Gores' Siemens buy: One big bet

Billions in losses. Thousands of layoffs. Sounds like a deal to Alec Gores.

The low-profile Los Angeles billionaire has entered into his largest acquisition yet, taking control of Siemens' (SI) troubled $5.5 billion telecom equipment unit, known as Siemens Enterprise Communications. The German industrial giant had been shopping the business for two years. During that time it lost more than $1.5 billion and sheared off more than 6,800 workers through restructuring efforts. Why does Gores think he can do better‾ 'This is a landmark deal for us but it's the same recipe, the same sauce,' he says. 'Big corporations are not as focused on the little things.'

Gores, 55, runs Gores Group, a private equity firm with interests in 15 companies and $1.7 billion under management. His highest-profile deal to date came in 2000 when Mattel (MAT) literally gave him Learning Co., the troubled education software maker for which it had paid more than $3.5 billion two years earlier. When Gores got involved, Learning Co. was losing $1 million a day. Gores split the company in three and sold off the pieces, earning what he says was a $100 million profit for himself.

As part of the latest deal, Siemens and Gores will pony up a combined $540 million in cash. Gores will also contribute two related telecom businesses he owns in exchange for a 51% stake in the new company. Siemens will retain the rest.

Reviving a core business

The unit makes telephone handsets, switching equipment, and software for business customers. Siemens previously created a joint venture with Nokia (NOK) involving its sales of network gear to big telecom carriers. Telecommunications was the original business of Werner von Siemens, who founded the company in 1847 based on a telegraph that recognized letters rather than Morse code. In recent years however, the Munich-based giant has decided to focus on its energy, health-care, and industrial businesses.

Gores, who was born in Israel and grew up in Flint, Mich., started his first business selling computers out of his father's basement. He later began purchasing dying technology companies so that he could sell to customers who still needed parts and servicing. His younger brother, Tom, runs Los Angeles-based Platinum Equity, another, somewhat larger, private equity firm.

The Siemens business has dozens of competitors, including giants such as Cisco (CSCO), Nortel (NT), and Alcatel-Lucent (ALU), as well as many smaller outfits. Gores considers that an opportunity. 'We'll look for other acquisitions and make it a leader in the space,' he says.

Turning around waste

Before that, he'll need to focus on profits. Asked how he'll turn things around, Gores points to another business he acquired, VeriFone (PAY), which he bought from Hewlett-Packard (HPQ) for $50 million in 2001. HP had paid $1.2 billion for the business in 1997.

When Gores bought VeriFone, the maker of credit-card verification terminals for retailers was unprofitable. Under Gores the company ditched a new product design initiative that was eating up 60% of its research budget and channeled the money into marketing and other more popular products. It also got rid of a leasing business that wasn't performing.

 

Gores ultimately sold the business to another buyout shop, Chicago's GTCR Golder Rauner, exiting, he says, at 10 times his original price. Today it's a publicly traded company with a $1.2 billion market value once again. 'You'd be surprised in a big company when they're not paying attention, there are buckets of waste,' he says.

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.

Copyright 2000-2008 by The McGraw-Hill Companies Inc. All rights reserved.

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