E.On's strategy is to become a top global, integrated energy service provider via focus and growth strategy. ... [The company will] concentrate exclusively on core energy service business; pursue accretive acquisitions to cement a leading position in Europe and to establish solid position worldwide; dispose of non-utility activities; and continually cut costs and restructure throughout the group.
E.On AG is the largest listed power generation company in Europe. The company was formed through the 2000 merger of VIAG AG and VEBA AG, companies that were initially founded in the 1920s. In their early years, VIAG had specialized in aluminum, electricity, and nitrogen, while VEBA had focused on coal and petroleum exploration and production. Both companies grew rapidly and prospered during the armament years before World War II and during the war as companies operated by the German Reich. They struggled financially during the post-war years of occupation by the Allies and oil crises of the 1970s. However, in the 1980s, the two companies privatized and diversified along similar timelines to emerge as prosperous conglomerates encompassing aluminum, energy production, telecommunications, chemicals, and upstream and downstream oil industry. By the late 1990s, it was no longer profitable to compete in so many areas, so VIAG and VEBA merged to become E.On in 2000, focusing on the core industries of energy and chemicals, and selling aluminum, oil, and telecommunications interests to corporations that specialized in these areas.
The beginnings of VIAG (Vereinigte Industrie-Unternehmungen Aktiengesellschaft) date back to World War I. Soon after the beginning of World War I, it became clear that a free enterprise economy would not be able to satisfy wartime production requirements, and that for many sectors a state-run economy was necessary. As early as August 13, 1914, the Kriegsrohstoff-Abteilung (KRA--War Commodities Department) of the Prussian War Ministry was founded, to guarantee the supply of raw materials needed for military purposes. In other words, these were materials for the arms industry, for clothing, and for other military equipment.
The KRA used new Kriegsgesellschaften (war companies) to procure the required products or to arrange for their procurement or manufacture. Kriegsmetall AG, Kriegschemikalien AG, and Kriegswollbedarfs AG were only a few of these large-scale organizations. As a consequence of the economic measures connected with the Hindenburg Program--a plan developed in 1916 to strengthen the adaptation of German industry for armaments production--the Prussian War Ministry combined under one organization all the military raw materials businesses and the procurement of substitutes by establishing the Kriegsamt (KA--War Office) for the entire Reich in November 1916.
The German aluminum industry received a significant impetus from the war, with the Hindenburg Program in particular providing further stimulus for its expansion. The company Vereinigte Aluminium Werke AG (VAW), based in Berlin, was founded on April 21, 1917, to manufacture the aluminum needed for the war. All of the country's aluminum interests were gradually collected in this company. Initially owned half by the Reich and half by a consortium made up of Chemische Fabrik Friesheim-Elektron AG, Metallbank, and Metallurgische Gesellschaft AG, the Reich took over full ownership at the end of the war.
The Lauta plant, which began operation in October 1918, consisted not only of an aluminum works but also of an aluminum oxide factory and a large power station connected to the brown coal or lignite mine Erika, owned by Ilse-Bergbau AG. However, the power station was sold in 1920 to Mitteldeutsches Kraftwerk AG. The high energy requirements of the aluminum industry meant that electricity from brown coal and from water power were particularly important. After the war, Erftwerk AG, running an aluminum works at Grevenbroich, and, like VAW, half-owned by the Reich until the end of the war, when it assumed full ownership, and the aluminum works at Töging am Inn were incorporated into VAW.
The Aluminum/Energy Link
The locations of these production sites were primarily determined by the need for a constant energy supply offered by neighboring electricity plants. Only a few days after the foundation of VAW, on April 27, 1917, the Innwerk Bayerische Aluminium AG--known as Innwerk AG from 1938--was established at Munich-Töging to provide a constant energy supply for the operation of the aluminum works.
Like VAW, the Reich's nitrogen works owed their creation to the shortage of raw materials that arose during World War I. Before the war, the production of explosives and of fertilizers containing nitrogen was based principally on the processing of Chilean saltpeter, imports of which to Germany could be cut off in the event of war. For this reason, Bayerische Stickstoff-Werke AG (BStW) was founded at Trostberg in early 1908, basing its production on the Frank Caro method and partly-owned by the Deutsche Bank. In 1915, commissioned by the Reich, BStW began to construct two calcium cyanide factories, at Piesteritz near Wittenberg and at Chorzow in Upper Silesia.
The Oberschlesische Stickstoff-Werke AG (OStW), to which the Chorzow factory was sold, was founded in December 1916, and was later appropriated by the Polish state. The Piesteritz factory remained under the Reich's ownership. It was incorporated into Mitteldeutsche Stickstoff-Werke Ag (MStW) on February 24, 1920, and all the company's shares--60 million marks--were acquired by the Reich. Finally, on May 28, 1920, Bayerische Kraftwerke AG--BKW, from 1939 known as Süddeutsche Kalkstickstoffwerke (SKW) AG--was formally incorporated, with its headquarters in Munich.
Germany's Interests in Electric Power
Apart from aluminum and nitrogen, the country's industrial interests were directed toward the electric power industry, as the production processes of both the aluminum and calcium cyanide industries were dependent on a sufficient supply of energy. On February 9, 1915, the BG-JAG brown coal works undertook to establish a large power plant for the production of nitrogen at Piesteritz.
As brown coal was used only to produce electrical current, the company changed its name to Electrowerke AG (EWAG). The large Zschornewitz power station had begun operation by the end of 1915. In 1918, EWAG began to develop grid electricity supply as its core activity. Deutsche Werke Aktiengesellschaft (DW) was founded at Berlin on December 4, 1919, with the object of converting about 20 armaments workshops and war shipyards owned by the Reich and the states of Prussia, Bavaria, and Saxony to peace-time production.
Another important company that was later to form the basis of VIAG was the Reichs--Kredit-Gesellschaft, which dated from 1919. To regulate the financial management of the Kriegsgesellschaften, founded during the economic control of World War I, the Imperial Treasury established a Statistical Office for War Companies. After the end of World War I, this office was gradually extended, producing the Reichs-Kredit und Krontrollstelle GmbH, based in Berlin and founded on July 20, 1919, which was transformed into the Reichs--Kredit-Gesellschaft mbH (ERKA) in September 1922. After the foundation of VIAG, ERKA, which remained stock-owned, became the company's bank.
VIAG Created to Manage the Reich's Industrial Interests
At the end of March 1923, the National Treasury Ministry that administered and supervised the Reich's industrial interests was dissolved in connection with the government's cost-cutting plans. Efforts were also made to find a means of managing the Reich's wide-ranging industrial interests, hitherto assigned to the Industry Department, in a non-bureaucratic way, organizing them on consistent, purely commercial principles. The two functions of the Industry Department were separated: the actual management of the companies was to be transferred to a specially created holding company, while the pure financial custody and management were transferred to the National Finance Ministry.
The holding company, based in Berlin, was founded on March 7, 1923, under the name Vereinigte Industrie-Unternehmungen Aktiengesellschaft (VIAG). The objects of the company were as follows: the holding of shares in commercial enterprises of every type; the operation, administration and financing of companies, as well as the undertaking of related banking transactions; and, in general, the adoption of any measures which seemed appropriate to the management board in order to attain or further the aims of the company. The company was entitled to establish branches both in Germany and abroad and to enter into cooperation agreements. Thus VIAG was defined purely as a stock holding company, which was not directly involved in production.
The founder of VIAG was the German Reich. In the foundation proceedings of March 7, 1923, the share capital was set at 600 million marks, divided into 600,000 shares at 1,000 marks apiece. The Reich was shareholder. Subsidiaries were the Reichs--Kredit-Gesellschaft mbH, Elektrowerke AG, Vereinigte Aluminium-Werke AG, and Duetsche Werke AG. Shareholdings in Elektrowerke AG and the Württembergische Landes-Elektrizitäts AG, in Vereinigte Aluminum-Werke AG and Innwerk, in Bayerische Aluminium AG and Deutsche Werke AG were among the most important of the assets transferred.
In the years following its foundation, VIAG concentrated on its core activities of aluminum, nitrogen, and electricity and strengthened the economic integration of these areas. The geographical centers of the group's activities emerged as central Germany and upper Bavaria. In central Germany, the company had EWAG, operating the Lauta power station using brown coal from Ilse-Bergbau AG, the aluminum works of VAW, and the calcium cyanide works at Peisteritz, supplied with electricity by the Mitteldeutsche Stickstoffwerke. Similarly, in upper Bavaria the hydroelectric power stations of Innwerk, Bayerische Aluminium AG, and Alzwerke GmbH worked together with the Töging aluminum factory--acquired by VAW in 1925, and the carbide factory of Bayerische Kraftwerk AG. Most of VIAG's shareholdings that did not fit with the core group activities were disposed of in the following years.
VIAG's First Profit
Before the beginning of the 1930s, the management of VIAG restructured its individual factories to attain profitability. The only income earned by VIAG was the dividends from its group companies. VIAG's net profits rose by 42 percent to 12 million reichsmarks between 1925 and 1929. In the financial year 1924-1925, a dividend of 5 percent was paid out for the first time. In the following years the dividend rose to 8 percent. A significant initial undertaking by the group was the conversion in 1925 of the separate factories of Deutsche Werke AG into independent companies better able to acquire production requirements for themselves, such as the factory at Spandau, which was converted into Deutsche Industriewerke AG (DIW), and was the only one of these companies to remain in the VIAG group.
Founded as Vereinigte Elektrizitäts und Bergwerke AG (VEBA) in 1929, VEBA traces its roots to the mid-nineteenth century, when William Thomas Mulvaney emigrated from London to Germany. Mulvaney was born in Northern Ireland in 1806 and began his working life as a surveyor in London. When the British Civil Service was restructured in the 1850s, Mulvaney was among the many who were made redundant. Upon moving to Germany in 1855, he used his surveying skills to select for purchase a number of coal fields in Westphalia. He employed new procedures for the construction of extremely efficient mine shafts, which put his mines ahead of others in production.
By 1865, his 1,230 miners were mining 330,000 tons of coal per year, much more than others with the same number of miners. After the war of 1870-1872, coal prices fell and Mulvaney's Irish shareholders sold out. In 1873 he formed, with two German banks, the Hibernia & Shamrock-Bergwerksgesellschaft zu Berlin, with 5.6 million marks as capital. Mulvaney served as the chairman of the board until his death in 1885.
Beginning in 1889, the company went through a period of expansion, attracting the unwanted attention of the Prussian government, which accumulated a 46 percent stake in the energy company by 1904. In spite of opposition from privately held banks and mining companies, the state acquired full control of Hibernia in 1917.
Hibernia formed the core of a state-owned energy cartel created through the 1929 amalgamation of the coal company with Preussischen Elektrizitäts-G.G. (PreussenElektra), the federal electric utility formed in 1927, and Preussichen Bergwerks-und Hütten AG (Preussag). The purpose of the formation of VEBA was to entice international financing for the companies. No foreign capital was invested, though some internal investments were obtained.
VEBA survived as a state owned business into the early 1930s. In 1933, VEBA became a major participant in the Third Reich's Four Year Plan, converting some of its works into armaments factories, and expanded into the petroleum industry in 1935, when it created a chemical refinery called Hüls. Intense wartime research led to the development of coal-derived gasoline and synthetic rubber. VEBA managed to avoid being bombed by the Allies until 1944, and by the end of 1945, the works were all repaired and in full operation again. After the War, most of the members of the board were arrested; one managed to disappear.
The Stinnes Link to VEBA
A businessman named Hugo Stinnes was creating what would become the biggest business concern in German history. His namesake company, Hugo Stinnes AG, would become part of the VEBA group in 1965. Born in 1870, Stinnes was the grandson of the successful coal merchant Mathias Stinnes; he founded Hugo Stinnes AG at 23 with a capital of 50,000 marks.
Initially, Hugo Stinnes followed his grandfather's formula for success, acquiring mines, building ships, and setting up coal depots throughout the North, Baltic, and Mediterranean seas. He was also involved in the massive expansion by amalgamation of the gas and electricity supplier Rheinisch-Westfälische Elektrizitätswerk AG. In 1909, he began to build up a trading center for his businesses in Hamburg, where he was most active during World War I.
In 1916, Stinnes bought out Eduard Woermann, and acquired the Hamburg-Amerika and the Norddeutscher-Lloyd, as well as shares in the Woermann and German East African lines, and he bought the entire business of coal merchants H.W. Heidmann and two hotels, one of which became offices for his empire. Having wiped out his competitors at home, he moved toward those in the occupied countries of Belgium and France, amalgamating and incorporating at will, and encouraging the German government to deport Belgian workers.
Stinnes continued after the war as before. His Deutsch-Luxemburg concern had been most seriously damaged, so in 1920 Stinnes arranged for its merger with the Gelsenkirchener Bergwerks AG, founded in 1873 by Emil and Adolf Kirdorf, to form the Rheinelbe Union, linking it with the Siemens-Konzern, which dealt in electrical appliances, instruments, automobiles, and trucks. The huge Siemens--Rheinelbe--Schuckert-Union had absolute control of both supply and market. With a capital of 615 million marks, it made Stinnes the most powerful businessman in Germany, if not in Europe.
He tried to earn popularity with the press by purchasing book publishers, paper mills, bookbinders, printers, and, finally, a few newspapers. For variety, he bought an automobile factory, the Esplanade Hotel in Berlin, and a few other hotels in Thüringen. Lastly, he began to move into banking, where he met his greatest opposition.
Stinnes once said that he had worked hard in order to make money for his children. Alas, within a year after his death in 1924, his sons had argued with the directors of the empire and with the banks their father had offended, and the banks sold sections of the company. Hugo Stinnes, Jr. got some American backing to form the Hugo Stinnes Corporation in New York. However, the family's share of the corporation was seized by the United States in 1941 as assets of the enemy. In 1947, Dr. Heinz Kemper was appointed by the Allies as trustee of Stinnes assets, which were transferred to the newly founded Hugo Stinnes AG in 1956. In 1965, VEBA acquired 95 percent of Hugo Stinnes AG, then in 1992, acquired the remaining 5 percent of the newly renamed Stinnes AG and took it off the stock exchange.
Armament and VIAG's Burgeoning Profits
The armament process, which began in 1933, brought an upturn in business for VIAG as for other companies. The number of employees rose by 66 percent over 1932-1933 to 30,387, with the number increasing to 70,000 in the years immediately prior to the war. VIAG and its companies, as a group owned directly or indirectly by the Reich, were harnessed into the armament program of the National Socialist government, especially after 1936. By 1935, the production capacities of group subsidiaries were already being used to the full, causing VIAG's businesses to extend their plants. VAW built a new aluminum oxide plant, Nabwerk, at Schwandorf, for example, and nitrogen production was increased considerably.
The annexation of Austria to the German Reich in March 1938 brought a significant increase in VIAG's sphere of activity, including looking after electro-industrial interests in the territories which had been adjoined to the German Reich. To meet this objective, VIAG founded the Österreichische Elektrowerke in Vienna on April 22, 1938; the company was renamed Alpen-Elektrowerke Aktiengesellschaft (AEW) one month later. In connection with the takeover of the Austrian National Bank by the Reichsbank and the transfer of the Österreichische Industriekredit AG to the Österreichische Creditanstalt-Wiener Bankverein (CA), VIAG received 76 percent of the bank's converted share capital of 70.7 million reichmarks as a contribution to an increase in its own capital base.
Expansion in the 1930s and 1940s
VIAG's expanded activities during the War included increasing its shareholding in Ilse-Bergbau AG to more than 60 percent by acquiring further ordinary shares worth 10 million reichsmarks. It also acquired further shares in Innwerk AG from the state of Bavaria, as well as 50 percent of the share capital the electricity company Bayernwerk Aktiengesellschaft (BAG) in Munich. Together with the state of Bavaria and the electricity company Rheinisch-Westfälisches Elektrizitätswerke AG (RWE), VIAG founded the Bayerische Wasserkraftwerke Aktiengesellschaft (BAWAG), based in Munich on January 26, 1940.
When the war ended, VIAG was sequestrated and administered, at first, by trustees. VIAG's situation between May 1945 and July 1951 was determined by the military rule in the four zones of occupation. Ludger Westrick, the general trustee appointed by the Bavarian state authorities and previously a director of VAW, is largely to be credited with extricating VIAG from military law through his attempts to restructure the business in cooperation with the Allies. This was made all the more difficult as dismantling of works under the Allied war repatriations program and the shortage of raw materials that dominated the day-to-day business. When the relevant Allied authorities lifted all bans, restrictions, and controls in 1951, complete reorganization of VIAG began with the election of a management board and the formation of a supervisory board. Bonn became the base of the new company, which in its first deutschmark (DM) accounts recorded a share capital that had dwindled to DM160 million.
VIAG's Post-War Profits Increase
After the financial year 1949-1950, net profits increased every year, reaching DM1.45 million in 1951-1952. In 1952-1953, a dividend, of 3 percent, was paid for the first time. VIAG had created a solid foundation for further progress. Shareholdings of VIAG totaled DM 254.06 million making up 95.9 percent of total group assets.
From 1953 to 1960, processes of consolidation, rationalization, and modernization dominated the business activities of the separate VIAG works. Dividends were raised by 1 percent each year, so that by 1959-1960 VIAG was able to pay out dividends of 10 percent. Bayernwerk AG raised its capital by DM 50 million to DM 150 million to increase its utilization of primary energy sources in Bavaria, such as brown coal, which were cheap at the time.
This strategy led to a decisive change in VIAG's energy supply base in subsequent years. In 1956, two-thirds of the electricity was produced by hydroelectric power and only one-third by steam power, but by 1960, thermal electricity generation from brown coal had already overtaken hydroelectric power. VIAG and its subsidiaries now formed a modern, stable group. In the following years the company devoted itself to expanding its subsidiaries to meet the continually growing markets for electricity, aluminum, and chemical products. Between 1960 and 1972, VIAG invested over DM 5 billion in its subsidiaries.
Post-War Changes for VEBA
The Allies turned VEBA over to the Federal Republic of Germany (West Germany) at the war's end. The government formed a new 21-member board of directors in 1952 and inaugurated a period of expansion. There were major extensions to chemical works and power plants. In 1956, because of the high cost of coal production, VEBA turned to oil production. Initially, share prices were high, but when they dropped VEBA bought quite a few of its own shares. Soon afterward, another VEBA subsidiary built the first nuclear power plant in West Germany. By the early 1990s, nuclear generators would provide nearly half of VEBA's power.
Struggling Toward Capitalization
In the 1970s, two issues were at the center of public interest: capital-raising for investments and privatization. The government's privatization plans--after its successes with Preussag and the Volkswagen works--aroused heated public debate and dominated the headlines in press articles on VIAG from the end of the 1950s until the actual privatization in 1986. In 1968-1969, the plans to privatize VIAG escalated to become an electoral issue and a subject of dispute between the parties. Another significant problem for VIAG was the fact that the company could not go to the capital markets to raise funds for financing and investment. The group could only obtain the funds needed for investment through bank loans, that is, by incurring debt.
VIAG could not develop freely in the market, and so could only work with restricted resources; in spite of its successful evolution, the group faced a serious obstacle to growth. Expansion through acquisition, indispensable for the effective development of an industrial group, was impossible. Internal expansion also proved extremely difficult. The consequences of these problems could be seen in high reserves, depreciation, and dividends, which were disproportionately low in relation to the company's success.
Although the federal government, as sole shareholder, had received DM124 million in dividends since 1953, it could not make funds available for any increase in capital. Because of this, VIAG was forced to increase its own reserves by drawing on current profits. In 1968, the share capital of DM 254 million was raised by DM50 million to DM304 million at a rate of 220 percent. The Kreditanstalt für Wiederaufbau--a bank for reconstruction founded in 1948 offering middle to long-term loans from the Marshall Plan as well as its own funds--took up the new shares. In this way VIAG acquired new funds amounting to DM 110 million. From this time onwards, the Kreditanstalt für Wiederaufbau held around 16 percent of the increased share capital.
The Aluminum and Electricity Production Mix
Associate companies continued to form the basis of VIAG's success in the 1970s. Growing industrialization and the progressive mechanization of work processes led to an increase in electricity consumption in VIAG's aluminum and calcium cyanide business. The aluminum works in particular, with the expansion and increased use of their capacity, needed significantly more electricity. Electrochemical production, with electricity consumption of just over four billion kilowatt hours (kWh), had a correspondingly high share of the total. Through the continuing expansion of electricity production, especially in the field production from steam power, VIAG's need for externally generated electricity was steadily reduced. VIAG's share of total electricity production in the federal republic stood at around 8 percent in 1965; by 1970 it had sunk to about 7 percent.
Aluminum had long been regarded as the principal business of VIAG. Although electric power production grew faster after World War II, VAW remained the group's largest business in terms both of turnover and of work force. VAW--with its subsidiaries, Vereinigte Leichtmetall-Werke GmbH (known from 1971 as VAW Leichtmetall GmbH), Aluminium Norf GmbH, Aluminium-Oxid Stade GmbH, and VAW of America Inc.--dominated VIAG's business activities throughout the 1970s and until the beginning of the 1980s. In 1960, VAW had a 70-percent share of aluminum production in the federal republic and met 30percent of the country's aluminum requirements. In 1971 VAW produced 248,000 tons of primary aluminum in total.
The aluminum crisis dominated the whole of the 1970s and the first years of the 1980s. The crisis had begun as early as 1968, when the federal republic placed high taxes on exports but reduced taxes on imports, a measure equivalent to a revaluation of the deutschmark by 4 percent. In 1969, the federal government raised the value of the deutschmark by 8.5 percent making US$1 equivalent to DM 3.66. As the aluminum price was largely dependent on the dollar, any speculation on the currency exchange market involving an upward valuation of the deutschmark or a devaluation of the dollar had catastrophic results for the aluminum market.
The oil crises of 1973 and 1976, and the accompanying increased price of oil required for electricity production, exacerbated the situation. In 1975, production declined significantly, leading to a reduction in working hours for VIAG's employees; the company lost DM120 million. Only in 1983 was the crisis successfully overcome. SKW at Trostberg was restructured during this period. While the share of the main product, calcium cyanide, declined to around a third of the total output, acrylic nitril production increased substantially. In 1981-1982, Hoechst AG sold its 50 percent share in SKW to VIAG, which now owned 100 percent of the company.
In the 1970s, electrical power production acquired increasing importance. Of the total profits of over DM 47.5 million produced by subsidiaries in 1973, DM 42 million came from the electrical sector. In particular, Bayernwerk AG, in which VIAG had a 38.86 percent shareholding--it had to hand over some of its BAG shares to the Bavarian state after the war--was operating with great success. Electricity production by VIAG companies in this sector amounted to 22.6 billion kWh in 1973. Gradually nuclear energy came to play an increasingly important role.
The share of electricity produced by nuclear power, which had amounted to only 4 percent in 1978, had risen to 70 percent by 1988, after the incorporation into the grid system of the nuclear power, which had amounted to only 4 percent in 1978, had risen to 70 percent by 1988, after the incorporation into the grid system of the nuclear power station Von Isar II in Bavaria. Hydroelectric power now only played a minor role. By the mid-1980s, VIAG had managed to overcome the crisis in the aluminum sector and had successfully completed the restructuring of its activities. At the beginning of 1981, VIAG acquired 50 percent of Thyssengas GmbH--an important step on the path of acquisition.
In 1971, VEBA embarked upon a grand reorganization scheme, disbanding Hibernia and putting nearly all of its shares into VEBA Chemie AG. VEBA was restructured along four main lines of operation: the supply of energy, chemicals, glass, and trade-transport services. In 1973 and again in 1979, the Federal Antitrust Commission ruled against VEBA's share dealings, although the Commission's ruling was ignored and the deals permitted by means of "ministerial permission." By this time, VEBA had some 900,000 shareholders, and was the biggest joint stock company in Europe.
VEBA encountered difficulties in the 1970s, when overcapacity and the global oil shortage combined to put the squeeze on the energy company's oil business. In 1981, VEBA added the U.S.-based exploration firm Mark Producing to its oil-seeking arms in Libya and Syria. When oil prices started to decline, VEBA again found itself on the wrong end of the energy industry's cycle. While the purchase and eventual divestment of Mark Producing was judged a "disaster" by Sharon Reier of Financial World, VEBA's subsequent affiliation with the state-owned Petroleos de Venezuela (PDVSA) helped build VEBA Oel into the largest German-owned oil company, supplying 60 percent of its own petroleum needs.
Privatization for VIAG at Last
After a partial privatization in 1986, the group was fully privatized in 1988. From May 3, 1988, onward, the federal government and the Kreditanstalt für Wiederaufbau sold their remaining shares in VIAG at a rate of DM210. In the second stage of the privatization, 6.96 million shares of DM50 each, with a nominal value of DM348 million were placed with a consortium of 51 banks under the leadership of Deutsche Bank AG.
Apart from the privatization, the period from 1984 to 1990 was marked by the sale and purchase of new shareholdings and by the restructuring of subsidiaries. Freed from state restrictions, VIAG was now able to be active on the capital markets, and could plan further acquisitions. At the beginning of 1986, VIAG acquired 15 percent of the share capital of Didier-Werke AG, at Wiesbaden. On January 1, 1990, VIAG took over Klöckner & Co. (KlöCo), at Duisburg-Hamborn, a company that had gotten into difficulties, together with Bayernwerk AG. Steel accounted for about half of the KlöCo's turnover amounting to nearly DM 12 billion; one-third of turnover came from energy, building products, heating technology, machine tools, transport, and textile importing; 14 percent of turnover came from raw materials, chemicals, and environmental technology; and 4 percent from trading in industrial plant.
Bayernwerk AG, a Munich utility, and VIAG established a joint industrial holding company, based in Berlin and named VBB Viag-Bayernwerk-Beteiligungs-Gesellschaft mbH, with each company having a 50 percent share. On January 1990, VBB acquired a 24.99 percent stake in Gerresheimer Glas AG at Düsseldorf. VIAG also acquired a series of other shareholdings between 1985 and 1990 through its subsidiaries, especially VAW, SKW-Trostberg AG, and Bayernwerk AG. The reunification of Germany offered VIAG possibilities for a new field of activity, especially in the central German factories that were lost at the end of World War II.
VEBA's Struggles in the Early 1990s
Rudolf von Benningsen-Foerder remained at the helm of VEBA through 1989, occasionally selling off a company or two or buying a few others. In 1987, the government's last 25.55 percent was sold and VEBA became a public company. Chief Financial Officer Ulrich Hartmann advanced to CEO and led the company through the mid-1990s.
VEBA's sales fell by 6.8 percent from 1992 to 1993 as declining chemical prices contributed to a 47.3 percent drop in net income. In 1991, when British investment bank S.G. Warburg's report that VEBA's constituent parts were more valuable than the whole, the company instituted a reorganization, selling several divisions and restructuring those that remained. The program included the elimination of 10,000 jobs. Hüls was the hardest hit, with a 27 percent work force reduction by the end of 1994. According to The Economist, Hartmann hinted that VEBA could shed its petrochemical core in the years to come.
The criticism, combined with a general downturn in the petrochemicals market, helped prompt an early 1990s diversification. In 1991, VEBA formed Baltic Cable, a joint venture with Swedish utility Sydkraft, to provide cable services in the two countries. VEBA also acquired Lion, a small software company, in the early 1990s, and faced wider competition in the energy business, as Germany opened that industry to international competition.
These measures helped fuel a seven percent rise in sales, from DM66.3 billion in 1993 to DM71.0 billion in 1994, and a healthy 51-percent rebound in profits, from DM1.01 billion to DM1.53 billion over the same period. With interests in electricity, oil, chemicals and transportation, VEBA AG was Germany's fourth-largest conglomerate in 1995. While over two-thirds of its annual revenues were generated in the European Community, the business also had operations in North America, Latin America, the Asia/Pacific region, and Africa.
The Scramble for Germany's Telecommunications Market
In 1995, there was a rush of competition as companies geared up for the liberalization of the telecommunications industry, due in 1998 with the end of the Duetsche Telekom AG (DT) voice services monopoly. VIAG joined the fray with British Telecommunications PLC to offer telecommunications services in Germany. DT had been serving over 95 percent of Germany's DM 70 billion ($45 billion) telecom market. On the heels of VIAG's announcement, VEBA, parent to Vebacom GmbH, negotiated with Cable & Wireless PLC to form a joint venture for telecommunications services in Germany that would be in direct competition with Duetsche Telekom.
Of these leaps into telecommunications, The Economist quips, "One of the more fashionable things to do if you are a slightly stodgy but rich European utility is to branch out into telecoms of one sort or another. It is not just that the phone market seems to be growing whilst most other public services look a little sluggish. It is also a question of sex appeal: who wants to be in the boring old business of delivering electricity, pumping water, or bringing commuters to work when there are things like satellite telephony and multimedia in the air?"
As it happened, Britain's Cable & Wireless pulled out of its joint venture with VEBA and RWE in 1997, one year before liberalization of Germany's telecom industry, demonstrating the frenetic rate of change in telecommunications. VEBA then made an offer to C&W to gain its 45 percent stake in Vebacom and, in the following year, made a deal with BellSouth Corporation in the United States for a joint venture to provide fixed and mobile communications services in Germany.
In 1998, VIAG, partnering with Orange PLC, won one of two very competitive licenses from the Swiss Communications Commission for mobile communications in Switzerland. Swisscom had had the mobile communications market to itself. The 1.8 GHz license was awarded to a consortia in which Orange and VIAG owned significant minority stakes. Orange and VIAG partnered on GSM-1800 licenses in three European countries, the others being Germany and Austria.
In spring 1999, VEBA and RWE AG agreed to sell the wireless assets of their telecommunications subsidiary to Mannesmann Arcor for $1.23 billion, a transaction that included a 6,600-mile fiber optic network, the customer base, trade name, and 2,800 employees. VEBA said it would focus on wireless telecommunications in the future.
Merging of VEBA and VIAG
VEBA and VIAG, both massive energy and chemicals conglomerates, announced in the press in September 1999 their planned merger, worth EUR 13.4 billion (US $14.0 billion). The companies had a combined annual turnover of 150 billion marks (US $80 billion) and 200,000 employees. The logic given was that the merged company could then become a global player, with its headquarters in Düesseldorf, co-led by Ulrich Hartmann, chairman of VEBA, and Wilhelm Simsom, chairman of VIAG. The key areas of the companies, chemicals and power supply, were to be launched in January 2000. Hartman noted that other major units of VEBA and VIAG would merge over the next few years.
According to the Xinhua News Agency, analysts stated that the "two main reasons for the merger are the fierce competition in a liberalized German domestic energy market, and, more important, the tougher pressure facing German companies in the European and world stage since the European common currency has been launched." It was estimated that the two companies would save about 1.6 billion marks per year by 2002. About 2,500 jobs, primarily in the energy unit, would be cut.
The Oil Daily further stated that the consolidation of European gas and electricity markets was accelerating because of the speed with which barriers were being knocked down by major U.S. companies, such as Enron Corporation and Southern Company. The combined new company, which would be owned 64.5 percent by VEBA and 35.5 percent by VIAG (VEBA was more than twice the size of VIAG), would focus on core products of energy and specialty chemicals, using the sale of non-core assets to fund acquisitions. VEBA also bought 10 percent of VIAG from the Bavarian government for about EUR 1.6 billion (US $1.59 billion), while Bavaria held 15 percent of VIAG. The newly merged VEBA and VIAG, the second and third largest energy companies respectively, would then be Europe's largest listed energy company.
The non-core businesses that would be divested were worth about $29 billion, and included all telecommunications holdings, aluminum, packaging, electronics, and logistics. The merged company would hold on to its oil interests, all of which came from VEBA. Although the new group would be based in VEBA's Düsseldorf headquarters, the energy division, focused on newly merged PreussenElektra and Bayernwerk, would be based in Munich. The specialty chemicals would include VEBA's Degussa-Huls division and VIAG's SKW Trostberg, and would also be based in Munich.
As noted in Chemical Week, the mega-merger "combined VEBA subsidiary Degussa-Huls with VIAG's SKW arm, creating the third largest German chemical company, after BASF and Bayer, with sales of EUR 16.34 billion (US $16 billion) per year." The restructuring launched by the new company included the divestment of businesses with combined sales of EUR 28.2 billion per year, approximately half its sales. Businesses that were up for sale included MEMC Microelectronic Materials and VEBA's 65.5-percent share of logistics group Stinnes, parent company of the world's largest chemical distributor Brenntag. Others included VAW Aluminium, mobile phone company E-Plus, packaging group Schmalback-Lubeca, glass maker Gerresheimer Glas, Cable television firm Cablecom, and trading company Kloeckner.
One of the more complex divestitures was that of VEBA Electronics Group, based in Santa Clara, California, made up of four member companies: MEMEC, EBV Elektronik, Raab Karcher Electronic Systems, and Wylie Electronics. In North America, Insight Electronics, Unique Technologies, and Impact technologies covered the semiconductor specialist market for MEMEC. VEBA Electronics had sales of $5.47 billion in 1999, a 33 percent increase over 1998.
In April 2000, VEBA and VIAG announced that their new company's name would be E.On AG, with the merger scheduled for June 2000. E.On would have 40 departments in 18 business areas, with the chemicals subsidiaries merger of Degussa-Huls and SKW Trostberg taking place later in the year. VIAG agreed to sell its 72.9 percent stake in glass packaging producer Gerresheimer Glas to private equity company Investcorp. The combined companies of Degussa-Huls and SKW Trostberg, with sales of EUR 5 billion (US $4.7 billion), were to become Degussa. E.On planned to double the sales of its remaining businesses to EUR 18 billion (US $17.5 billion) by 2004.
Let the Acquisitions Begin!
E.On, as Germany's second largest power company, announced its acquisition of the British utility Powergen for US$7.3 billion in May 2001, a deal that was approved by regulators later in the year, ultimately closing in spring 2002. This was E.On's opportunity to break into the U.S. market, as Powergen-owned LG&E, a Kentucky electricity supplier. The deal was the most recent in a series of mergers and acquisitions that had restructured Europe's deregulating energy markets in a two-year period. The acquisition made E.On the second largest electricity supplier in the world, with Electricité de France being the first. It was reported in Europe that E.On stated that it had another US$35.2 billion to finance acquisitions.
In July of 2001, BP acquired 51 percent of E.On's VEBA Oel's downstream business in an effort to compete with Royal Dutch/Shell, making BP the largest downstream company in Germany. VEBA Oel had interests in five refineries at the time. E.On received in return a 51-percent stake in BP's Gelsenberg subsidiary that held the British company's 25.5 percent interest in Germany's leading gas distributor Ruhrgas. In addition, BP paid E.On US$1.63 billion in cash, and assumed US$950 million in debt. According to the Oil Daily, the acquisition was the first step toward BP's full ownership of VEBA Oel in June 2002, when it acquired the remaining 49-percent in return for its remaining interest in Ruhrgas and a further US$2.4 billion. BP's acquisition of VEBA Oel and its Aral chain of gas stations gave it a 25-percent share of the German retail market and the leader in all of Europe, with the exception of Italy and the Balkans, with an average of 16-percent market share. The deal between also enhanced E.On's emerging profile as an international multi-utility.
The international operations of VEBA Oil and Gas were acquired by Petro-Canada in January 2002, a deal valued at C $3.2 billion (US $2 billion) in cash, and involving production of 175,000 barrels of oil equivalent per day (boe) and gas reserves of 600 million boe. The acquisition was a significant expansion for Petro-Canada, which moved the company more deeply into the North Sea, North Africa, and Latin America, and increased the company's holdings in Libya, Venezuela, and Syria. The expansion increased daily production by 78 percent for Petro-Canada production.
The New World of Energy Markets
By May 2002, Europe's major power utilities were positioned for takeovers in the United States, but found the number of targets depleted at home by the takeover frenzy of US$100 billion, while the valuations of American energy firms were halved by the collapse of Enron. Europe reported that European utilities had spent about US$25 billion on U.S. power companies in the previous four years, but still want a bigger presence in the world's largest power market. E.On Chairman Ulrich Hartmann stated that he planned to make two acquisitions in the U.S. midwest, using funds from planned asset sales and potential bank loans for expansions.
In July 2002, E.On acquired a 40-percent stake in Ruhrgas, a company that is held publicly by ExxonMobil, Shell, and Preussag for EUR 4.1billion (US $3.98 billion). In its completion of the acquisitions of Gelsenberg, Bergemann, and the ExxonMobil, Shell, Pruessag shares, E.On became the full owner of Ruhrgas. Conversely, E.On sold its 65.4-percent stake in Stinnes AG to Deutsche Bahn AG for cash in August 2002 for EUR 32.75 per Stinnes share, or 24.5-percent premium over the stock's closing price on June 26, 2002. In this continued shifting from a diversified conglomerate to an international energy presence, only time will tell what paths E.On will take to reinvent itself in the future.
Principal Subsidiaries:E.On Energie AG, Munich, Germany; Viterra AG, Essen, Germany; Degussa AG, Düsseldorf, Germany; Stinnes AG, Mülheim/Ruhr, Germany; Schleswag AG, Rendsburg, Germany; EWE Aktiengesellschaft, Oldenburg, Germany; EMR GmbH, Herford, Germany; e.dis Energie Nord AG, Fürstenwalde, German; Avacon AG, Helmstedt, Germany; Wesertal GmbH, Hameln, Germany; PESG Aktiengesellschaft, Paderborn, Germany; TEAG Thüringer, Erfurt, Germany; Energie-Aktiengesellschaft Mitteldeutschland EAM, Kassel, Germany; E.On Bayern AG, Regersburg, Germany; Thüga Aktiengesellschaft, Munich, Germany; E.On Kerndraft GmbH and E.On Kraftwerke GmbH, Hanover, Germany; Ruhr Energie GmbH, Gelsenkirchen, Germany; E.On Netz GmbH, Bayreuth, Germany, E.On Wasserdraft GmbH, Landshut, Germany; E.On Sales & Trading GmbH, Munich, Germany; Espoon Sähkö Oyj, Espoo, Finland; E.On Scandinavia AB and Sydkraft AB, Malmö, Sweden; Powergen PLC, Coventry, UK; E.On Benelux B.V., Rotterdam, The Netherlands; E.On Bohemia s.r.o., Prague, Czech Republic; E.On Polska Sp. Z o.o., Warsaw, Poland; E.On Italia S.p.A., Milan, Italy; E.On Hungária Rt, Budapest, Hungary, LG&E Energy, Louisville, Kentucky, United States.
Principal Competitors:BASF AG; RWE.
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