As Europe’s top economy emerges from the energy crisis, activist investors are resuming their years-long efforts to break up some of Germany’s most venerable companies. They see streamlining as a promising path to reviving share prices.
This week, investors demanded that Brenntag, a distributor of chemicals, spin off its specialties division. Brenntag was founded in Berlin in 1874 as an egg trader. Similar demands to release value have been made of Bayer, Fresenius, and Thyssenkrupp.
After a lull last year that investment bank Lazard attributed to the energy crisis brought on by the war in Ukraine, executives and investors say that signals a rebound in shareholder activism that may force companies to consider major overhauls and spin-offs.
Investors, according to Lawrence Elbaum, co-head of the shareholder activism practice at law firm Vinson & Elkins, are seeking value-enhancing tactics that don’t demand a lot of funding in a competitive market.
Deka Investment, which oversees 367 billion euros ($392 billion) in assets and owns stakes in the majority of significant German corporations, has repeatedly criticized German businesses for having structural flaws.
Ingo Speich, the company’s head of sustainability and corporate governance, predicted that activism would increase in 2023, helped by “the small size of the activism landscape and the low valuation of German corporations relative to those in the United States.”
Germany’s blue-chip DAX 30 index has had the worst year of any major European stock market, rising only 2%. The German benchmark DAX index’s price-to-earnings (PE) ratio of 14.6 falls far short of the S&P 500’s 20.9 PE ratio.
With their long histories (some were founded in the nineteenth century), many of Germany’s largest corporations have amassed businesses that no longer make sense to combine under one roof, according to Speich.
“We are no pure-play fanatics and neither are we fans of conglomerates. But when a company is undervalued, then there’s a reason for that,” he said.
The United States has a significantly richer history of corporate break-ups, as evidenced by plans unveiled in October by medical device maker Medtronic (MDT.N), which is forming a new company out of its patient monitoring and ventilators businesses.
Other examples from the last two years in the United States include Johnson & Johnson, General Electric, and 3M.
According to Joe Kaeser, supervisory board chairman of Siemens Energy (ENR1n.DE), the United States is far more advanced, as well as more successful, in the field of shareholder activism.
“A leaner set-up can take advantage of untapped energy and crystallise hidden value, especially in a complex environment with difficult market conditions,” he told Reuters.
From 2013 to 2021, while serving as CEO of the conglomerate Siemens AG, he oversaw one of Germany’s most successful corporate break-ups, which included the separation of Siemens Energy and Siemens Healthineers and the merger of Siemens’ wind business with Gamesa.
According to Kaeser, management and governance issues are still prevalent in Germany and present opportunities for activists. He claimed that German boardrooms had a different sense of ownership than other countries because of a certain “friends and family” mentality.
Shareholders of Siemens benefited from the slimming down. Siemens has generated the most value among all German listed companies since 2003, according to German wealth manager Flossbach von Storch, with an estimated 126 billion euros in value created (measured by dividends, share buybacks, and stock price development).
However, another leaner machine serves as a reminder that shrinking doesn’t always unlock value; the study found that conglomerate Thyssenkrupp, which has been selling off assets for years, is among the biggest value destroyers.
(Adapted from Reuters.com)
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