Siemens Refocuses On Core Business

| About: Siemens AG (SIEGY)

Siemens AG (SI) is an electronics and electrical engineering company with diverse operations in industry, energy, healthcare, and other sectors worldwide. Siemens forms a part of the telecommunications industry with a market cap of $88.6 billion. The company has non-core business activities such as baggage handling and postal and parcel service units that have generated total revenue of around 900 million Euros. Siemens has been significantly criticized in the recent past for derailing from its core operations and focusing on trivial business activities.

Following the criticism, Siemens has decided to gradually selling off all of its non-core business activities in order to refocus on its core business. The company has already started acting on its restructuring plan which involves extensive cost cuttings, divestments and layoffs.

Restructuring of Siemens's Lighting Unit Osram

It was reported by Dow Jones that Siemens plans to conduct extensive restructuring of its lighting unit Osram in an attempt to save costs. The plan includes a reduction of workforce by more than 10%. The whole restructuring process is expected to cost around $640 million. As a result of the restructuring, the company expects to save $1.3 billion. This will also enhance Siemens' overall profitability.

Osram has around 39,000 employees worldwide and the restructuring will result in the layoff of around 4,700 employees. The company has already cut 1,900 jobs since the last fiscal period. The main focus of the company is to spin off Osram's operations from smaller markets. Therefore, a substantial proportion of the layoffs will be from outside of Germany.

Acquisition of Invensys

The largest industrial conglomerate in Germany, Siemens announced that it has entered into an agreement to acquire the rail automation business of Invensys plc (NASDAQ:ISYS) which is based in London for $2.9 billion. This acquisition is a part of Siemens' plan to refocus on its core business; industry and infrastructure. With this acquisition, Siemens' presence in the rail automation sector will be strengthened.

The association of Siemens and Invensys is not new. Both the companies have worked together in the recent past on a project to provide signaling for London's Crossrail network. By securing a major position in the industry, Siemens will be able to provide cutting edge solutions and technology to rail operators all around the globe. This acquisition is a major step by the company that will help it refocus on industry and infrastructure in an effective manner.

Invensys provided its detailed plan for utilization of the consideration to be received by Siemens. According to the officials at Invensys, the firm will return $1 billion to its investors through special dividends, while the remaining amount will be utilized in eliminating the pension scheme deficit of the company.

The acquisition is expected to be completed by the second quarter of the next fiscal year. Siemens plans to merge the acquired signaling unit with its rail automation division in order to strengthen its own operations. This will give the company a major push in the rail industry. The extensive expansion as a result of the merger may also give the German industrial conglomerate a competitive advantage against its competitors such as General Electric (NYSE:GE). Currently, General Electric holds a major position in the industry and infrastructure sector as it has its operations going in all the right markets. The demand driven by the development works in the developing countries have provided General Electric with an opportunity to enhance its revenue. The rising revenue and stabilizing position of General Electric is being reflected in its stock price very positively. The share price of General Electric has been following a positive trend with the current range between $21.24 and $21.48 and the 52 week range of $16.25 and $23.18.

With extensive restructuring and a major acquisition, it may be difficult to derive a judgment regarding the prospective financial performance of the company. With no evidence regarding a decline and slight evidence regarding an improvement in profitability, in my opinion, investors should hold the stock of the company. If the steps taken by Siemens bring the anticipated results, the profitability of the firm will rise. However, Siemens' prospective market performance is contingent upon the success of the restructuring and acquisition of the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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