“Psycho-Terror” Isn't Just a Hedge Fund Insult

(Bloomberg Opinion) -- I’d never heard of the phrase “psycho-terror” until the chairman of ThyssenKrupp AG used it in a recent newspaper interview to describe the tactics of some activist hedge funds.

The comments from Ulrich Lehner were a bit gnomic but you’d assume he was referring to Elliott Management Corp., the New York fund that has bought a stake in the German industrial giant. Elliott certainly thought so, branding the remarks “defamatory.” Lehner has since resigned.

After ThyssenKrupp’s profit warning on Tuesday evening, one might be tempted to throw the “psycho-terror” insult back in the direction of the steel-to-elevators conglomerate. It’s a pretty neat description of the prolonged mental anguish that investors and employees have suffered for a decade as the company has bled cash and failed to lift profit margins, despite what seems like constant restructuring and cost-cutting.

With the departure of both Lehner and CEO Heinrich Hiesinger in recent weeks, there’s now a massive leadership hole at ThyssenKrupp. Until a replacement is found, labor representative Markus Grolms – a member of the IG Metall trade union – will act as caretaker leader of the supervisory board. That will reassure workers much more than shareholders.

In one sense, the profit warning makes a bad situation worse. ThyssenKrupp no longer expects to generate positive free cash flow this year because of problems at its plant construction and shipbuilding division. There will be less money to fund investments and the company’s hefty pension liabilities.

Yet the downbeat outlook might at least stop interim CEO Guido Kerkhoff from offering up the same tired excuses about why the group doesn’t need a more fundamental overhaul. ThyssenKrupp’s operating margins haven’t exceeded 3 percent for six years. With a bit of luck, the management clear-out and poor results should be the catalyst for change. “So bad, it’s good,” as Jefferies analyst Seth Rosenfeld puts it. 

The kind of long-duration construction projects done by ThyssenKrupp are inherently vulnerable to management over-optimism on cost and timing. Hence they need very close oversight. But the expected 220 million-euro quarterly loss at ThyssenKrupp’s Industrial Solutions business suggests this hasn’t been happening. It begs the question of whether that kind of management grip is possible in such a diverse, complicated company.

Kerkoff, who was previously finance director, is right to demand swift action to fix the profit shortfall and for the unit to focus on smaller, less risky projects. But that should have happened long before now.

For its part, Elliott claims it isn’t pushing for a full breakup of ThyssenKrupp. That’s prudent. Germany’s political establishment has been roused into action to keep the hedge fund “locusts” at bay. Meanwhile, anchor shareholder the Krupp foundation is smarting after workers criticized its passivity. It’s doubtful that Elliott could swing a breakup even if it wanted one.

Instead, an Elliott representative told die Welt  on Wednesday that it wants ThyssenKrupp to slim down central corporate costs (check out these images of ThyssenKrupp’s flashy HQ) and give the business units more autonomy. The holding structure and joint ventures favored by Siemens AG provide an alternative, though unproven, model. The status quo is no longer an option.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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