Demergers and destruction: activists press Europe conglomerates

Tue Nov 29, 2016 10:15am EST
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Toby Sterling

AMSTERDAM (Reuters) - The days of the European conglomerate may be numbered, as activist shareholders are pressing diversified groups to spin off secondary businesses and focus on doing one thing well.

Many investors and analysts - and some managers - say that in a world where good returns are hard to come by, breaking up businesses that don't belong together can be profitable.

In theory, spinning off business divisions allows the parent company and the spin-off alike to focus better on their respective strategies, while investors tend to value both more highly due to greater transparency.

"I think demergers and the destruction of conglomerates is the next major trend in the M&A market," said Christer Gardell, co-founder of Cevian, a Swedish-based activist investment fund.

"The trend has already started, it's going to run for the next 10 years," said Gardell, who is pushing Swiss-Swedish engineering giant ABB (ABBN.S: Quote) to spin off its power grid equipment division from its robotics and other operations.

While some conglomerates such as ABB are trying to hold their businesses together, others are embracing the trend either under pressure from investors or even willingly.

A wave of spin-offs through initial public offerings (IPOs) among energy and industrial groups is already underway. Philips (PHG.AS: Quote) of the Netherlands, Fiat Chrysler (FCHA.MI: Quote) of Italy and Germany's biggest energy groups E.ON (EONGn.DE: Quote) and RWE (RWEG.DE: Quote) have all floated major divisions this year. German engineer Siemens (SIEGn.DE: Quote) has announced similar plans.

Companies with many business lines are "mostly too complicated, too bureaucratic, too slow, and they usually suffer from poor capital allocation and poor performance", Gardell told Reuters. "Obviously for investors to invest in these complicated structures, they require a discount, and usually it's a significant discount."   Continued...

A man stands in front of the logo of Swiss engineering group ABB before a news conference in Zurich, Switzerland October 4, 2016. REUTERS/Arnd Wiegmann/File Photo