ABB - a financial analysis

Content

Introduction

ABB - Business Operations
Overview
Facts and Figures

Corporate Governance
Owners and Share-structure
Governance system
Further Implications

Financial Goals
Targets
Figures and Financial ratios

Capital Structure

Dividend Policy

Self-Sustainable Goal System

Final Comments

References
Information sources
Theory
Internet

Introduction

The last decades has meant a distinctive shift in the world of business. ABB Group has followed the ongoing trend of globalisation. It has become a truly Multinational Enterprise (MNE); showing in its structure and way of managing operations that it has adopted to the new conditions of global markets and competition.

"ABB is in the business of creating value - for our customers, shareholders, employees and the communities in which we operate."¹

Could such a mission be pursued successfully? Does the international diversification of the company help to achieve its goals? All value creation is essentially financial. This term paper is dedicated to analysis the financials of the ABB Group. My purpose is to see whether the financial position matches the expressed value creating goals. I chose the time period from 1998-2001 for my analysis. Unfortunately the Annual Report 2001 was published merely days before the dead line of this term paper. But nevertheless I tried to include the latest figures in my analysis.

ABB - Business Operations

Overview

The ABB Group is a provider of products and systems incorporating advanced technologies and innovative applications, specializing in automation and process technologies for industrial and commercial customers. It consists of five industrial businesses and one financial service segment. With its headquarter in Switzerland, it is located in more than 100 countries and employs about 160000 people. ABB Ltd is the group holding company of ABB AG (Switzerland) and ABB AB (Sweden). It constitutes the parent company of the ABB Group.

Facts and Figures

Figure 1 and 2 show the distribution of revenues. These give us an idea about the diversification among the world and different industries. Geographically, the main market is Europe. The sectors of Automation and Building Technologies constitute ABB´s biggest division. Segments such like Power Transition, Power Distribution and Automation keep on leading in their businesses. ABB tries to be extremely customer oriented. The whole organisational structure is directed to costumer needs².

Abbildung in dieser Leseprobe nicht enthalten

Figure 1. Revenues distributed amongst the markets Figure 2. Revenues per segment

(Annual Report (2000), p.3) (Annual Report (2000), p.3)

Corporate Governance

Owners and Share-structure

ABB had in the year of 2000 130.000 shareholders. If we add on the number of owners who control ABB shares through nominees, the total number of shareholders will be approximately 210.000. Altogether they held 300.002.358 registered shares with a nominal value of 2,5 CHF each. In the year 2001 ABB performed a stock split in terms 4:1, which raises the number of outstanding shares up to 1.200.009.432.

In 2000 the main owner was the BZ Holding Group Ltd and it is still today with an owning proportion of more than 10%³. According to ABB no other shareholder held control over more than 5% of the total voting rights. The conclusion is that the ABB has got a very dispersed ownership.

ABB is cross-listed on the Swiss Exchange SWX, Stockholm Stock Exchange, Frankfurt Stock Exchange, New York Stock Exchange (ADS⁴ ) and London Stock Exchange. This would imply that the ownership is also geographically diversified. To cross list implicates the entrance to more liquid markets, i.e. to overcome mispricing of segmented market by gaining lower cost of capital⁵.

Governance system

As mentioned above, the headquarters of ABB is located in Switzerland. Switzerland, like most countries in central Europe, is a bank-oriented corporate governance system. In the same time the company is listed in 5 different stock exchanges. I think that the reason to why ABB is doing this is to change in direction towards the Anglo-Saxon corporate governance system. This idea would also be supported by the fact that ABB in 1999 removed the stock differentiation system from a four class share to a single class one and their changes in accounting principles in towards a higher standard for more transparency⁶.

Further Implications

Motives behind these described developments are given in the all the charming competitive advantages of becoming or being a MNE: cheaper capital, new product market, stable material market, less operating exposure⁷. But it has its disadvantages. Dispersed ownership leads to a decrease in control for the shareholders. If shareholders are weak, one could guess that Agency cost⁸ are high within ABB. To force management to act in shareholders interest is quite more difficult having many owners. The problem is known as the collective action problem⁹. To decrease the agency problem monitoring and bonding activities are used. To mention here are the improved accounting standards, the cross listing and globalization¹⁰. Additionally managers are remunerated regarding towards an incentive scheme that includes offering stock warrants and warranting appreciation rights to key employees, for no consideration. "The program is intended to enhance ABB's long- term performance and the creation of greater shareholder value" ¹¹. I would like to question the effectiveness of this system. It is possible that the agency just changes shape¹². I could not find that the compensation at present is linked to concepts like Economic Value Added¹³, but in the outlook ABB states that it is going to tie incentive plans directly to shareholder value targets¹⁴. In theory that is a step in the right direction. Following the recent reveal of the retirement compensation program one can argue that ABB had and has agency problems.

Financial Goals

Targets

ABB is running a value creation strategy ¹⁵ . In their believe growth is essential for value creation for all stakeholders. In this section I like to define the goals in numbers so it is possible for us to analyse these targets.

"We are dedicated to increasing long-term shareholder value. By achieving

innovative and competitive solutions for our customers, we will generate the

growth needed to deliver a superior return to our shareholders and attract capital investment."¹⁶

In the statement above ABB draws parallels between growth and profitability. In theory excessive growth is seen as negative for shareholders but preferred by managers to achieve financial flexibility¹⁷. I will try to examine the explicit financial goals given in the Annual Report 2000 and by using theoretical arguments see if they fit with ABB´s value creating goals when I plot out the Balanced Growth Line in the end of this paper.

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¹ ABB Annual Report (2000), p.22

² Fundamental changes announced in 2001, see ABB Annual Report (2000), p. 4

³ See www.bzbank.ch

⁴ ADS=American Depositary Shares

⁵ For a deeper discussion see Eiteman et al (2001), Ch. 10

⁶ See e.g. ABB Press release: "ABB releases historical figures", 18.09.01; The new standard is US GAAP

⁷ See Eiteman et al (2001), Ch. 7, 10

⁸ Agency cost arises because of goal incongruence and information asymmetry between shareholders and managers. For a deeper discussion, see Hamberg (2001), Ch. 3

⁹ Referring to the hope of shareholders that one can be a "free rider" und so do not have to bear cost and effort to enforce management to establish incentive schemes, see Hamberg (2001), p 74

¹⁰ I refer here to the argumentation of Stulz (1999), who indicated lower agency cost because of the signalling effect coming from the commitment to higher disclosure standards

¹¹ ABB Press release "Stock option program highlights shareholder value as key management focus", 15.12.1997

¹² Managers can manipulate information to their own benefits; this refers also to the short term vs long term value maximisation discussion

¹³ For a further discussion see Hamberg (2001), Ch. 11

¹⁴ See ABB Group Annual Press Conference, Zurich 2001

¹⁵ ABB Annual Report (2000), p. 22

¹⁶ www.abb.com, Vision and Strategy

¹⁷ See discussion SWM vs MWM in Findlay and Whitmore (1974); Referred to Donaldson (1984) Management desire Corporate Wealth for their survival, independence, self-sufficiency, self-fulfilment