VideoIn normal circumstances, shutting down a consistently money-spinning division might cause the odd eyebrow to be raised in the boardroom or among investors. But these weren't normal circumstances. In spring 2002, ABB was in deep trouble. The Swiss-Swedish power giant's total debt of €9 billion ($11 billion) exceeded its market value of around $9.6 billion. The firm was facing a liquidity crunch, and potentially huge liabilities from asbestos lawsuits in the United States.
Little wonder that new CFO Peter Voser, along with CEO and chairman Jürgen Dormann, wanted the firm to "drive down the risk profile," recounts Alfred Storck, head of corporate finance and taxes, and deputy CFO.
That meant the break-up and sale of parts of the financial services arm — and a complete turnaround for the firm's profit-center treasury. Since the merger that created ABB in 1988, the treasury had been run as an in-house dealing room, trading in foreign exchange, interest rate and credit swaps, commodities, emerging markets and energy, and actively recruiting employees from the banking community to do so. Of a total treasury staff of 229 in 13 locations worldwide, around 40 were traders, racking up a notional daily trading volume of between $3 billion and $5 billion.
The treasury had turned a profit year on year, but that counted for nothing: amid talk of a downgrade of ABB's debt to junk status, Voser and Dormann could no longer stomach the potential for losses. In June 2002, in the wake of a plan to refocus the business on the "twin pillars" of power technology and automation technology, the decision was taken to halt proprietary trading, and to transform treasury top to bottom. In the three years since, it's morphed from a sprawling, risk-taking profit center to a centralized, risk-averse, service-oriented corporate treasury. ABB's group treasury operations (GTO) is now in three standalone locations — Zurich, Singapore and Norwalk, Connecticut — with just 49 staff.
Says Storck: "You have to decide where to focus, and where to compete. We couldn't afford any longer to have treasury as a profit center, with third-party contracts, as if we were competing with the smaller banks. Top management knew what the results were, but also what the risks were."
Profits of Doom
ABB's was a classic example of a corporate relic — go-go profit-center treasury operations. They started springing up some 30 years ago when multinationals, aware of their increased need to hedge while wanting to reduce transactions costs and tighten spreads, began raiding talent in dealer communities. Allocated heady sums of capital every year, these new treasury operations had the authority to trade financial instruments in the same way a bank would — provided they could demonstrate appropriate returns. The income generated from running countless open positions was typically under close and detailed monitoring, but integration with the rest of a company was minimal. It worked, for a while at least. "Some aggressive corporates used to make more money through treasury trading than through their underlying results," recalls Inès de Dinechin, head of fixed income and derivatives sales for corporates at SG CIB in Paris.
These days, however, profit-center treasuries are thin on the ground. Many of them hit the skids after currency crises in the 1980s and 1990s, when trades famously turned sour for a string of companies including Volkswagen, Metalgesellschaft, Procter & Gamble and Ashanti Goldfields. Since then, corporate appetite for proprietary trading has waned; in the main, executives have allocated capital to core businesses over even the best-run and most profitable treasury operations.
What's more, experts reckon that profit-center treasuries won't make a comeback: not even now, when many companies are cash-rich, and when historically low interest rates are spurring the chase for higher returns. "It doesn't matter if balance sheets are strong again or not, speculation has become a dirty word for corporates," says Martin Schneider, a partner at Zurich-based treasury consultancy Tomato.
Today, at least 90 percent of corporate treasuries in Europe are run as departmental cost centers with neither profit targets nor a capital allocation, reckons François Masquelier, head of treasury and corporate finance at RTL, the €4.9 billion ($6 billion) pan-European broadcaster owned by German giant Bertelsmann, and former chairman of EACT, the European Association of Corporate Treasurers. "Most treasuries have realized they're not there to make money, but to protect the assets of the company, and make sure risks are properly addressed," he says.
But this is where a new understanding of "profit center" is emerging. Thanks to the likes of Sarbanes-Oxley in the United States, the LSF in France, and KonTraG in Germany, executives have been obliged to lay down guidelines, processes and controls to ensure that all activities within a company — treasury included — are carried out in accordance with the company's objectives.
Combined with the advent of IFRS, that's led to a new trend: the close monitoring of treasury operations. In many cases for the first time, treasuries have been obliged to report on the mark-to-market value of their positions, along with a whole host of risk exposures — "essentially, as if they were run on a profit-center basis," says Martin O'Donovan, technical officer at the U.K.'s Association of Corporate Treasurers (ACT).
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