By Jens Hack, Maria Sheahan and Philipp Halstrick
MUNICH/FRANKFURT (Reuters) - Tension in the highest ranks of German engineering giant Siemens had been brewing for months when top managers gathered late last month to review the state of the business.
The 166-year-old titan of German industry was having a horrible year, its image tarnished by pricey delays to offshore wind and high-speed train projects, and the closure of its solar thermal business, which had lost 1 billion euros.
But few of those present could have guessed, as they entered the sleek white Siemens Forum building in Munich, that long-running resentments and rivalries were about to boil over with dramatic effect.
The nine members of the management board, led by Chief Executive Peter Loescher, had come together on a Thursday in the midst of a German heat wave, one week before Siemens was to publish its third quarter results.
With some executives taking part by phone, the discussion took a gloomy turn, sources familiar with the talks said, as the heads of the company's big divisions -- industry, energy, healthcare and infrastructure -- warned about disappointing orders and a deteriorating economic environment.
Some argued that Loescher's goal, announced less than nine months before, to boost the firm's operating profit margin to 12 percent by 2014, looked unrealistic. Joe Kaeser, the finance chief who had long viewed that goal with skepticism, agreed.
Loescher pushed back, but to no avail. The fateful decision was taken: Siemens should abandon the profit goal.
Hours later, after a green light from in-house legal experts, the company put out a terse "ad hoc" statement to announce the news. It took the market by surprise and Siemens stock nose-dived.
It was the sixth time in Loescher's six years at the helm of Siemens that he had misjudged the group's profit outlook and it would be the last.
Within days, the 55-year-old Austrian, the first outsider ever to run the company, was unceremoniously booted out.
Kaeser, a "Siemensianer" of over three decades whose disdain for his boss was an open secret in the company and among investors, was hoisted into the top job. Both Loescher and Kaeser declined to be interviewed for this story, although Kaeser told a German newspaper he had played no part in Loescher's removal.
The change at the top of Germany's second most valuable company was shocking both for its speed and for the ruthless way in which it was carried out in a country known for its cozy, consensual approach to business.
It prompted a reaction from Chancellor Angela Merkel, who faces an election next month. She called Siemens a "flagship" and said she hoped it would soon return to "calm waters".
More importantly, the turmoil at Siemens has highlighted weaknesses at the highest levels of German industry at a time when the country is being held up as a model of manufacturing strength in a region in crisis.
Loescher, the son of a sawmill owner, was hailed as a savior when he arrived six years ago from U.S. healthcare group Merck after a bribery scandal at Siemens that claimed the scalps of his predecessor Klaus Kleinfeld and chairman Heinrich von Pierer.
He wasted little time, tackling the scandal head-on and launching the biggest corporate restructuring in decades at Siemens, a company of some 370,000 employees -- a third based in Germany -- which traces its roots to an electrical telegraph company founded by Werner von Siemens in Berlin in 1847.
But Loescher, a tall, reserved man who speaks five languages including Japanese, soon ran into trouble.
Workers fought back against job cuts and the clean-up of the bribery scandal cost hundreds of millions of euros. The new CEO issued his first profit warning only nine months into the job.
Huge writedowns in the company's healthcare and solar businesses followed.
Under Loescher, Siemens failed to keep up with rivals such as Philips
The size and complexity of its business portfolio -- it makes products ranging from gas turbines, to trains, ultrasound machines and hearing aids - have also been a problem of late. Investors have been particularly critical of costly delays plaguing the offshore wind and train businesses.
"It simply should not be possible for a Siemens executive to sign a contract that can result in a half-billion euro loss for late delivery," said Peter Reilly, an analyst at Deutsche Bank.
Some insiders believe Loescher simply failed to recognize that another profit warning would sink him.
"He really underestimated the impact of this," said one source close to the company who requested anonymity. "He can be naive on things like this."
Others see him as the victim of a well-organized putsch, led by Chairman Gerhard Cromme, with the tacit consent of Kaeser.
"It looks to me like he was set up for a fall," said Pascal Boeuf, a fund manager at UBS. "There are signs that this putsch had been planned for some time."
What does seem clear is that Cromme, who brought Loescher on board in 2007, worked actively in the hours after the profit warning to lay the groundwork for his exit.
Cromme, who declined comment, had been forced to step down as chairman of ThyssenKrupp
It is also clear that relations between Loescher and Kaeser were fraught. One source told of a shouting match between the two in an elevator over Loescher's attempt to muzzle the outspoken Kaeser on conference calls with analysts.
At a recent shareholders' meeting in Munich, the two were asked pointedly about their relationship. Loescher played down the tensions, but Kaeser's response did little to ease concerns: "We complement each other like light and darkness," he said.
A former employee says the two hate each other "like the plague".
"YOU CAN'T DO IT THIS WAY"
Still, Loescher did not see the axe coming even after the profit warning sent Siemens stock sliding 8 percent. The next day, a Friday, he gave an interview to Germany's Sueddeutsche Zeitung in which he spoke of "headwinds" and vowed to stay on.
Little did he know that phone calls to organize his exit had begun the evening before, shortly after the "ad hoc" release landed, and that two meetings of board members to discuss his fate had already been set for Saturday.
The first of these meetings was held at the Kempinski Hotel at Munich airport and heard the views of the 10 members of the Siemens board who represent the interests of shareholders.
The other was made up of 10 Siemens labor representatives, who by German custom hold half of the board seats. Their meeting took place at the Siemens Forum building where the profit warning had been decided two days before.
At the Kempinski, Cromme quickly made clear that Loescher must go, sources familiar with the talks told Reuters. One described the chairman's plan as "meticulously prepared".
But Josef Ackermann, the former CEO of Deutsche Bank, pushed back, according to another source, at one point telling Cromme: "Gerhard, you can't do it this way".
Two board members -- Michael Diekmann, the head of German insurance group Allianz
Meanwhile in the city centre, the 10 other board members were reluctant to take sides on Loescher's future. But they feared if they remained neutral, denying Cromme the majority he needed to push out Loescher, then the chairman himself would fall, to be replaced by Ackermann, whom they viewed with suspicion.
In the end, the decision was taken to go along with Cromme and his plan to install Kaeser as CEO. Loescher's fate was sealed.
Can Kaeser, a Bavarian who changed his name to Joe from Josef during a stint in the United States, get Siemens back on track?
Ben Uglow, an analyst at Morgan Stanley, believes his intimate knowledge of Siemens and focus on shareholder value are "relatively unique", giving him as good a chance as anyone.
Still, the challenge is daunting.
Kaeser will have to face down the unions and pare back Siemens' unwieldy business portfolio in order to boost profitability. Crucially, he must show he can say no to contracts that could come back to bite the company.
"Siemens has had an execution problem, and I do not expect that to change," said one fund manager who works for a top-10 investor in Siemens.
The economic environment, in Europe and Asia, won't make things easy. On Wednesday, Kaeser acknowledged that a pickup in China was taking "significantly longer than hoped".
And then there are the lingering tensions arising from Loescher's abrupt ejection, and suspicions that Cromme and Kaeser may have colluded to dislodge him. One executive described the battle between Ackermann and Cromme as "red hot".
"Cromme has to go," the fund manager said. "Only then can Siemens successfully manage to reinvent itself."
(Additional reporting by Arno Schuetze and Tom Atkins; Writing by Noah Barkin; Editing by Giles Elgood)