The ThyssenKrupp Debacle

• Our company has been pilloried in recent months for various compliance infringements.
• We paid an antitrust fine of €103 million for the so-called rail cartel. Further investigations and damages claims from our customers are still to come.
• In May 2012 we put the Steel Americas plants up for sale, because the strategy has proved unsustainable.
• We announced yesterday evening that we have had to record a further impairment charge of around €3.6 billion on these plants.
• This in turn is the main reason for the Group’s overall negative EBIT of €(4.4) billion.
• For the first time in its existence, ThyssenKrupp AG will not pay a dividend.
• And our Supervisory Board yesterday resolved to terminate the appointment of three Executive Board members and usher in a completely new start.

As Hiesinger understated so well, “…it is obvious a great deal has gone wrong in the past.”

Let’s start with infringement. Inventio accused ThyssenKrupp’s elevator unit of knowingly infringing on Inventio’s patent for elevator installation. (Among other projects, ThyssenKrupp installed 73 elevators at the new One World Trade Center in New York.) In April of 2012, the Alabama Department of Environmental Management fined ThyssenKrupp Steel $75,000 for a total of 17 air quality violations by its mills in Calvert, Ala.

The antitrust fine ($139 million) resulted from evidence that ThyssenKrupp was part of a decade long cartel that fixed railroad track prices. In November, company officials revealed to prosecutors further evidence of corruption involving foreign rail-technology contracts.

Not illegal, but unethical, an executive board member used company funds to take journalists on lavish trips.

Of course, the Steel Americas project was by far the biggest disaster for ThyssenKrupp. The plan to manufacture steel slabs in Brazil then ship them to Alabama for processing into sheet steel was beset by delays and overruns. ThyssenKrupp attributed the failed project to poor management, overly optimistic interpretation of existing economic conditions and the eventual decline of the economies in both Brazil and the U.S. The Executive Board was accused of concealing overruns and project difficulties.

In Brazil, economic conditions changed significantly as raw material and labor costs increased and the value of Brazilian currency fell. ThyssenKrupp’s original investment of $4.6 billion rose to $7.03 billion from overruns.

The U.S. plant in Alabama was leaking money as well. In an effort to stay afloat, ThyssenKrupp began a divestment strategy to reduce assets by $14.5 billion. In 2011, with its debt doubled, the company sold 50 million treasury shares for €1.6 billion ($2.16 billion) cash and took a write down of €2.1 billion ($2.84 billion). In 2012 Steel Americas was put up for sale and the company was forced to take another write down of €4.7 billion ($6.35 billion). In December, ThyssenKrupp took a further impairment charge at its Steel Americas unit of €3.6 billion ($4.8 billion). ThyssenKrupp credit rating has been downgraded to junk by three of the major creditors. The Steel Americas market value is now estimated to be worth substantially less than $5 billion.

As mentioned above by Dr. Hiesinger, the company EBIT was a negative €4.4 billion ($5.95 billion) at the end of the fourth quarter 2012—and nothing was available to pay a dividend to shareholders for the first time in the company’s history.

Executive board members Olaf Berlien, Edwin Eichler, and Juergen Claassen were all relieved of their duties as well as Bertin Eichler, vice chairman of the ThyssenKrupp AG Supervisory Board. Angry shareholders have been calling for the head of ThyssenKrupp Chairman Gerhard Cromme as well.

ThyssenKrupp, in the future, will make car components, naval ships,and elevators—steel will account for only 30 percent of sales.

The sale of the Steel Americas project is ongoing. We can only hope that the winners of the bids have better luck than ThyssenKrupp.