Old World Germany Versus the Hedge Funds

Thyssenkrupp’s CEO and chairman have gone, but Cevian and Elliott haven’t won the day yet.

By Alex Webb

Ulrich Lehner’s decision to resign the chairmanship of Thyssenkrupp AG doesn’t represent an out-and-out victory for activist investors Cevian Capital AB and Elliott Management Corp.

Cevian has been pushing the German industrial giant to simplify its conglomerate structure for five years, so Lehner’s departure just two weeks after CEO Heinrich Hiesinger also quit would appear to be a big step toward achieving its goals. The 8 percent jump in the share price on Tuesday certainly reflects that view.

But it overlooks the identity of Thyssenkrupp’s biggest shareholder: the Alfried Krupp von Bohlen Foundation. It still has a larger stake than Cevian and Elliott combined and has long opposed a breakup of the company. It was the loss of support from foundation chief Ursula Gather that helped spell the end for Lehner, according to Bloomberg News. So you’d be presuming a lot if you thought his departure might automatically signal a dismantling of the conglomerate. The identity of the Hiesinger and Lehner replacements should offer more of a clue.

Little Result For So Much Industry

Gather’s reluctance to sing the same tune as the hedge fund activists — or “locusts,” to use local parlance — is unsurprising given her organization’s origins and stated mission, including a commitment “to the common good.” Under the leadership of the late Berthold Beitz, the foundation and Krupp Steel (which later merged with rival Thyssen to form the present-day company) played a huge role in accelerating German post-war industrial growth and rehabilitation, particularly in the State of North Rhine-Westphalia.

As such, it’s unlikely to pursue any path that would lead to heavy job cuts in the company’s home region. In his resignation statement, Lehner went so far as to invoke Beitz’s remit to “successfully further develop the company in the interest of customers, employees and shareholders” — in that order.

Nonetheless, Hiesinger and Lehner’s shared vision of a conglomerate that could cross-sell otherwise disparate products (Thyssenkrupp spans car parts, submarines and elevators) seems dated in an era where big manufacturers prefer to deliver integrated systems. Moreover, Thyssenkrupp’s development under their leadership failed to prove otherwise. Central administrative costs steadily increased, tipping 511 million euros ($599 million) last year, up from 377 million euros in 2011. That increase represents more than 15 percent of net income.

A Failure To Elevate Profit

But there may still be options that can keep all stakeholders happy. The lucrative elevator business has long been the focus of the activists. It accounts for 58 percent of profit but just 17 percent of revenue. Spinning out or selling a minority stake in the division could highlight its underlying value, and generate a much-needed capital influx for the parent company.

If that money were reinvested in modernizing and realigning the other divisions, it could keep Gather and the worker representatives on the supervisory board satisfied too, according to Christian Obst, an analyst at Baader Helvea Bank.

The departure of Hiesinger and Lehner might indeed herald a more flexible mindset at the 207-year-old company. But the foundation still holds the keys.