Siemens Continues to Carve Up Health Care
German Engineering Giant May Announce Hearing-Aid Unit Sale Before Annual Results This Week
Siemens AG Chief Executive Joe Kaeser is about to shed another part of the company’s health-care unit, while betting that the German engineering giant’s future lies with its energy business.
Siemens declined to comment on plans for its health-care business.
The expected transaction follows Siemens’s recent decision to shed two other health-care units. The company in August outlined plans to sell its hospital information-technology business to U.S.-based Cerner Corp. for $1.3 billion. Siemens in July said it plans to sell its microbiology business to Beckman Coulter Inc., a subsidiary of Danaher Corporation. The microbiology disposal, estimated by analysts to be valued at €330 million, would allow Siemens to focus more on in vitro analysis, the core of its diagnostics business.
Over the past year, Mr. Kaeser has been working on shedding noncore businesses and streamlining divisions as part of a cost-cutting program and broader restructuring of the trains-to-medical-equipment giant. Last month, he separated its health-care business operationally from the rest of Siemens, creating what he called “a company-within-a-company.” Analysts said the move could be the first step toward divesting the rest of the health-care business.
Analysts expect Siemens Healthcare to report a 4% profit increase to €626 million for the quarter ended Sept. 30 on Thursday, according to a recent poll by The Wall Street Journal. They expect the energy unit’s profit to rise 7% to €601 million.
The disposal of the hearing-aid, microbiology and IT divisions would leave Siemens Healthcare focused primarily on medical imaging and diagnostics. Medical imaging—the health-care business’s most lucrative unit—manufactures products like CT scanners, MRI machines, and ultrasound technology.
Siemens and U.S.-based competitor General Electric Co. are the global leaders in medical imaging, each with market share of 28%, followed by Dutch electronics group Philips NV, at 23%, according to J.P. Morgan .
The imaging business generates a lot of cash for Siemens, but is growing slowly due to a weakening global market for health-care equipment and solutions, which J.P. Morgan estimates will grow by between 1% and 2% in 2014, with only a slight improvement next year.
Siemens and its rivals have all been squeezed by reduced government health-care spending across Europe in the wake of the eurozone debt crisis. The companies have also faced a slowdown in equipment spending in the U.S.—the world’s largest health care market—because the Affordable Care Act has mandated new funding priorities, limiting hospital resources for equipment upgrades.
GE and Philips, unlike Siemens, view health-care as central to their businesses.
“We are investing massively in IT, in making hospitals more efficient,” said Jean-Michel Malbrancq, president and chief executive of GE’s European health-care business. He said GE sees a health-care role for the Internet of Things, where the Web meets real-world equipment. “We play in a space where [some] competitors don’t play.”
Expensive technological shifts in the health-care sector could push Siemens to exit the health-care market while it is still very profitable, analysts have said. Emerging trends that will demand substantial investments include a greater focus on data analytics and molecular diagnostics.
Increased global competition and industry consolidation are other factors that could drive Siemens to shed its health care business through a spinoff, an initial public offering, or an outright sale, according to analysts.
A spinoff of Siemens Healthcare by 2016 might create more value for the company than an initial public offering, even though analysts expect Siemens to pursue an IPO.
An IPO would generate cash that could be invested in other acquisitions, said Andreas Willi, an analyst at J.P. Morgan. “Given the Siemens track record, I am not comfortable with Siemens investing a big amount of money and would rather see the proceeds going directly to investors in the form of a share in Healthcare,” he added. Analysts have said Siemens overpaid for its recently announced acquisition of U.S.-based oil equipment manufacturer Dresser Rand Inc., valued at $7.6 billion.
A spinoff or IPO could value the health-care business at more than €30 billion, said Christoph Niesel, a portfolio manager at Union Investment, a Siemens shareholder.
But according to a person familiar with internal deliberations at Siemens Healthcare, the business is “not working toward a deadline for complete separation.”
Some industry experts questioned whether a near-term divestment of the health care business would help Siemens’s overall growth prospects. “With the rest of Siemens not firing on all cylinders, the timing isn’t right” said one portfolio manager who follows the company.
Despite Mr. Kaeser’s efforts to focus on energy with planned acquisitions of Dresser Rand and the energy operations of Britain’s Rolls-Royce Holdings PLC, Siemens has said it expects lower margins for its gas turbine and power generation businesses over the next few years.
Analysts at Morgan Stanley expect Siemens’s profit margin for energy to be 13.2% when it reports its fourth-quarter results, compared with approximately 20% for its medical-imaging business.