts, drawn up for the first time in accordance with US GAAP. During the 1998-2000 period, it now appears that some 28% of reported net income came from non-operating sources (property and business disposal gains). In 2000, operating net income was 43% lower than the reported figure (although there was considerable restructuring last year). We believe that investors will strip out such gains to arrive at an estimate of sustainable operating earnings."

Swedish ASEA and Brown Boveri, along with the acquisition of Combustion Engineering and Taylor in the US, George Kent in the UK, and a multitude of others -most recently Elsag Bailey - puts ABB among the top-3 in the industrial automation business. The decision of former ABB CEO Goeran Lindahl to focus on factory automation has been tough on the company. Shareholders watched the stock drop precipitously as the company spent millions on acquisitions while competitors reported falling demand. So, after 30 years in ABB, 15 years in corporate management and four years as CEO, Lindahl has been replaced by Jorgen Centerman, 48, the head of ABB's Automation business.

In reality, ABB is in big trouble. Lindahl was dumped because his transformation wasn't working and the profit growth was all related to accounting issues and capital gains. After previously indicating that a move to US GAAP would have no material impact, ABB's operating profit fell by a third, which was even worse than expected. And they are stuck in a low growth, low margin rut. The shares are down 40% from last year and could fall a lot further.

The new CEO, Jorgen Centerman, has the backing of Percy Barnevik, Chairman of the ABB Board. Centerman is a smart guy and knows the automation business. He has promised that he will reinvent ABB as a customer-centric organization and that the first fruits of his new strategy will be evident in a couple of quarters. However, to change an organization with 160,000 employees, restructure the way it has historically operated and expect the new structure to deliver significant business gains by the second half of the current year is hugely optimistic - such transformations rarely occur seamlessly.

Also, Centerman is starting out knee-deep in gaap-goop. ABB had previously delayed its planned US stock-market listing blaming "weak market conditions". Now, it's recent press release reports that they intend to be listed on the New York Stock Exchange during the second quarter of 2001. It seems certain that US GAAP accounting, which ABB still does not understand, will collapse Centerman's customer-centric campaign.

An ABB bid for Invensys is unlikely - they are still sorting out Elsag Bailey and must tend to their own, old knitting if they hope to survive.

Stay tuned....