Siemens to Oust Chief After String of Setbacks That Prompted Profit Warning

FRANKFURT — The supervisory board of Siemens, one of Germany’s largest companies, said that it would fire its chief executive at a meeting on Wednesday and replace him with an insider following a string of problems that led to a profit warning last week.

Peter Löscher, an Austrian who has been chief executive of the electronics and engineering giant since 2007, is taking the blame for a series of missteps that have plagued the company during the last year, including a late delivery of high-speed trains for the German national railroad and delays in completing offshore wind turbine projects.

The German news media reported that Joe Kaeser, a member of Siemens’s managing board and its chief financial officer, would be most likely to replace Mr. Löscher, but a company spokesman said on Sunday that he could not confirm the reports. In a statement Saturday, Siemens, based in Munich, said its supervisory board would name another member of the company’s executive board as chief executive, but it did not say who.

Siemens’s fortunes have consequences for the German economy as a whole because it is one of the country’s largest employers, with about 120,000 workers, and because it is something of a bellwether for the country’s industrial sector.

Along with automobiles, the German economy is based on the production of high-priced goods that are sold to governments and corporations. Siemens’s broad array of products includes gear for power generation, trains and other transportation equipment, and medical devices like X-ray scanners. Problems at Siemens are potentially a bad omen for the country.

On Thursday, Siemens shares plunged 6 percent after the company said it would not meet its profit goals for the fiscal year that begins Oct. 1. Siemens did not give a detailed explanation for the expected shortfall, attributing it to “lower market expectations.” But it appeared to reflect a combination of weaker-than-expected economic growth in crucial markets as well as management mistakes.

The profit warning fed concern that demand for German exports from China and other developing markets may no longer be strong enough to compensate for the weak European economy. Sales in the United States, where Siemens has 60,000 employees, also appear to be falling short of expectations despite the recovering growth in America.

Germany has weathered the euro zone crisis better than other countries because its machinery and engineering divisions have been able to tap developing markets, especially China. But recently the Chinese economy has been cooling, while Europe remains in recession.

Siemens had already reported a 7 percent decline in sales during the first three months of 2013, to 18 billion euros, or about $24 billion. On Thursday, the company is scheduled to announce earnings for the quarter that ended June 30.

Mr. Kaeser, reported as the likely replacement for Mr. Löscher, is a 56-year-old Siemens veteran credited with keeping the company on a steady course after the previous chief executive, Klaus Kleinfeld, resigned under pressure in 2007. Mr. Kleinfeld is now chief executive of the aluminum producer Alcoa.

Mr. Löscher, 55, was the latest in a line of Siemens chiefs who have tried to focus the sprawling company on its most profitable businesses and make it easier to manage. Under Mr. Löscher, Siemens spun off its Osram lighting unit, and this month it sold its half of a joint venture with Nokia that supplies equipment for mobile telecommunication networks.

Those moves raised money and simplified the company but were not enough to compensate for other problems, including delays in delivering high-speed ICE trains to Deutsche Bahn, the German railway.

Members of the supervisory board met informally on Saturday and will make the management changes formal at a regular meeting scheduled for Wednesday.

Siemens C.E.O. to Leave Following Profit Warning

Siemens said in a statement late on Saturday that at a meeting on July 31, the supervisory board would pass the decision on Loescher's early departure.

"In addition, it will decide on the appointment of a member of the managing board as President and CEO," it added.

Siemens, among Germany's three biggest companies by market value, did not provide further details.

Two people familiar with the matter earlier told Reuters that the majority of Siemens' 20-member supervisory board favored finance chief Joe Kaeser as replacement for Loescher. The company declined to comment.

There have been persistent rumors over the past year that Kaeser, who was already on Siemens' management board when Loescher joined in 2007, had his eye on Loescher's job, though the two have repeatedly said they worked well together.

Late last year, when questioned about the rumors, the CFO said the two complemented each other like "light and dark".

OVERPROMISED, UNDERDELIVERED

When Loescher became CEO six years ago as the first company outsider to take the helm at Siemens, he was presented as a hero who would lead Siemens out of a massive bribery scandal that had tarnished its image and its finances.

But after tackling that task, Loescher started losing credibility as he repeatedly misjudged demand development in its main markets.

A bellwether of Germany's economy whose products range from gas turbines to fast trains and hearing aids, Siemens is suffering from the stuttering global demand that saw German exports fall the most since late 2009 in May.

In addition, Siemens' earnings have been hit repeatedly by one-time charges related to project delays and other issues.

Loescher was forced to put on the back-burner a strategy to increase annual sales by about a third to 100 billion euros last year, announcing instead a plan to save 6 billion euros over two years to compete with rivals such as General Electric Co.

The plan, which unions fear could affect 10,000 jobs, was meant to boost Siemens' core operating profit margin to at least 12 percent from 9.5 percent by 2014.

On Thursday, the company scrapped that target, issuing a brief statement in which it cited lower expectations for how its markets would perform.

Siemens is scheduled to release third-quarter results on Thursday when analysts expect Loescher to elaborate on what prompted the company to scrap its margin target.

(Reporting by Jens Hack.; Writing by Maria Sheahan. Editing by Andreas Cremer and David Evans)

DealBook: A Warning Shot on Management Buyouts

Kathy Willens/Associated PressRonald O. Perelman’s attempt to take Revlon private in 2009 resulted in an $850,000 federal penalty and $37 million in settlements of private lawsuits.

The adage “what you don’t know can’t hurt you” does not apply to federal securities laws, as Revlon learned from the Securities and Exchange Commission when the company settled an accusation that it deceived its minority shareholders. The larger question is whether the S.E.C. might actually start to police buyout offers from management and controlling shareholders that are rife with conflicts of interest and usually end up favoring the buyer over the minority shareholders.

The case centers on efforts by MacAndrews & Forbes, the controlling shareholder of Revlon owned by the billionaire Ronald O. Perelman, to arrange a transaction in 2009 in which shareholders would exchange their stock for preferred shares. S.E.C. rules require certain disclosures about the deal before it can go through, and whenever a company speaks, it has to be truthful — or at least not dishonest.

The problem in any transaction designed to squeeze out minority shareholders is that the incentive for the buyer is to pay the lowest price possible, but corporate leaders also have an obligation to protect all shareholders from an unfair transaction. Thus, the controlling shareholder has to try to maintain at least the facade that the deal provides adequate compensation. As the Deal Professor wrote recently, “Time and again, management buyouts have gone awry as executives allegedly used their position to buy companies on the cheap.”

The S.E.C. accused Revlon of failing to disclose to independent directors and shareholders that the exchange offer had been found wanting by an outside financial adviser to its employee 401(k) plan — something anyone would want to know about a deal. To keep shareholders in the dark, however, the company went to great lengths to avoid receiving information that would activate its disclosure obligation. It engaged in something one of its employees called “ring-fencing” to keep information from being delivered so that Revlon did not, in turn, have to disclose it.

S.E.C. rules require a company involved in a buyout like this to disclose any report or opinion it receives about the value of the deal and its fairness. When Revlon learned about the negative evaluation of the offer, it rewrote the rules for the 401(k) plan to keep the trustee from disclosing the financial adviser’s determination so that it could claim ignorance. This all sounds a little bit like the child who says “my eyes are closed, so you can’t see me.”

The S.E.C. usually pursues this type of disclosure case as a violation of Rule 10b-5, the broad antifraud provision reaching any “scheme or artifice to defraud” related to a securities transaction. But the accusation against Revlon is under the rarely used Rule 13e-3(b)(1), which prohibits engaging “in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person” in a going-private transaction.

While the wording of the two rules are similar, there is a crucial difference between them. Rule 13e-3(b)(1) reaches conduct that might not meet all the requirements to prove a fraud, as long as it comes reasonably close to appearing to be deceptive. That lets the S.E.C. pursue cases even if it cannot meet all the technicalities for a fraud case, as would be required under Rule 10b-5.

The S.E.C. also opted to bring the case as an administrative proceeding rather than a complaint in federal court, where it pursues most fraud actions. The Dodd-Frank Act authorized the agency to obtain penalties in this type of proceeding, which means it does not have to run the risk of having a federal judge — perhaps even Judge Jed S. Rakoff in Manhattan — scrutinizing its settlement.

Revlon agreed to pay $850,000 as a penalty to settle the case, along with an order not to violate the law again. In its administrative filing, the S.E.C. noted that the company had paid substantial amounts to settle shareholder class actions, totaling about $37 million.

The fine is more of a nuisance than any type of deterrent, but the case may be intended to serve more as a warning to other companies about the S.E.C.’s interest in disclosures in a going-private transaction. The interesting question is whether the S.E.C. will start to use Rule 13e-3(b)(1) to police the conduct of management and controlling shareholders when they try to force out minority shareholders.

Issues related to the inherent conflicts of interest in these transactions have been left for the most part to the state courts because it is usually a question of internal corporate governance regarding the process of evaluating an offer. Delaware is the leading jurisdiction for these transactions, and its courts have struggled to deal with these issues. For the most part, legal rulings push companies to put in place mechanisms to simulate the type of arm’s-length bargaining that would take place in a typical buyout by having independent directors try to negotiate a better price.

Revlon’s efforts to keep important information from its independent directors responsible for evaluating the deal undermined the core of the protection afforded by state law to minority shareholders. If a company is going to deceive its own directors, what hope do shareholders have of receiving a fair deal.

The S.E.C.’s case portrays the company’s conduct as an extreme example of the type of manipulative acts a controlling shareholder can undertake to obtain the deal it wants while giving the appearance of complying with its disclosure obligations under federal securities laws. So if the S.E.C. is only going to pursue cases that involve this type of egregious misconduct, then other companies involved in management buyouts can breath a sigh of relief as long as they do not engage in the type of “ring-fencing” Revlon tried.

But the administrative proceeding could also be seen as a shot across the bow for companies considering this type of transaction. Although shareholder litigation is inevitable in almost any deal, the federal government has largely stayed away from getting involved in going-private transactions — at least until now.

The potential for unfair treatment when a controlling shareholder tries to force out the minority is the type of situation in which the S.E.C.’s mission of protecting investors calls for greater involvement in policing the disclosures. If nothing else, the settlement with Revlon tells companies that their dealings with minority shareholders may be subject to heightened government scrutiny, which can have its own deterrent effect.

British Study Raises Warning on Scottish Banks

LONDON — An independent Scotland could find its banks too big to rescue in the event of another crisis, according to a British government report that compares the Scottish financial sector to those of debt-laden Iceland and Cyprus.

The document, to be published Monday, is the latest of three studies by the British government meant to sway opinion in Scotland ahead of next year’s planned referendum there on independence.

Last month the British government suggested that an independent Scotland would not be able to keep the pound sterling and would have to either adopt its own currency or embrace the euro.

The new study, a summary of which was made available ahead of publication, highlights the size of Scotland’s banking sector — much of which had to be rescued by British taxpayers after the financial crash — relative to the rest of the Scottish economy. The sector stands at 1,254 percent of Scotland’s gross domestic product, compared with banking assets in Britain worth 492 percent of G.D.P., the Treasury document says.

“By way of comparison, before the crisis that hit Cyprus in March 2013, its banks had amassed assets equivalent to around 700 percent of its G.D.P. — a major contributor to the cause and impact of the financial crisis in Cyprus and the ability of the Cypriot authorities to prevent the systemic effects when it hit,” the study says.

The document adds that by the end of 2007 Icelandic banks had amassed consolidated assets equivalent to 880 percent of Icelandic G.D.P.

It cites the verdict of the Organization for Economic Cooperation and Development, which said that “the banks grew to be too big for the Iceland government to rescue.

“Banking in these circumstances became very dangerous when the global financial crisis deepened,” it said.

The study says that “a serious banking crisis in an independent Scotland could pose a significant risk to Scottish taxpayers,” with the potential economic fallout amounting to about 65,000 pounds ($98,600) per capita.

The paper concludes that Scottish banks could either have to accept higher risks and costs associated with volatility or restructure and diversify their assets.

John Swinney, finance secretary of the Scottish government, which supports independence, dismissed that document as “a discredited, feeble attempt to undermine confidence in Scotland’s ability to be a successful independent country” adding that “it will not work.”

Mr. Swinney said that he had viewed a leaked draft of the paper and that much of it “seems to be based on a flawed, outdated view of the world which takes no account of the substantial banking reforms which have been ongoing across Europe since 2008.”

The Treasury’s study counted Scottish banks as all those registered in Scotland, including the Royal Bank of Scotland — but excluding NatWest, which is part of the group but is registered in London, and excluding assets of RBS’s foreign subsidiaries.

Bank of Scotland, which is part of the Lloyds Banking Group, is included as a Scottish institution as it is registered in Scotland.

Untangling Scotland’s banks from the broader British financial sector would be a highly complex task were Scots to vote for independence, because both RBS and Lloyds Banking Group were bailed out by British taxpayers after the financial crash.

The British government owns 80 percent of RBS and 40 percent of Lloyds, which are both run from London. That would almost inevitably require some changes in ownership in the event of independence.

Nevertheless the Treasury’s study argues that the total support provided to RBS in 2008 would have been the equivalent of 211 percent of Scotland’s G.D.P. By contrast the total British interventions across the whole banking sector were 76 percent of the country’s G.D.P.

The document also adds that any attempt at shared regulatory arrangements between an independent Scotland and the continuing United Kingdom would be “significantly more complex than those that currently exist” and would be likely to increase the costs for firms of complying with this regulation.

Hip Resurfacing Draws Warning After Study Published in Lancet

A major study released on Monday urged women to avoid an alternative hip replacement procedure known as “resurfacing” and also recommended against its use in smaller men.

The study reflected the experiences of some 32,000 patients followed by the National Joint Registry of England and Wales. The report was sponsored by the British registry and published in a medical journal, The Lancet.

The researchers, headed by Dr. Ashley W. Blom of the University of Bristol, concluded that resurfacing had an “unacceptably high” early failure rate in women when compared with traditional hip replacement. The early failure rate was also higher in smaller men.

Traditional hip implants are supposed to last 10 years or more before requiring replacement. But the only class of patients in which the durability of a resurfacing was on a par with a traditional plastic-and-metal implant was middle-aged men of larger stature, the study found.

The new report is in keeping with earlier findings about resurfacing, a procedure that preserves more of a patient’s thigh bone than a conventional hip replacement.

Some device makers and surgeons heavily promoted the technique as a breakthrough that would allow younger patients to remain more active. But the procedure’s popularity has fallen in recent years as concerns about it have grown.

Resurfacing devices belong to a class of products know as metal-on-metal implants in which both the cup and ball of an implant are made of metal. Over the last two years, the use of all-metal implants has largely ceased because of evidence that they generate metallic debris as they wear, damaging tissue and muscle.

In a commentary accompanying the new report, an expert in this country, Dr. Art Sedrakyan, noted that the apparent failure of resurfacing devices raised questions about how such products were reviewed by the Food and Drug Administration.

“If hip resurfacing devices are found to be unsafe, then the implications are grave,” wrote Dr. Sedrakyan, a researcher at Weill Cornell Medical College of Cornell University.

While traditional all-metal implants were marketed in this country with little testing, the F.D.A. required producers to run clinical trials of resurfacing implants before they were sold here. As a result, patients who got traditional metal hips that failed can sue their manufacturers, while those patients who got a resurfacing that failed are barred from doing so.

Companies that market resurfacing devices such as Smith & Nephew, which sells a product known as the Birmingham implant, have repeatedly argued that the devices are not prone to the same problems as traditional all-metal implants. And some patients who got a resurfacing have also said that it has allowed them to participate in more physically demanding activities, like skiing.

In a statement, Smith & Nephew said that the new report underscored the company’s longstanding position that “patient selection” is important to the success of the Birmingham device.

“In the right patients, it has a record of superior clinical performance,” the company said.

Dr. Blom, the British researcher, reported that data showed the Birmingham device was used in about 50 percent of all resurfacing procedures captured by the registry.