The impact of investment funds on restructuring - Eurofound

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The impact of investment funds on restructuring practices and

employment levels

Company case studies

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Contents

1. United Kingdom

2. Germany

3. The Netherlands

4. Sweden

5. Italy

6. Poland

7. Hungary

Bibliography

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AA/Saga-Acromas

AA/Saga-Acromas represents the UK’s second largest private equity acquisition (after Alliance Boots) and constitutes

the case which to date has received most publicity. Though it has been widely covered in the media, it is still difficult to

ascertain some of the history of the acquisition, subsequent operations and outcomes, especially for labour.1

The Automobile Association (AA) was established in 1905 to provide motoring services to the public and was organised

as a mutual organisation owned by its members. Over the years it had come to supply breakdown and recovery services,

insurance, and books and magazines and it employs patrol staff, insurance workers, staff office, call centre workers and

other miscellaneous staff. In the late 1990s, it had a total employment of around 10,000. However, by then it had already

begun restructuring, not least by closing its high street shops, with the loss of 1,000 jobs.

In 1999, through a members’ vote, the AA was de-mutualised and reconstituted as a private limited company. Shortly

thereafter, the company was sold to the gas company Centrica, for GBP 1.1 billion (about €1.76 billion at 1999 exchange

rates). In 2004, Centrica sold the subsidiary for an estimated GBP 1.7 billion to two private equity firms, Permira and

CVC. In summer 2007, the AA was merged with Saga, a travel and insurance company specialising in packages for older

people. Since 2004 Saga itself had been owned by Charterhouse, another private equity firm, and turnover had increased

by 80% since the private equity buyout. In the process of this merger, the three private equity houses created a new

holding company for the two parts, named Acromas, with the AA part valued at GBP 3.35 billion and the Saga part at

GBP 2.65 billion. As stated, this makes Acromas the UK’s second largest private-equity owned company. Acromas is

predominantly owned by the three private equity houses but employees also hold 20%. This is split between direct

ownership (share awards were made to employees at the time of the merger) and indirect ownership in an Employee

Benefits Trust (from which employees can purchase shares). This continues the arrangement at Saga (staff made over

GBP 350 million from their share subscriptions when the merger took place).

In terms of employment, more information is available on the course of events at the AA than at Saga and so this account

concentrates on the former company.

The AA had for many years recognised the GMB union and had a set of collective agreements with the union. All in all,

the AA was deemed to be a ‘model’ employer. In 2005, soon after the sale to Permira and CVC, the company

derecognised the GMB and recognised a more recently created union, the AA Democratic Union, later renamed the

Independent Democratic Union (IDU) after the merger with Saga. The precise course of events is unclear, but there was

some element of dissatisfaction amongst members with the GMB, and the new union was led by a former official of the

GMB. The IDU received legal accreditation from the Certification Officer, the UK statutory body concerned with

certifying the independence of unions and overseeing their affairs. However, some staff remained in the GMB, though

the latter officially retained no bargaining or consultation rights.

Through 2004 and 2005, the AA made an estimated 1,700 to 3,500 staff redundant from its total workforce of 10,000.

According to the company, this was necessary to deal with increasing competition and to obtain efficiencies which would

secure the long-term future of the company. Also, it was suggested that the previous owner, Centrica, had contemplated

such redundancies, but had never actually implemented them. According to management, new debt constraints now

forced the company to do what had long been required. Along with this, there was a tightening up of working

United Kingdom

© European Foundation for the Improvement of Living and Working Conditions, 2010

1

1Clark (2009), which gives the GMB’s perspective on the case. We would like to thank Ian Clark for discussions about this case and

also Mike Wright, University of Nottingham, for the provision of other information and also for discussions. See also Thornton

(2007).

2

arrangements and, on the company’s own admission, this may initially have been taken too far and have had negative

effects on service quality. According to the GMB union, these moves were precipitated by the high debt burden on the

company and its desire to cut costs as a way of meeting targets. Also, according to the union, there were significant

changes in work organisation: the workload of patrol staff was intensified and call centre staff were subjected to

increased monitoring. Again according to the union, terms and conditions were also changed, with reduced holiday

entitlements, more overtime working, and more flexible hours demanded by the employer. At the time of the buyout, the

company introduced an employee share-ownership scheme, in which around 1,000 AA staff invested an average of GBP

2,500 (at the time of the merger they made on average around GBP 9,000).

The GMB union launched a high-profile and controversial campaign, which brought private-equity owners at the AA in

particular and private equity owners in general into public debate. The union demanded greater transparency, regulation

of borrowing, and changes in tax arrangements for private equity companies. The owners responded, arguing the case

for the private-equity business model in terms of turning around and revitalising companies. They also argued that there

had been no deterioration in terms and conditions of employment and claimed that changes in industrial relations resulted

from inter-union rivalries, which were not of their making. Directly or indirectly, one outcome of the extensive publicity

has been a voluntary code (based upon Walker, 2007), established by the British Venture Capital and Private Equity

Association (BVCA).

At one point in the acrimonious publicity campaign, it looked as though the management under Permira and CVC was

about to re-recognise the GMB, but since then, the management of Acromas has further refused recognition.

In 2009/2010, AA management announced changes in the company’s defined benefit pension scheme, in particular

capping the amount that counts towards pensionable salary. The unions (both the GMB and the IDU) claim that this is

cost cutting prior to an initial public offering (IPO). Ian Allen, national president of the IDU, said ‘There is a cynical

view among our guys that this is just a move by PE [private equity] to polish the company up a bit before the “for sale”

sign goes up’ (Financial Times, 2010a). In February 2010, the IDU held a consultative ballot on the proposals: 99% of

those responding opposed the company’s plans. In spring 2010, it was announced that a strike would take place (57% of

the ballots received from 87% of 2,400 members were in favour of taking strike action) (Financial Times, 2010a). For

its part, the company says: the pension scheme has a large deficit; better cost management is required; the company is

prepared to contribute more to clear the deficit in the scheme; and it has no intention of terminating the defined benefit

scheme, though it has been closed to new members for some time (Financial Times, 2010a).

Since the merger in September 2007, Acromas appears to have performed well despite the recession. Earnings before

interest, tax, and amortization (EBITDA) increased by over 8% between 2007/2008 and 2008/2009 (with turnover up by

4%). Overall employment in the group increased from 11,699 to 12,170. This included a small increase from 4,801 to

4,867 in the roadside services part of the company. It was thought that Acromas would seek an initial public offering

(IPO) in 2010 but this seems to have been deferred, along with a number of other anticipated IPOs.

In conclusion, the AA had seen some significant changes before acquisition by private equity. Since then, there have

undoubtedly been further changes and hostile industrial relations with the GMB union. On the other hand, Acromas

claims it has rationalised systems, realised synergies between different parts of the business, and recovered its high

ranking for service quality.



3

The impact of investment funds on restructuring practices and employment levels

Table 1: Key figures for AA/Saga

Note: EBITDA = earnings before interest, taxes, depreciation and amortization; EBIT = earnings before interest and taxes; EBT =earnings before taxesSource: AA/Saga

Cadbury: A UK company confronts two periods of hedge fund activism

The origins of Cadbury date back to the 1820s. Slowly, growing by internal expansion and acquisition, through the 19th

and early 20th centuries, it developed its chocolate business into a larger confectionery concern and opened factories

throughout the British Commonwealth and in other countries. In 1969, it merged with the drinks company Schweppes

to create Cadbury Schweppes. Subsequently, it acquired a number of other drinks and confectionery businesses in the

US and other parts of the world.

Cadburys was always seen as a progressive, if somewhat paternalistic, employer in the UK and in other countries where

it operated. Over time, as the company grew, the family holding became diluted and family management ceased. The

company still maintained a reputation as a good employer, offering competitive terms and conditions and providing

workers a voice through trade unions and works committees. However, this did not stop the company from closing plants

and relocating production, though usually with attention to redundancy and other benefits.

By the late 1990s, Cadbury Schweppes was the world’s second-largest confectioner (after Mars-Wrigley) and one of the

world’s largest soft drinks companies. It had a listing on the London and New York stock exchanges. Increasingly, its

revenue source shifted to North America. Similarly, its share register changed, with the biggest single groups being

institutional investors in the US (followed by investors in the UK). The company had in part grown organically, but also

significantly by acquisitions. It should also be noted that, through the 1980s, it was quite ready to sell off parts of the

company. In the late 1990s it had around 72,000 employees worldwide, with 6,000 in the UK, and was the biggest

confectionery company in the world.

Cadbury has had two major encounters with investment funds which shaped the structure and ultimately decided the

survival of the company.

The first encounter was with Trian Fund Management, which is based in New York and owned by Nelson Peltz, an

entrepreneur, financier and activist hedge fund investor. Trian’s investors included pension funds, insurance companies

and various endowments. Peltz himself had built up a number of food and beverage-related companies, one of which

was Snapple, which he had bought for USD 300 million (approximately €270.9 million at then current exchange rates)

in 1997 and sold to Cadbury Schweppes in 2000 for USD 1 billion. Later Peltz built up shares in Cadbury Schweppes,

amounting to around 3%, and started to lobby for improvements in performance and changes in the management and

direction of the company.

Peltz argued that Cadbury Schweppes’ profit margins were low and falling. Furthermore, he believed that the company

was in fact in two different lines of business (confectionery and beverages), with different marketing and distribution


2007 2008 2009

Turnover (in GBP million) 1,483.1 1,544.5 1,611.8

EBITDA (in GBP million) 447.1 484.5 547.2

EBIT (in GBP million) 409.8 440.8 496.5

EBT (in GBP million) n.a. -29.8 64.1

Employees n.a. 11,699 12,170

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channels. For him, the two parts were greater than the whole and he pressurised the company to demerge its largely North

American beverage division. This campaign was supported by a number of other activist hedge funds and the Qatari

Sovereign Wealth Fund (SWF).

At the time of Peltz’s intervention, Cadbury embarked on a programme to raise profit margins by reducing the workforce

by 7,500 employees and by closing 15% of its factories by 2011. Cadbury’s management have subsequently claimed that

they were planning to restructure the business anyway, to generate cash which would enable the company to acquire new

brands (it was believed that the potential for organic growth was limited). However, the hedge fund intervention

undoubtedly accelerated the pace of change at Cadbury Schweppes.

A number of events took place in the wake of Peltz’s intervention. First, in October 2007, the company announced that

its plant in Keynsham, England, would be closed with the loss of 500 jobs and production transferred to Poland. It was

also announced that 200 jobs would go from the Bourneville plant in Birmingham, England. The Unite trade union

accused the company of behaving like an ‘asset stripping PE [private equity] firm’. Secondly, the European beverages

part of the company was sold off to the private equity funds Lion Capital and Blackstone and in 2008 the American

business drinks division was demerged. This North American beverages division subsequently became Pepper Snapple,

in which Peltz held an interest. In December 2008 the company also sold its Australian drinks business to the Japanese

company Asahi. Among other things, it was reported that Cadbury top management wanted to put an end to the ‘war of

attrition’ with activist investors. Thirdly, the company’s regional operating structure was scrapped and replaced by seven

regional business heads reporting directly to the chief executive, at a cost of 250 jobs. Fourthly, Peltz and others

successfully pressurised Cadbury to appoint new senior managers and board members who they thought would be

sympathetic to their views of the future of the company. Meanwhile Peltz had also, unknown to Cadbury, built up a stake

in Kraft, the US food giant.

There is no record of any discussions with employee representatives on these matters, though the British unions argued

against the demerger. Employees in different parts of the world were transferred over with the demerger of the company

and the subsequent sale of other beverage companies in, for example, Australia. It is not known whether there were any

job losses or changes in terms and conditions of employees.

The second encounter of Cadbury with hedge funds was during the hostile takeover bid from Kraft. In 2009, the latter

made a bid for Cadbury, which was now significantly smaller and, after restructuring, more attractive to, and digestible

by, the US food conglomerate. As the Financial Times put it, ‘Kraft has been interested in Cadbury’s sweets brands for

some time, but as long as the UK company owned beverages as well, it was too big and unwieldy for Kraft to consider

buying … Cadbury had now made itself a “sitting duck” – because it was now a nice, simple business ripe for sale’

(Financial Times, 2010c). Initially Cadbury dismissed the Kraft offer, but there was speculation in the press about

whether this was a real strategic defence or merely an attempt to bid up the price of Cadbury shares.

At this point, hedge funds started to buy Cadbury shares in anticipation that the price would rise and that Kraft would

be successful in its bid. From September 2009 onwards, 26% of Cadbury shares were sold by long-term investors,

mainly North American institutions. Holdings by hedge funds and short-term traders stood at 5% in September 2009, but

had risen to 31% by mid-January 2010. According to the now ex-chairperson of Cadbury, ‘In the end, it was the shift in

the shareholder register that lost the battle for Cadbury … The Achilles heel was the large proportion of HFs [hedge

funds] on the register’.2

(As an aside, Nelson Peltz held around a 3% stake in both Cadbury and Kraft and press

speculation was that during the bidding period he went ‘long’ on Cadbury and ‘short’ on Kraft.)



2Speech by Roger Carr, ex-chairman, Cadbury plc, at Said Business School, Oxford, 9 February 2010.

5


Kraft paid GBP 11.9 billion for Cadbury, which it financed in part with a combination of stock and debt. Cadbury

shareholders gained a 50% premium on the share price and Cadbury’s ex-chairperson announced that the sale was a

‘clear success for value creation for Cadbury shareholders’, while at the same time pointing to the ‘short-term’ interests

of hedge funds (Financial Times, 2010c).

Supporters of the takeover claim that Kraft is better at operational management than Cadbury and will grow the business

along with its other brands. Critics say it is over-indebted and uncommitted to large parts of Cadbury activities. For his

part, according to the Financial Times, ‘even Peltz believes there is a risk the company’s much-loved brands will not get

the attention they deserve in a big food company’ (Financial Times, 2010c).

As to effects on labour, it is too early to say what will happen after the acquisition by Kraft. The trade unions in the UK

opposed the sale to Kraft and claim that they were in no way consulted in the deal. It is uncertain what the outcome of

the sale will be in terms of restructuring, jobs, pay and benefits, etc. One early announcement concerns the Keynsham

plant in England: during the takeover bid Kraft said that it would keep the plant open; but within a month of the

finalisation of the deal Kraft announced that the factory would indeed be closed. The UK business secretary subsequently

referred to a lack of ‘straight dealing’ by Kraft (Financial Times, 2010b). For its part, Kraft, on welcoming Cadbury into

the ‘Kraft Foods Family’, said that it found its earlier assurances impractical, but has announced that it will respect

Cadbury traditions and continue to grow the business, while integrating it into its worldwide operations. The UK unions

say there is an ‘irresistible imperative’ that an indebted Kraft will cut jobs, and point out that 35 Kraft sites closed over

the period 2003–2005, with the loss of 20,000 jobs worldwide. The unions also claim that in other European countries,

Kraft had been forced to make more concessions, as when it acquired Danone’s biscuit interests in France.

Table 2: Key figures for Cadbury

Note: all turnover and profit figures for years prior to 2008 are re-presented to take account of the removal of Schweppes in autumn2007. These figures therefore relate just to the confectionery business.

P&O: a Dubai SWF in the UK

The UK has been the most significant country in Europe in terms of investment funds. It has been the main country for

private equity and hedge funds (both as headquarters for funds and also as a location for their investment). It has also

been a major investment location for sovereign wealth funds (SWFs). The SWF model has taken various forms in the

UK, ranging from relatively small holdings, to larger holdings on a longer-term basis, and to some acquisitions of a

whole company. The case of Dubai World/Dubai Ports World (DW/DPW) and P&O falls into the latter category.3

DW is a Dubai government-owned holding company, under the control of the Dubai ruling family. Under the DW

umbrella are the following: DPW; the investment company Istithmar; the property developer Nakheel; and a number of

other companies and funds. The Investment Corporation of Dubai is another family/government investment vehicle. The


2004 2005 2006 2007 2008

Turnover (in GBP million) 3,990 4,295 4,483 4,699 5,384

EBITDTA (in GBP million) 332 452 313 286 398

EBT (in GBP million) 187 323 244 254 400

Number of employees 58,442 58,581 n.a. 50,465 46,517

3This case study is based on material in Wilke et al, 2009.

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financial basis of the fund is past oil revenues (now largely depleted), earnings from other sources, and borrowings from

neighbouring Gulf states, especially oil-rich Abu Dhabi, and from world money markets.

DPW was created to develop Dubai as a major transhipment centre and to constitute a logistics and port management

company. In view of this it might be argued that DPW is not an SWF in the strict sense of the word, but is a freestanding,

though state-owned, enterprise. However, it must be countered that DPW is clearly a part of DW, which is the vehicle

under which a number of state-controlled companies and funds are located.

For its part, P&O was an established UK shipping and ports operating company, with significant worldwide interests. Its

shares were widely dispersed and traded on a number of stock exchanges. Under various charismatic chief executive

officers (CEOs) it had diversified into ferries, real estate, construction and other areas, and by the early 1990s was

something of a conglomerate. However, in the late 1990s, under pressure from institutional investors, it divested its

construction, property, cruise liner and container businesses. The company came increasingly to concentrate on logistics

and port terminals, but it also retained a substantial UK-based ferry business. At the time of the acquisition it had 22,000

employees worldwide.

In 2005, a bidding contest for P&O developed between DPW and the Singapore SWF Temasek. In the end the former

was successful, except that P&O’s US-based port operations were taken out of the deal, having been blocked by the US

government. DPW paid a 70% premium on the initial price and the deal was valued at around GBP 4 billion

(approximately €5.84 billion at 2005 exchange rates). The acquisition was an all-cash operation, financed with some

existing funds, but also with significant new borrowings.

Having acquired P&O, the company was delisted, headquarters were moved to Dubai, and, though many non-Dubai

senior managers remained, it was clear that key decisions were to be made in Dubai. Subsequently, in late 2007, DPW

was listed on the Dubai stock exchange, with eligibility for 20% of the shares restricted to nationals of Gulf states. At

the time of acquisition, DPW stated: ‘This is not a portfolio, but a strategic investment’ and it has acted accordingly,

seeking to integrate operations and develop the company.

In the labour area, given the short period that has elapsed and given a lack of transparency, it is difficult to ascertain what

the effect of the DPW acquisition has been. As one UK union official stated to the authors of this case study: ‘You don’t

see them or hear them. It’s almost as though they are not there.’ In practice, continuing P&O policy, the strategy has been

largely to leave industrial relations to local management. However, some further points should be noted.

In terms of employment relations, to date there has been little reduction in staffing, though as the world economic crisis

has continued, this has increased. However, this would presumably have taken place whoever owned the company, and

it is happening in other maritime companies as well. There was some fear among the UK unions that DPW might sell

off the ferry part of the company, on the grounds that it does not fit with its core interests and is not particularly

profitable. However, to date, the only announcement which has been made is that the UK-Spanish ferry will be closed

at the end of 2010. In another area, DPW is going ahead with the development of a major new container port at Thames

Gateway.

In the UK, the unions have expressed some concern as to whether DPW will meet all its pension obligations to industry

schemes. There is some confusion in this respect and legal action is pending. Thus, the outcome of pension arrangements

is unclear, but it must be said that from the viewpoint of employees the deterioration in pension terms had already

occurred under P&O ownership.



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In terms of work organisation, there is no evidence that under DPW there have been changes in working practices,

involving the structure of jobs and work intensity. In fact, again, significant changes in these areas had already been

brought about by P&O in the two decades before acquisition. For its part, DPW makes much of its investment in training

and the unions have confirmed that it continues a good tradition in this area.

In terms of industrial relations, under P&O and now under DPW, trade unions are recognised in countries such as the

UK, the rest of Europe, Australia, Argentina, and some other jurisdictions. However, any negotiations are always at a

local level. At the time of the acquisition, employees and their representatives were informed, but not consulted, by

DPW. In Europe, there is a European works council and the unions have expressed some disquiet that DPW might be

using this to bypass collective bargaining. In Dubai, DPW does not recognise unions and has not entered into new

recognition in any countries where it did not previously exist. At a worldwide level, the unions have been unable to

establish any dialogue with DPW. Again, however, to put this in perspective, the same applied to P&O and applies to the

other major global port operators.

In late 2009, it became apparent that Dubai had overextended and overleveraged itself, that debt obligations could not

be fully met, and a major crisis ensued. As a result, Dubai-owned enterprises have rescheduled certain debts and have

drawn on support from the country’s neighbour, Abu Dhabi, which – as said already – is richer in oil. To date, there is

no evidence of whether or how this has fed through to DPW and labour relations.


8

Cewe Color and activist hedge funds

The case of Cewe Color represents one of the best-known examples of hedge fund activism in Germany. During the

conflict between the Cewe Color management and several US hedge funds, both sides made extensive use of the media

and the conflict attracted considerable publicity. Furthermore, this case is one of the few examples of hedge fund

activism where the company management and the employees worked together and achieved a common and successful

strategy against activist hedge funds.

Cewe Color is Europe’s market leader in the photofinishing industry. In addition to processing digital and analogue

photos, the company produces related products such as photo calendars, books and gift articles. It has 13 locations in 24

European countries and around 2,700 employees. Its headquarters are in Oldenburg, northern Germany.

The company is structured into two sections: the Neumüller Cewe Color Foundation and Cewe Color Holding AG.

Together these two control the operative business section, Cewe Color AG & Co. OHG. The main shareholder of Cewe

Color Holding AG is a group of heirs of the company founder Heinz Neumüller, with 27.4% of the shares. The second-

largest shareholder (with 9.9% of shares) is Lincoln Vale European Partners, a US hedge fund with headquarters in the

Cayman Islands. Other important investors are the Nord LB, a so-called ‘Landesbank’4

(7.8%), the Sentosa Beteiligungs

GmbH, a small German investment company (6.7%), and Guy Wyser-Pratte, a US active investor hedge fund (6.3%).

The remaining 32.9% of the Cewe Color shares are in free float.

In 2005, the company attracted the attention of institutional investors including several hedge funds. For these investors,

the company was an interesting target because it had high liquidity, very low debt, and seemed to be undervalued.5

In

summer 2005 Wyser-Pratte was joined by two other hedge funds – MarCap Capital and K Capital Partners – who

respectively acquired 10.7% and 4.5% of the Cewe Color shares.

In the following year, the management and investors worked together reasonably amicably. In several press statements

the hedge funds emphasised their trust in the management and its strategy to manage the biggest challenge for the

company: the transition from analogue to digital photography. However, in autumn 2006 the hedge fund managers lost

patience with the company’s management. They blamed the management (in particular the CEO) for mismanaging the

company and ignoring the interests of shareholders. In their eyes, the transition from analogue to digital photography

was for the most part completed and thus they felt the company should liquidate their equity reserves and pay out a

special dividend to shareholders. The hedge funds demanded a dividend of €5 per share, whereas management offered

€1.20 per share.

These disagreements marked the beginning of a fierce conflict between Cewe Color management and the activist hedge

funds. This conflict was mainly carried out in public, which was quite new for Germany. Additionally, both sides made

extensive use of the media, which was a familiar tactic for activist hedge funds but again not a common strategy for the

company management. The climax in this conflict was reached in early 2007 when the hedge funds sued the management

and the chairman of the supervisory board for collusive behaviour to influence the share price with the aim of forcing

out the hedge funds.

Germany


2

4The main purpose of a German Landesbank (regional state bank) is to underpin the local economy (especially small and medium-

sized enterprises – SMEs) by granting credits, to support local savings banks and also provide infrastructure finance for local and

regional governments. In most cases these banks are long-term investors with very patient capital. They might be seen as typical

for the ideal type of a Rhenish blockholder.

5In 2005 Cewe Color had an equity ratio of 41.5% and free cash flow of more than €15 million.

9


The Cewe Color management resisted this pressure and argued that paying out a special dividend would deprive Cewe

Color of the opportunity to make necessary investments in the future. Furthermore, the CEO emphasised that the overall

transition process within the company would lead to dismissals and that he was not prepared to pay a special dividend

at the same time as laying off people.6

Cewe Color blamed the hedge funds for seeking an immediate large profit without

having any interest in the sustainable development of the company. The action against Cewe Color was dismissed in

August 2007.

Although the hedge funds were unable to force the management to call an extraordinary shareholders’ meeting, they

persisted and planned to use the next ordinary meeting in April 2007 to vote some board members out of office and

replace them with others supportive of the hedge funds’ strategy.

In preparation for this final confrontation two preconditions were very important for the Cewe Color management.

First, the company obtained the support of two large shareholders, the family heirs (27.4%) and Landesbank Nord LB

(7.8%). These two blockholders represented a traditional type of shareholding in the German economy. Such investors

provide very patient capital, support comparatively low-risk investments, and have strategic long-term interests.

Second, the management acted in concert with its workforce, the works councils and the unions. With the backing of the

employees, the management was able to take the moral high ground in the media and public opinion. Prior to the

shareholders’ meeting, the unions and works councils called on the employees to demonstrate against the hedge funds

in support of management. More than 1,700 workers answered the call. In the media the conflict was characterised as

‘Oldenburg vs. New York’. This positive publicity for management was an important factor in winning over the

remaining shareholders.

As a result of the publicity, the shareholders’ meeting had an exceptional attendance, with 87% of shareholders present.

The management was able to mobilise 51%, while the hedge funds won over only 36%. Thus, the balance of power was

clear. Nevertheless, the hedge funds tried to attack management with a typical practice in proxy contests – that is, the

fight for shareholders’ votes. The hedge funds confronted management with a flood of applications and questions and

tried to provoke procedural errors so they could contest the results of the shareholders’ meeting afterwards. After a 12-

hour meeting, nearly 59% of the attendees expressed their confidence in the Cewe Color management. In November

2007 K Capital Partners exited its investments with large losses, and in April 2008 MarCap Investors followed suit.

The case of Cewe Color therefore provides an interesting example of a hedge fund intervention in a German SME, and

where an alliance between block shareholders and employees and their works councils were able to see off the hedge

fund intervention.


6In the main transition period 2005/2006, the company reduced its workforce by 600 employees. This reduction was mainly caused

by the move from analogue to digital photography and not by the direct influence of the new investors. Although the new investors

supported the transition strategy, Cewe Color had already started with this process before the hedge funds invested in the company.

10

Table 3: Key figures for Cewe Color

Source: Cewe Color annual reports

Edscha: a German automobile supplier and a secondary buyout

The case of Edscha represents a good example of the differences between an initial and a secondary buyout and the

resultant consequences for the company and the employees. Furthermore, the case shows how investment funds reacted

to economic problems in the company, especially in the automobile supplier sector, a very competitive industry subject

to cyclical fluctuations.

Edscha is one of the leading suppliers of convertible roof and hinge systems for the automobile industry and is among

the 100 largest automobile suppliers in the world. In 2006, the company employed around 7,000 people at 31 sites. In

early 2009 it declared bankruptcy.

After the death in 1997 of Richard Bremicker (a successor of the company founder), Edscha was sold to the former

manager, Horst Kuschetzki, in a management buyout (MBO). This deal was backed by two Dutch investment funds,

PCIParcom and Flint Echo, and a third fund from the UK, NatWest. The deal was valued at €130 million and was one

of the largest MBOs in Germany at that time.

Horst Kuschetzki had joined Edscha in 1994 at a time when the company was subject to increasing international

competition and a strong decline in prices. Kuschetzki initiated a restructuring process in order to deal with economic

and market changes, including a refocus on the main costumer of Edscha (the automotive industry) and the closure or

sale of non-core operations.

In the first few years after the MBO, Edscha progressed quite well. Turnover increased by nearly one-third and operating

profits doubled in two years. At that time, the financial investors planned to exit their investment to benefit from these

positive developments. Therefore, they decided to bring the company to the stock market in late 1998.7After the issuance

of the shares in an IPO, the financial investors together held two thirds of the Edscha shares and Kuschetzki owned the

remaining one third.8

In March 1999, the shareholders’ meeting decided to increase the capital stock and to offer a further

2.85 million shares to the public. As a next step of their exit strategy, the financial investors PCI Parcom and NatWest

planned to sell off 50% of their shares. This should have resulted in a reduction of the shares held by private equity to



2002 2003 2004 2005 2006 2007 2008 2009(Q1–Q3)

Turnover (in € million) 439.2 416.2 428.5 431.1 400.5 413.5 420.0 282.4

EBITDA (in € million) 57.4 58.1 60.1 68.5 63.2 52.8 52.7 30.5

EBIT (in € million) 13.2 13.8 15.9 28.7 26.3 14.3 12.3 3.0

EBT (in € million) 17.5 13.2 14.2 25.5 21.1 12.8 10.3 1.6

Equity ratio (%) 38.8 38.0 40.8 43.3 49.5 45.5 42.9 39.2

Number of employees 3,977 3,906 3,828 3,730 3,131 3,124 2,921 2,677

7Edscha was converted from a GmbH firm (Ltd/plc) to an AG (inc.).

8PCI Parcom (38.2%), NatWest Ventures (22.9%) and Flint Echo (5.7%).

11


less than 20% and a free float of more than 50%. However, the two investors decided that a price of €13 per Edscha

share was too low and did not represent the real value of the company. Thus the two private equity funds retained around

40% of the shares and the free float increased to just 29%, which may have discouraged other institutional investors from

investing.

Nevertheless, the decision to take Edscha public had an overall positive effect on the company. In order to meet the

requirements of a listed company, internal and external transparency increased. In comparison to the time when Edscha

was family-owned, disclosure improved noticeably and the company’s public recognition increased significantly.

Furthermore, productivity, profits and worker numbers increased steadily. In particular, from 1997/1998 to 2001/2002,

Edscha’s workforce increased from 3,811 to more than 5,000. Along with this, the share price doubled in the first three

years and Edscha was close to entering the German MDAX.9

In 2002, PCI Parcom, Flint Echo and the other funds made a new attempt to exit their investment. This time the positive

development of Edscha seemed to be sufficient to realise their expected gains. In total, 43% of Edscha shares were up

for sale. Nevertheless, the share price was still not very high and the investors decided to sell their shares as a complete

package to a single buyer. In December 2002 the US private equity fund Carlyle Group purchased the shares in a

secondary buyout for €245 million. This was nearly twice the amount of the initial MBO in 1997. In this way, Carlyle

acquired 70.5% of Edscha shares, including the shares of the manager Kuschetzki, who nevertheless remained as a

member of the management board. Additionally, Carlyle made an offer for the free-float shares and by February 2003 it

held more than 98% of Edscha shares. As a result, Carlyle was able to ‘squeeze out’ the remaining shareholders and in

January 2004 the company went private.

In the first years after this secondary buyout, Edscha was severely affected by the general economic decline in the

automobile and supplier industry, with the result that the situation of the company worsened. Due to the general slump

in demand, automobile manufacturers began a price dumping strategy that was subsequently passed on to the supplier

industry. As a result, Edscha’s turnover in 2004/2005 declined by around 5% over the previous year. Its debt ratio also

increased because Carlyle transferred the debts of the secondary buyout (nearly two-thirds of the purchase price) onto

the company. In early 2005 Edscha paid out a further €60 million to Carlyle in the form of a recapitalisation.

In response to Edscha’s poor economic development, Carlyle began to intervene heavily in the operational business of

the company. It introduced a strategy which aimed to reduce the labour costs by more than 10%. This strategy included

overtime work without wage adjustments, general wage cutbacks, and a slight reduction in the number of jobs.

Additionally, Carlyle sold parts of the company, such as the production of sliding roofs for trucks. However, it should

be noted that workforce representatives agreed with this decision due to strategic considerations.

With the beginning of the economic crisis in 2007 and a further dramatic slump in the automobile industry, Edscha’s

situation became increasingly precarious. Along with the decline in demand, Edscha faced a severe lack of liquidity.

Banks and other financiers were no longer willing to provide the company with new financial resources. For its part,

Carlyle injected fresh capital into the company and unsuccessfully sought new bank credits. In February 2009 the

company declared insolvency for the European sites which employed 4,200 workers; 2,300 of them in Germany.

Nevertheless, Edscha was able to continue production and, due to the sale of the main company section, most jobs were

saved. In August 2009, the convertible roof section was sold off and in October that year the production of hinge systems

was also sold. Carlyle briefly considered a reinvestment, but the automobile industry as one of the main creditors of

Edscha, amongst others, rejected this idea.


9The MDAX is Germany’s second stock index, which includes mid-cap companies and lies between the DAX (largest 30

companies) and SDAX (for small-cap companies).

12

The second investor, Carlyle, cannot be held responsible for the general financial problems of Edscha, which were

mainly a consequence of the downturn in the automobile industry as a whole. However, Carlyle certainly controlled the

thin equity base of Edscha, which was one of the main reasons for its vulnerability in the crisis. Hence, some of the trade

unions blamed Carlyle for ‘draining’ Edscha, which finally resulted in the insolvency of the company.

Table 4: Key figures for Edscha

Source: Edscha annual reportsNote: Edscha’s financial year ends on June 30.

ProSiebenSat1 Media AG: first and secondary buyouts

ProSiebenSat1 Media AG represents a case of an initial and secondary buyout in the media sector, a favoured target of

private equity investment. The company is Europe’s second largest broadcasting company. It operates 20 free TV

channels in 13 European countries and employs more than 5,000 people around Europe. As such, ProSiebenSat1 Media

AG is the largest private equity owned broadcasting company in Europe. The case is interesting because it allows a

comparison of the different strategies implemented by the first and second private equity investors.

ProSiebenSat1 emerged from the insolvency of the German Kirch Group in 2002. The latter had created a large media

consortium in Germany, with activities in different markets (press, TV, film rights). ProSiebenSat1 Media AG was one

of these activities. In 2001 financial problems in the Kirch group forced the whole company into insolvency. At that

point, ProSiebenSat1 Media AG had net debts of more than €2 billion. In the following months, Kirch reduced the

workforce by 20%.

In March 2003, Leo Kirch’s attempt to sell the whole group to a German media investor (the publisher Heinrich-Bauer

Verlag and Hypovereinsbank) failed. After another round of negotiations, a group around the US billionaire Haim Saban

and several private equity investors (Bain Capital, HellmannFriedmann, Quadrangle Group, Thomas H. Lee, and

Providence Equity Partners) acquired 72% of the company’s shares. Part of the deal was a recapitalisation of €282

million in 2004 to reduce the company’s large debt. In total, the whole volume of the deal amounted to more than €1

billion.

From the beginning, Saban talked openly about his intention to resell ProSiebenSat1. Although Saban had a background

in the media business, he did not intervene directly in ProSiebenSat1 operations. Instead he tried to control the company

by installing new management, with new incentive systems and key financial indicators. In 2004, there was a second

(but smaller) reduction in employee numbers. However, the main part of the strategy was the continuous reduction of

programme costs through increasing the number of repeat shows and the proportion of low-budget elements in the daily

programme. In terms of employment and working conditions, the period during which Saban was invested was quite

unremarkable. Although the company gradually reduced its workforce immediately after the entry of Saban, over the

whole investment period the number of employees remained constant.



2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009

Turnover (in € million) 985.8 932.1 1.087 1.306 1.076 n.a.

EBITDA (in € million) 101.7 90.2 90.2 96.3 107.7 n.a.

EBIT (in € million) 58.4 44.4 41.1 44.9 44.7 n.a.

EBT (in € million) 35.8 17.5 19.7 23.9 6.8 n.a.

Number of employees 6,900 6,533 6,180 6,855 6,626 6,500

13


In the initial years of the Saban investment, the company developed quite well. From 2003 to 2005, profits increased

from €39.4 million to more than €220.9 million (mostly due to a buoyant advertising market). In light of this, Saban and

his co-investors wanted to sell the company to realise a maximum profit. In early 2005, Saban started to negotiate with

the German publishing group Springer over a buyout. However, in 2006 the German antitrust authority and the

Commission on Concentration in the Media (KEK) vetoed this deal. The antitrust authority argued that with

Springer/ProSiebenSat1 and Bertelsmann, the German and the European media sector would be dominated by two

companies and this would reduce competition in the European media sector to an unacceptable level.

In October 2006 a new bidding procedure began and in December two private equity companies, the US-based Kohlberg,

Kravis & Roberts (KKR) and the UK-based Permira, agreed with Saban on a secondary buyout for around €3 billion.

KKR and Permira followed a different investment strategy from Saban. They aimed to form a strong European TV group

with a high potential for synergy effects (a so-called ‘buy and build’ strategy). In August 2005, the two private equity

funds bought the Luxembourg broadcasting company SBS, at that time Europe’s second largest broadcasting company.

Soon after the secondary buyout, the funds started to merge both companies and in July 2007 ProSiebenSat1 officially

acquired SBS. This deal resulted in the very high net debt of ProSiebenSat1 of around €3.3 billion.

At first, the main focus of KKR and Permira was on the integration process between SBS and ProSiebenSat1, including

possible synergies in programmes and employees. Cost-reduction strategies led to the centralising of news departments

and the abandoning of regional branches. In Germany, the TV station SAT1 was affected through the loss of 180

employees and a relocation of units from Berlin to Munich. The works councils protested against this and in early 2009

called a strike. During negotiations with the management, the employee representatives achieved a social plan which

included higher compensation levels and a ‘try-out’ period at the new location in Munich. Nevertheless, after the

acquisition of SBS, the overall workforce decreased from 5,930 employees in 2007 to 4,980 in 2009.

Additionally, despite the high level of debt, KKR and Permira extracted high dividends from ProSiebenSat1. In 2007 the

company paid out a dividend of €270 million to its shareholders, although the profit in that year was only €90 million.

Employee representatives criticised the private equity companies for this behaviour and blamed them for the dramatic

losses of financial resources and the high debt.10

For their part, the two private equity funds later admitted that the 2007

payout was a mistake, especially in light of the financial crisis. It should be noted that for the following two years KKR

and Permira waived a dividend.

One can see clear differences between the two sets of private equity investors. The first group, with Haim Saban as a

leading figure, used a strategy of improving economic performance. The result was a moderate reduction in personnel,

a new management structure with strong financial incentives, and cost-saving programmes. The (earnings before tax,

interest, and deprivation (EBITDA) quickly increased and the company was sold at a good profit. The second private

equity investor preferred what might be termed a ‘value creation and growth strategy’ by trying to create a Europe-wide

TV group. Part of this strategy was the exploitation of synergy effects between different units. However, it is unclear if

this strategy will work in the future.


10In July 2008, the works councils of the different company sections wrote an open letter to the management and called for an

intervention and a change of strategy.

14

There are clear differences in the financial consequences of the different strategies. Under Saban, the debt ratio was not

used to increase profitability for the investor. The rate of external debt decreased from 65% in 2002 to 36% in 2006. This

changed dramatically under KKR and Permira. In 2007, they extracted a dividend that was higher than the profits of the

company and financed the acquisition of SBS Broadcasting completely with credit. As a result the debt ratio increased

to 82%.

Table 5: Key figures for ProSiebenSat1

Note: * The increase in employment was caused by the acquisition of the Luxembourgish SBS Broadcasting.Source: ProSiebenSat1 Media AG annual reports

Ferrostaal, Mauser and Almatis: the return of SWFs in Germany

The activities of sovereign wealth funds (SWFs) are not new in Germany and have origins dating back to the 1970s.

Based on the high oil revenues at that time, several Middle Eastern SWFs invested in German companies. The most

famous examples are the investments of the Kuwait SWF in the German automobile manufacturer Daimler (1974) and

the investment of the Iran fund in the steel producer Krupp (1974) and the engineering company Deutsche Babcock

(1975). After this first investment period, the activities of SWFs in Germany slowed down for nearly three decades.

There were various reasons for this, but two are particularly significant. On the one hand, the international oil price in

the 1980s and 1990s dropped and caused a decline in oil revenues for the SWFs and a decrease of their investment

activities. On the other hand, the German economy was characterised by a high degree of interconnectedness between

companies, banks and insurance companies which made it difficult for foreign investors to become active in Germany.11

From the early 2000s the situation changed. The increasing oil price caused most SWFs to grow significantly. According

to estimates, SWFs’ assets under management increased from around USD 800 billion in 1999 (about €792 billion at

1999 exchange rates) to USD 3,800 billion (€2,637 billion) in 2009 (IFSL Research, 2010). In 2009, 62% of these assets

were based on commodity exports, primarily oil revenues. As a result of this massive growth and in response to the

purported end of the ‘oil century’, more and more SWFs started to invest their money in stockholdings and other asset

classes. Together with other European companies, several German firms were targets for SWF investments.

Parallel to this development, the investment strategies of SWFs seemed to change. Traditionally, they had been

characterised by minority stockholdings, long-term investments, and only limited influence on the business as active

shareholders. However, in recent years several SWF investments have taken place that differ from this earlier investment

pattern. Thus, SWFs have purchased majority stakes and acquired entire companies. Additionally, SWFs have invested



2002 2003 2004 2005 2006 2007 2008 2009

Turnover (in € million) 1.895 1.807 1.835 1.990 2.105 3.237 3.054 2.761

EBITDA (in € million) 170.0 188.7 321.3 418.5 484.3 522.3 618.3 623.0

EBIT (in € million) 108.0 128.9 285.2 382.7 444.3 385.3 263.5 475.1

EBT (in € million) 21.0 61.1 217.5 350.7 385.3 249.8 -68.4 231.0

Equity ratio (%) 35 37 49 59 64 18 8.1 9.4

Number of employees 3,072 2,899 2,699 2,788 2,976 5,930* 5,464 4,980

11This network, called ‘Deutschland AG’, was based on cross-investments between companies, banks and insurance companies and

on the same individuals holding multiple seats on the supervisory boards.

15


in an increasingly strategic manner. Middle Eastern SWFs in particular have invested in companies which may provide

the country of origin with important know-how for improving their infrastructure and enhancing the local economy, both

within and beyond the oil-producing sector. As a consequence, as they develop as active investors, SWFs may well

become more involved in the day-to-day business of their companies and the relevance of these investors regarding

employment and working conditions might increase in the future.

Regarding these possible changes in investment strategies, three German cases are especially interesting: first, the recent

investment of the Abu Dhabi SWF’s International Petroleum Investment Company (IPIC) in the engineering company

Ferrostaal; second, the engagement of the Dubai investment company DIC in the packing company Mauser; third, DIC’s

investment in the aluminium producer Almatis. At present, little information is available on labour and employment

outcomes, but background data on the three cases is presented below so as to provide an overall picture.

Ferrostaal is an engineering company based in Essen. The company is active in large industrial projects dealing with

the construction of power plants, petrochemical facilities and solar projects. It is also active in the construction and

maintenance of naval ships and submarines. In 2008 Ferrostaal employed around 4,400 people in over 60 countries.

Since 1990, the company has been part of the German engineering and automobile company MAN, one of the world’s

leading manufacturers of commercial vehicles and power engineering products. In January 2009 MAN sold 70% of

Ferrostaal to the Abu Dhabi-based SWF IPIC. MAN retained a 30% stake in Ferrostaal, but planned to sell off the

remaining shares to IPIC in 2010. However, IPIC has rejected this plan due to a bribery scandal involving Ferrostaal –

the company was accused of paying money to foreign governments in return for orders for huge industrial projects.

IPIC was established in 1984 with the aim of reinvesting Abu Dhabi’s oil revenues. According to the SWF Institute, it

is the 28th largest SWF worldwide, with USD 14 billion assets under management (approximately €10 billion). IPIC is

a state enterprise of Abu Dhabi and is responsible for all investments in the oil and petrochemical sector. In addition to

its investment in Ferrostaal, IPIC is known for investments in the Austrian oil and gas group OMV, the Spanish oil

company CEPSA, and the German automobile manufacturer Daimler (the latter via Aabar, a subsidiary of IPIC).

For MAN, the sale of Ferrostaal was the final step towards a refocusing on their core business, the manufacturing of

trucks and drive systems. For IPIC, the purchase of Ferrostaal was led mainly by strategic concerns. As already stated,

Ferrostaal is one of the world’s leading engineering companies in the field of petrochemical plant and is therefore a

suitable extension of IPIC’s portfolio, which mainly includes companies dealing with oil, gas and renewables.

Ferrostaal’s know-how in the petrochemical sector can enhance the oil production sector, and Ferrostaal can also build

new industrial plants in Abu Dhabi, making the country more independent of oil revenues. Abu Dhabi announced that it

plans to increase the turnover of Ferrostaal to €4 billion in 2013 (2008 turnover was €1.64 billion). Simultaneously, IPIC

has introduced a programme to reduce costs by 10%. Both the Ferrostaal management and IPIC have emphasised that

this strategy will not result in layoffs. On the contrary, the company says it plans to increase its workforce due to

expected economic growth. The number of employees at the company’s headquarters in Essen increased by 100 within

the first year of new ownership.

Mauser AG, based near Cologne, is one of the world’s leading packaging companies. In 2003, the private equity

company One Equity Partners, a subsidiary of JP Morgan Chase, acquired the company and began what might be termed

a ‘buy and build’ strategy. Consequently, Mauser’s turnover increased from €250 million in 2003 to nearly €1 billion in

2007. In that year, the Dubai investment company DIC purchased Mauser for around €850 million. At the time, the

company employed around 3,700 people at more than 50 locations worldwide. Since the entry of DIC, Mauser’s

workforce has increased to 4,173 employees.


16

DIC is the investment company for the private fortune of Sheik Mohammed bin Raschid. Its focus is mainly on private

equity investments, but it is usually seen as a SWF. For some observers, this kind of state-owned investment company,

specialised in private equity activities, is a new dimension in SWF activities. These investment funds seem to be

acquiring majority stakes in companies and also using credit leverage for their investment deals.

Almatis is a good example of the strategic change in DIC’s investments in Germany. Almatis is based in Frankfurt and

is one of the world’s market leaders in the development and production of specialised aluminium oxide, which is used

in several industrial manufacturing processes. DIC acquired Almatis for USD 1.2 billion (approximagely €0.7 billion) in

2007, of which USD 1 billion was financed with credits. Typically for private equity investment, the debts were later

transferred to the company. At that time the company employed more than 900 people. Since then, because of the current

financial crisis, it has faced various economic problems. From 2008 to 2009, its turnover decreased by 80% and the

company was no longer able to meet its liabilities. In response to this, in July 2009 DIC teamed up with the US

investment company Oaktree Capital – a company specialising in distressed debt – to develop a restructuring plan and

reduce Almatis’s liabilities. As part of the plan, Oaktree acquired a major stake of Almatis debts. However, more recently,

the alliance between DIC and Oaktree fell apart because of different approaches to restructuring. Oaktree tried to crowd

DIC out of its investment and planned to restructure Almatis on the lines of US insolvency Chapter 11. For its part, DIC

rejected this plan and in turn negotiated with the remaining creditors over a debt-for-equity swap, intended to secure

DIC’s influence in Almatis. The final outcome of this conflict is not yet clear.

Conclusion

The three cases studies show how some SWFs operating in Germany have changed their investment strategies. They

have changed from being largely invisible investors with only minor shareholdings to being active investors which take

over entire companies and influence the operating business. Consequently, in future these investors may have a

significant influence on employment and work relations within their companies. This can have positive effects, as shown

by the Ferrostaal and Mauser cases, where new growth perspectives caused a rise in employment. Nevertheless, the case

of Almatis shows that this kind of investment can also have negative implications. In this case the investment strategy

of the SWF has led to increasing debts and seems to be similar in effect to private equity intervention. Due to the newness

of these investments, the long-term implications for employment and industrial relations are not yet foreseeable.

Nevertheless, it is likely that these investors will gain more influence in the future due to their massive financial

resources.

Table 6: Key figures for Ferrostaal

Source: Ferrostaal annual reports and website

Table 7: Key figures for Mauser AG

Source: Mauser AG



2005 2006 2007 2008

Order intake (in € million) 1,745 1,982 1,556 1,836

EBIT (in € million) 64 119 179 167

EBT (in € million) 57 81 173 158

Number of employees 4,563 4,879 4,175 4,431

2005 2006 2007 2008

Revenue (in € million) 872 924 955 1.006

Number of employees n.a. 3,675 3,700 4,173

17© European Foundation for the Improvement of Living and Working Conditions, 2010

HEMA and a series of hedge funds and pvt equity houses

HEMA is a household name in the Netherlands, regularly described in news reports as part of the Dutch ‘heritage’.

HEMA is a large retailer, with a strong domestic orientation, located in all the larger Dutch cities. It is known for selling

its own brand and serving its own unique niche in food, clothing, office supplies, cleaning products and domestic

appliances. HEMA was founded in 1926 as a department store for the working class. Later it became a part of the

upmarket Bijenkorf, which operated a large department store in Amsterdam. In the late 1950s, it introduced the franchise

formula in the Netherlands. From the 1960s onwards, there was rapid growth, both in the Netherlands and in

neighbouring countries. At present, HEMA has 412 stores in the Netherlands, 62 in Belgium, eight in Germany, two in

Luxembourg and one in France, employing a total of approximately 10,000 workers.

In 1996 Koninklijke Bijenkorf Beheer (KBB), of which HEMA was still part, merged with the publicly quoted retailer

Vendex and became Vendex KBB. The latter controls a number of different retail formulas, which stand in the way of

effective management, centralised supply and distribution systems. It also has a top-heavy commercial real estate

portfolio. The board of directors was aware of these challenges and tried to divest some of the companies in order to

streamline corporate structure. Over a few years it sold off Hans Anders (glasses), Siebel (jewellery), Kijkshop

(household appliances), Perry Sport (sports clothing), Prenatal (baby clothing), and Scapino (women’s fashion), mostly

to private equity funds. However, this was too little, too late. In 2002, in the wake of the dotcom crisis, Vendex showed

a loss of €46 million.

This set in motion a course of events that resulted in a series of private equity buyouts. In 2003 an American investor,

Guy Wyser Pratte, who had set up his own private equity/hedge fund, used his shareholder voice rights to raise questions

over corporate governance. Later that year, Wyser Pratte voiced concern over the low return on equity of Vendex and

asked for more dividends. Between 2003 and 2004, Wyser Pratte looked to other investors of similar mind and was able

in 2004 to announce that a consortium owned 14% of the firm. He then called for the sale of Vendex. In February 2004,

the Vendex directors announced their own sale plans and indicated that four potential bidders were interested, among

which were Permira (UK) and a combination of KKR (US) and Alpinvest (Netherlands). The KKR/Alpinvest

combination won, with a bid of €15.40 per share, a 35% premium over the share price before the bidding war,

representing a total sum of €1.4 billion. The shareholders were satisfied with their return on equity (ROE) and the unions

were content with the Dutch participation in Vendex and the promise by the investment partners that there would be no

involuntary layoffs.

In August 2004, Vendex KBB was delisted from the Amsterdam stock exchange. Between 2004 and 2006 the board of

directors was gradually replaced by people handpicked by KKR. In March 2006 the new owners granted themselves a

dividend of €461 million to pay for the leveraged buyout (LBO). This was financed through higher indebtedness of the

firm. In response, Standard & Poors lowered its rating from BB- to B+. The new owners also changed the name of

Vendex KBB to Maxeda, sold off some formulas which did not fit the new strategic view, and started selling off real

estate (with estimated proceeds of €618 million).

In early 2007 Maxeda announced it was willing to sell HEMA, which was responsible for approximately one third of

the revenues of Maxeda and employed about half of all Maxeda employees. According to press reports, there were at

least four parties interested in buying HEMA: three (partly) Dutch parties and the UK-based Lion Capital, a fairly new

private equity fund with €2.5 billion assets under management but with no recognised experience in retailing. In June

2007 Maxeda announced the sale of HEMA to Lion Capital for approximately €1.25 billion, almost the same sum that

the investment partners had paid for Vendex KBB in total three years earlier.

Lion Capital immediately announced ambitious targets for HEMA, in the form of establishing mini-stores throughout

the Netherlands and expanding its market share in Belgium, Germany and France. These plans were developed under

The Netherlands 3

18

the former owner, Maxeda, which had however failed to invest the managerial resources to turn them into a success. The

buyout was financed by Lion Capital on the back of bank loans of €762.3 million against a subordinate loan of €269.6

million by Lion Capital itself to HEMA at an interest rate of 13.5%. As is standard with LBOs, the interest to be paid on

the loan was added to the principal. Despite strong performances in 2007 and 2008, HEMA announced losses in both

years, mainly due to the interest payments on the debt with which HEMA was burdened after the buyout. Incidentally,

this announcement opened up a public discussion about the fiscal treatment of debt, which is referred to in the Dutch

country chapter of the main report). In 2009, Lion Capital took the unusual step of increasing its equity stake in Hema,

with €80 million, resulting in a debt to equity ratio of 8%, an improvement of six percentage points. Hema opened 46

stores in 2009, of which six were in Belgium, and plans to open another 50 stores by the end of 2010.

Table 8: Key figures for HEMA (€ million)

Source: HEMA

Since the buyout, there has been some anecdotal evidence of deteriorating employment conditions at HEMA. In March

2009, the union FNV Bondgenoten organised a successful one-day strike at a central distribution hub to enforce a higher

wage increase offer from management. During 2009, FNV Bondgenoten recorded a sharp increase in complaints over

worsening employment conditions, related to overtime, weekend and evening shifts, workload, etc. All of these were

said to be aimed at enhancing the flexibility and mobility of the workforce. In addition, FNV Bondgenoten filed a legal

complaint against the firm. It is unclear to what extent the deterioration of employment relations was caused by the

financial constraints imposed by the new owner or instead was due to the wider deterioration of macro-economic

conditions caused by the financial crisis. At present, FNV Bondgenoten is said to be content with the performance of the

firm and its industrial relations.

Meanwhile, Maxeda has indicated that it is willing to sell its ‘crown jewels’, such as De Bijenkorf, V&D, Hunkemöller

and M&S Mode, providing for an effective exit of KKR and its partners, who even by 2008 were reported to have

received a return of 2.3 times their initial investment. This is in line with private equity practice, according to which

private equity funds aim for an exit in a five-to-seven-year time span, provided that the return on investment is

satisfactory.

PCM: Private equity in Dutch newspapers

Perscombinatie and Meulenhoff (PCM) is a large publisher, known in the Netherlands for publishing five of the

country’s six national daily newspapers, four of which are high-quality broadsheets. PCM is the product of a 1994

merger between a number of publishers.

During the 1990s, PCM was faced with the need to respond to two threats to its newspaper business. The first was the

long-term erosion of the traditional readerships of each of the newspapers which it published. The second was the rise

of new media, such as the internet and the commercial broadcasting in the field of radio and TV. While newspapers

formerly competed among one another for scoops and readership, increasingly they also had to fight with other media

for a shifting audience.



2008 2009

Interest payments 114.4 115

EBITDA 132 n.a.

Net profits -15 -19

Gross revenues n.a. 1100

Debt 1,031.9 n.a.

19



PCM responded by creating a number of costly and ill-considered internet activities and also tried to broaden its product

range by diversifying into books, films, radio, TV, and other service activities, such as selling travel arrangements and

wines. However, what was not addressed was the complex governance structure of the firm, which still reflected the

origins of the different newspapers and was backed by equity stakes. The result was a firm that behaved more like a

conglomerate and was hence unable to ensure that each of the titles possessed a viable business model. In fact, the profits

of two papers were increasingly used to subsidise the other titles. The resulting managerial deadlock and financial

unsustainability is clearly visible from the performance of the firm, as depicted in Table 9.

Table 9: Key figures for PCM (€ million)

Source: HEMA

Since the buyout, there has been some anecdotal evidence of deteriorating employment conditions at HEMA. In March

2009, the union FNV Bondgenoten organised a successful one-day strike at a central distribution hub to enforce a higher

wage increase offer from management. During 2009, FNV Bondgenoten recorded a sharp increase in complaints over

worsening employment conditions, related to overtime, weekend and evening shifts, workload, etc. All of these were

said to be aimed at enhancing the flexibility and mobility of the workforce. In addition, FNV Bondgenoten filed a legal

complaint against the firm. It is unclear to what extent the deterioration of employment relations was caused by the

financial constraints imposed by the new owner or instead was due to the wider deterioration of macro-economic

conditions caused by the financial crisis. At present, FNV Bondgenoten is said to be content with the performance of the

firm and its industrial relations.

Meanwhile, Maxeda has indicated that it is willing to sell its ‘crown jewels’, such as De Bijenkorf, V&D, Hunkemöller

and M&S Mode, providing for an effective exit of KKR and its partners, who even by 2008 were reported to have

received a return of 2.3 times their initial investment. This is in line with private equity practice, according to which

private equity funds aim for an exit in a five-to-seven-year time span, provided that the return on investment is

satisfactory.

PCM: Private equity in Dutch newspapers

Perscombinatie and Meulenhoff (PCM) is a large publisher, known in the Netherlands for publishing five of the

country’s six national daily newspapers, four of which are high-quality broadsheets. PCM is the product of a 1994

merger between a number of publishers.

During the 1990s, PCM was faced with the need to respond to two threats to its newspaper business. The first was the

long-term erosion of the traditional readerships of each of the newspapers which it published. The second was the rise

of new media, such as the internet and the commercial broadcasting in the field of radio and TV. While newspapers

formerly competed among one another for scoops and readership, increasingly they also had to fight with other media

for a shifting audience.

2008 2009

Interest payments 114,4 115

EBITDA 132 n.a.

Net profits -15 -19

Gross revenues n.a. 1100

Debt 1031.9 n.a.

20

PCM responded by creating a number of costly and ill-considered internet activities and also tried to broaden its product

range by diversifying into books, films, radio, TV, and other service activities, such as selling travel arrangements and

wines. However, what was not addressed was the complex governance structure of the firm, which still reflected the

origins of the different newspapers and was backed by equity stakes. The result was a firm that behaved more like a

conglomerate and was hence unable to ensure that each of the titles possessed a viable business model. In fact, the profits

of two papers were increasingly used to subsidise the other titles. The resulting managerial deadlock and financial

unsustainability is clearly visible from the performance of the firm, as depicted in Table 9.

Table 10: Key figures for PCM (€ million)

Source: PCM

To break out of this deadlock, in 2003 the share owners decided – after consultation with all stakeholders – to look for

a powerful financial partner to pursue a strategy of takeovers in the publishing sector. The search for a partner resulted

in 15 preliminary bids, of which five were asked to make a more detailed proposal. Of these, four were financial

investors and one, de Persgroep, was a strategic investor. In late 2003, PCM announced the participation of Apax, a

London-based private equity house. Once again, this was after extensive consultation with all stakeholders, including the

works council.

In 2004, PCM announced that it would transform itself into a holding company to accommodate a new financial investor

with big pockets, ambition and know-how, namely Investments, a Luxembourg-based vehicle of Apax, which purchased

all the existing equity stakes of PCM for €610 million. Investments was 47.5% owned by Apax, while one of the former

owners, SDM, retained a stake of 41.9%. The new holding company paid for the underlying equity stakes through a mix

of subordinated loans carrying interest of 12.36% and external bank loans of €300 million carrying a variable interest

rate of on average 4.74% in 2005 and 5.7% in 2006, resulting in an annual interest payment of approximately €40

million. This was more than four times the profits booked in 2003, of which approximately €14 million went to Apax.

The participation of Apex in the holding company was terminated in March 2007 when it was apparent to all participants

that the investment strategy for which Apax had come on board had failed to materialise. In mid-2006, Apax had been

refunded its subordinated loan of a little less than €140 million by the holding company, on condition of making the sum

available again if an investment opportunity presented itself. In March 2007, PCM announced the sale of the equity stake

of investments to Stichting Democratie en Media for a sum of €100 million, generating a net return for Apax of

approximately €138 million. On the other hand, PCM was left with huge debts of €400 million and negative reserves of

€55 million.

The Apax involvement in PCM turned into such a high-profile case not only because the Apax involvement cost PCM

a lot of capital and did not bring much in return, but also because it gave many Dutch journalists first-hand experience

of what came to be seen as the typical way of operating of Anglo-Saxon capitalism. This explains the large number of

Dutch publications, including two books, on the ‘Apax affair’.

In January 2008 the Dutch Society of Journalists (NVJ) together with the trade union FNV Kiem filed a legal complaint

in the Dutch Company Law Chamber to establish a formal investigation into the ‘wheeling and dealing’ of PCM between

2004 and 2007. The Chamber published the results of its investigation in April 2009. According to the report, it was the



1999 2000 2001 2002 2003

Total revenue 701 751 734 695 647

EBITDA 71 69 31 8 25

Net profits 34 26 2 -9 9

21


executive board and the supervisory board that were mostly to blame for the Apax ‘adventure’, as well as the lack of any

value added coming out of Apax’s involvement. The investigation explicitly stated that Apax acted according to private

equity standards and this should have come as no surprise to PCM’s management.

Meanwhile, in 2009 PCM sold itself to one of the earlier contenders, De Persgroep, which claimed it would revitalise

the firm. In April 2010, in the latest instalment of the dismemberment of PCM and in search of a need to recapitalise

itself, De Persgroep announced the sale of a leading paper, NRC Handelsblad, to a further group of Dutch investors.

ABM Amro: an early activist hedge fund intervention

This case is a dramatic example of an intervention by an activist hedge fund in the internal management of the largest

Dutch bank, ABN Amro. The fund was the London-based TCI, which had already made a name for itself in 2005 with

its obstruction of the attempted takeover of the London Stock Exchange by Deutsche Börse.

While any historical reconstruction of the rise and fall of ABN Amro should really start with the merger of ABN and

Amro in March 1990, this account commences in the early 2000s. At that time the new CEO, Rijkman Groenink, had

voiced the ambition to turn ABN Amro into a world-class player, belonging to the top five global banks in terms of total

assets and profitability. By then, ABN Amro was by far the largest Dutch bank, entering the top 10 of global banks in

1998 at sixth place, and reaching third place in Europe, just behind Deutsche Bank, with USD 504 billion in assets

(approximately €428 billion at 1998 exchange rates). However, given the small size of the Dutch deposit base and the

imminent consolidation of the European banking market, ABN Amro was frantically searching for a second home base

in Europe, the US or Latin America.

However, within the board of directors there was no consensus on future strategy. ABN Amro suffered from huge internal

conflicts between the retail or commercial banking side of the firm and the wholesale or investment banking side. This

internal conflict was brought to a head by the apparent inability of the management team to bring the cost base of the

bank firmly under control. By some this is seen as an effect of a typical Dutch style of mergers between equals, which

generally fails to reap sufficient synergies from overlapping activities and redundancies, and hence as the ultimate cause

of the eventual demise of ABN Amro.

The attempts of the management team to bring down operational costs below 70% of gross revenues became increasingly

desperate, resulting in major strategic shifts from retail to wholesale and back again and from Europe to the US and back

again. This resulted in a gradual fall in the international rankings as published by The Banker, pushing the ambitious

goals of Rijkman Groenink further out of reach. In 2003 ABN Amro exited the top 10 and was even surpassed by its

Dutch rival ING. In 2007, just before the takeover, ABN Amro was ranked at number 24.

In this context a number of activist hedge funds, including TCI and Tosca, began to stalk the increasingly desperate

moves of the ABN Amro board of directors and targeted the firm as a possible subject of intervention. In February 2007,

TCI finally made its move when it sent a letter to the board of directors calling both for a withdrawal of ABN Amro from

the bidding war over the Italian bank Capitalia (seen by ABN Amro as a future second home base), and announcing its

wish to put a future breakup or merger of ABN Amro on the agenda of the AGM scheduled for April 2007. According

to TCI, which at that time owned approximately 1% of ABN Amro, the incumbent management team had failed to set

out a convincing strategy and to bring down costs. Moreover, according to TCI, through extensive takeovers ABN Amro

had become an ‘archipelago’’ of unrelated activities which would be worth more independently. To back up their claim

TCI referred to an analysis by Merrill Lynch, the future consultant of the triumvirate that would finally take over and

break up ABN Amro. As activist hedge funds are wont to do, TCI sent the letter simultaneously to Bloomberg and large

financial dailies such as the Financial Times and the Wall Street Journal.


22



A week later, the board of directors announced that it would offer the bank for sale – a new strategic shift contrasting

sharply with earlier announcements. Consequently, ABN Amro began exclusive merger talks with its British counterpart

Barclays, with which it has been in on-and-off talks since January 2007. The Dutch management team dismissed the

suggestion that this was initiated by the TCI letter, saying that it was in fact the result of an autonomous corporate

decision. In April 2007, a consortium consisting of The Royal Bank of Scotland (RBS), Fortis and Santander, brokered

by Merrill Lynch, joined the fray. In response, ABN Amro declared their bid to be hostile and granted the consortium

only reluctant access to its books.

Only four days after the end of exclusivity for Barclays, ABN Amro suddenly announced the sale of most of its US

possessions, in the form of Chicago-based LaSalle, a unit of ABN Amro which was particularly coveted by RBS, the

lead partner in the consortium, to Bank of America. A Dutch organisation of small shareholders (Vereniging Effecten

Bezitters or VEB) then commenced a legal case at the Dutch Company Law Chamber to force ABN Amro to undo the

sale, because it was seen as a move to obstruct the bidding war and hence perceived as contrary to the interests of

shareholders. In a dramatic session, the Chamber granted the request of the VEB and obliged ABN Amro to repeal the

sale. This judgment was overturned in a higher court a few weeks later. However, the consortium remained in the race.

Moreover, it offered shareholders a higher sum (€71.7 billion) including more in cash. At the time of the final offer,

Barclays was only able to bid €67.5 billion, as a result of a declining share price.

In October 2007, the consortium announced that nearly 100% of the shares had been sold to them, finalising the formal

takeover of ABN Amro. Under the agreement between the parties, RBS would take over the wholesale part of ABN

Amro (including the Dutch-based elements of wholesale banking), Fortis would obtain the Dutch part, and Santander

would take over the Latin American and Italian parts. To ensure an orderly breakup process, the consortium had

established a holding corporation, RFS Holding, which was the formal owner of the shares of ABN Amro. Given the

size, complexity, and interests involved, the Dutch central bank had given permission for the takeover only under strict

regulatory and monitoring conditions. Moreover, the European Commission, on the basis of competition considerations,

had indicated that it would only grant permission to any takeover by Fortis if parts of the Dutch business of ABN Amro

were sold to a third party. As a result, the breakup process would take place under extreme diligence and was expected

to take more than a year.

In the meantime, the US subprime mortgage crisis had started to impact upon a growing number of financial markets.

Increasingly, weak banks with too many unsustainable obligations came in the crossfire of market rumours, bearish

investors, and hedge funds pursuing short selling. Since the takeover of ABN Amro was the largest banking takeover in

history, the consortium partners had to load themselves up with capital to pay for their prey.

Fortis was forced to tap the equity market to pay €13 billion for ABN Amro. As a result of the slow process of

consolidation (partly caused by the diligence of the Dutch central bank), Fortis was forced to go to investors a second

time. In June 2008 it tapped an additional €8.3 billion, antagonising many of its shareholders who were not given a

chance to stock up on their shares and were hence confronted with a depletion of share values. On the back of a sharp

loss in share value in the wake of the flashpoint of the crisis, the third week of September 2008, Fortis was blacklisted

by an increasing number of its interbank counterparties. When markets dried up completely after the Lehman bankruptcy

on 16 September, Fortis faced liquidity and solvency problems which were so serious that the Dutch and Belgian

governments had to intervene. In early October 2008, the Dutch parts of Fortis and its remaining possessions of ABN

Amro were formally nationalised by the Dutch government. The Belgian government was forced to do the same for the

Belgian side of Fortis. For RBS, the episode also ended in disaster. In October 2008, the British government announced

an infusion of new capital in RBS, resulting in de facto state ownership of the bank. The CEO of RBS, which had led

the consortium to victory a year earlier, was forced to resign. In January 2009 RBS announced losses of GBP 28 billion

(about €31.08 billion), of which GBP 20 billion was due to toxic mortgage products on the books of ABN Amro. The

23


only member of the original consortium which came out of it well was the Spanish bank Santander, which sold its Italian

stake before the worst of the crisis and simply added ABN Amro’s Latin American network to its own.

In the Netherlands, the breakup of ABN Amro was perceived as an unforgivable policy failure, caused by

narrowmindedness, greed and indifference to national interests. Moreover, the ABN Amro case has served as a

cautionary tale to many politicians as well as regulators, and has given rise to some of the re-regulatory measures in the

field of corporate governance and financial market regulation that are discussed in the Dutch chapter of the hedge fund

report. A Dutch parliamentary hearing committee, which was established to investigate the causes of the crisis, dedicated

almost a quarter of its analysis to a discussion of the ABN Amro case.

For the purposes of this report, the case of ABN Amro is presented as one where an activist hedge fund was involved

early in changes in company policy. However, it is difficult to estimate the size of the effect of this intervention on

subsequent events. Also, for the purposes of this report, there is the question of the effect of the whole set of events on

employment. Jobs have undoubtedly been lost in both the former ABN Amro and in its successor companies, but the

causes of these job losses have been complex.


24 © European Foundation for the Improvement of Living and Working Conditions, 2010

Skandia and the hedge fund Cevian

Skandia provides traditional life insurance, mutual fund savings, insurance, and banking, and describes itself as one of

the world’s major providers of insurance and long-term savings. The company was founded in 1855 and was among the

first to be listed on the Stockholm Stock Exchange. It slowly extended its reach, entering the North American, South

American, Asian and Australian markets in 1900, 1953, 1955 and 1970 respectively. The company is currently

represented in some 20 countries in Europe, Asia, the Americas and Australasia.12

Two major crises are crucial for Cevian’s relationship with Skandia. The first is the so-called life-company crisis,

affecting all major Swedish insurance companies providing pension insurance plans. During the stock market boom in

the 1990s, they had convinced many of their customers to invest in stocks by promising large returns. This bountiful

period came to an abrupt end with the stock market crash in 2000–2002, and many customers lost a large part of their

savings. The customers felt misinformed, arguing that they had not been provided with sufficient information regarding

the risks involved. Instead they had been fed information promising an expected return of around 15%–20% per annum

(Swedish Financial Supervisory Authority, 2004). The ambiguous regulations, inadequate information, and lack of

consumer protection evident in the wake of the crisis undermined public trust.

The second crisis only involved Skandia. In November 2003, several of Skandia’s senior managers, including the CEO

and the chief financial officer (CFO), were accused of financial irregularities. In a nationally televised press conference

in December 2003 attracting immense media attention, Skandia announced that it had initiated an investigation. This led

it to conclude that some senior managers had carried out ‘unsuitable, unethical, and in some cases, probably illegal acts’

(BBC, 2003). These involved excessive and unauthorised bonuses and the renovation of luxury apartments using

company funds as well as the provision of attractive apartments to top managers and their family members at an

extremely low cost. Initially convicted, executives appealed and some were later cleared of criminal charges. On top of

this came dealings in connection with Skandia’s life insurance subsidiary, Skandia Liv, whose profits and assets were

expropriated by Skandia at the cost of Skandia Liv’s share and insurance holders (Nachemsson-Ekwall and Carlsson,

2004). This led to a class action suit against Skandia by the civil organisation ‘Class Action against Skandia Association’,

its 14,000 members claiming compensation for some 1.2 million life insurance customers (Kollnert and Weber, 2008).

Against this background, it is not surprising that Skandia suffered a loss of profits and a drop in stock prices. By 2003,

the share price had fallen to one tenth of its 1999 value (Norén et al, 2006). In December 2004, the hedge fund Cevian

acquired 3% of Skandia’s shares. Cevian believed that the current share price largely reflected its poor reputation, and

not its potential profitability. It was in other words fundamentally undervalued (Sunesson, 2008). By September 2005,

Cevian had increased its holdings to 3.4%. At that point Cevian had also been given the power of attorney for an

additional 3.5% of total shares, putting the shares under its control at 6.9%.

In addition to the undervalued stock, Cevian had also noted that Skandia’s ownership consisted mainly of institutional

funds. No single owner represented more than 5% of total shares. Cevian was familiar with many of the board members

and aimed to exercise control through board representation (Sunesson, 2008). It was successful in this regard, first

gaining a position on the board’s nominating committee and then on the board itself. A number of different so-called

‘value enhancing’ measures had also been outlined prior to entry. These primarily involved attempts to regain the trust

Sweden4

12See the company’s website: http://www.skandia.se

http://www.skandia.se

25



of the Swedish customers, but also to support growth in other countries. Cevian furthermore judged that Skandia’s

operating costs were excessive and could be reduced. Finally, as a further possibility, there was the option of breaking

up the company and divesting some of its parts.

Cevian was only partly successful in pursuing this strategy. During its involvement, several changes were made to the

board and in top management. In addition, a strategy was designed for improving the company image. This initially

focused on regaining the confidence of the company’s employees, which had suffered as a result of the firm’s

management troubles. Subsequently, in late 2004, a media campaign was rolled out to improve the company image. TV

commercials were run in 2004 and 2005 in which the company admitted its mistakes while trying to direct attention to

positive aspects of the company, mainly its non-management employees (Karlsson and Sjökvist, 2008).

To reduce costs, a reorganisation of the company took place in the fall of 2004. Skandia and its subsidiaries had had a

silo-like structure, with each of the four subsidiaries – SkandiaBanken, SkandiaLiv, SkandiaLink and SkandiaLifeline –

acting as independent organisations. The different organisations had separate missions, selling their own products to their

own customers through their own distributors and sales units. This was now changed into an integrated business model.

Although, for legal reasons, SkandiaLiv and SkandiaBanken could not be dissolved as independent companies, the

subsidiaries came to share joint information technology (IT), administration, communication and human resources

departments (Makloof and Sundberg, 2006). This streamlining led to layoffs of around 200 employees. It is of course

uncertain how instrumental Cevian was in this development – the reorganisation largely took place prior to Cevian’s

stock purchase. Nevertheless, the changes were clearly in line with those outlined by Cevian.

Cevian was never able to fully implement its strategy. Throughout the engagement in Skandia, Cevian actively pursued

the sale of the company. In September 2005 the South African insurance company Old Mutual announced that it was

interested in acquiring Skandia. The arrival of the bid from Old Mutual, the subsequent heated public discussion about

the future of Skandia and the valuation of the bid (including government intervention and legal action against Old Mutual

by the Swedish Shareholders’ Association), as well as the transfer itself, made implementation of the strategy difficult

(Sunesson, 2008; Karlsson and Wallström, 2007).

Cevian was, however, satisfied with the rate of return implied by the offer and pushed the sale against the resistance of

other shareholders (Sunesson, 2008). In February 2006, Skandia was bought by Old Mutual, an acquisition that included

the sale of all of Cevian’s stock to Old Mutual.

Cevian’s involvement in Skandia came at a low water mark in the history of Skandia. Cevian judged Skandia shares to

be undervalued, and indeed the share price almost doubled during their holding period. For Cevian and its partners, the

investment was clearly profitable. For Skandia’s employees the outcome is more difficult to assess. As is evident from

Table 10, after a series of layoffs in Sweden as well as abroad, employment was at its lowest in 2004. No employment

reductions were observed during Cevian’s involvement. The assessment of the employment consequences of Cevian’s

involvement is somewhat complicated by the realignments within the company, where in addition to aggregate

employment changes there are also instances where subsidiaries were transferred to the parent. Uncertainty also remains

regarding the long-term consequences beyond Cevian’s holding period, yet the bottom line is perhaps that no aggregate

employment reductions took place during that period.

26

Table 11: Key figures for Skandia

Source: Skandia’s annual reports

Callenberg and Segulah

Callenberg is one of Scandinavia’s leading engineering groups within marine electrical automation and heating,

ventilation and air-conditioning. The company is involved in the whole production chain, from design and construction

to installation, testing and service. Primarily focused on Scandinavia, the company is also represented in North America

and Asia.

The west coast of Sweden used to be the home of a substantial shipbuilding industry, with major shipyards in the cities

of Uddevalla, Gothenburg, Landskrona and Malmö. The shipbuilding industry was directly connected to the equally

important shipping industry, and these two provided employment for an extensive network of suppliers. One of these

suppliers was, and is, Callenberg Engineering. The company is situated in Uddevalla, and was founded in 1951. During

the heyday of the Swedish shipbuilding and shipping industry, its major customer was the local shipyard.

Starting in the latter half of the 1960s, increasing competition from Japanese and South Korean shipyards first led to a

decline in profitability and then to substantial losses. The Swedish shipyards responded to the challenge by restructuring

and further specialisation, in particular in large bulk carriers and tankers. However, massive overcapacity – combined

with the reduction in oil shipments as a result of the oil crises in the 1970s – caused immense problems and a series of

closures. Within a decade, between 1975 and 1987, the number of employees in the Swedish shipbuilding industry

involved in the construction of new merchant vessels went from almost 30,000 to zero (Storrie, 1993).

Callenberg reacted to this upheaval by broadening its markets, first in the US and then in Asia. Even before the crisis,

the company had started to specialise in system deliveries in electronics, navigation and communication as well as

services to shipping companies and shipyards abroad (Blomberg and Oleru, 2009 for the following account, unless stated

otherwise). In 1984, Callenberg opened a subsidiary. In 1999, another subsidiary was established in Singapore. These

both catered for the local cruise industry as well as local shipyards.

In 2001 Callenberg was owned by Expanda, a company centred on furniture and design. Expanda had acquired

Callenberg in 1999 as part of a bigger purchase, and Expanda’s board had already at that point declared Callenberg’s

activities extraneous to Expanda’s core business and that it was looking for a partner (Expanda, 2001). The initial contact

between Callenberg and the private equity firm Segulah was indeed made by one of Expanda’s owners who contacted

Segulah regarding the possibilities of a buyout. In May 2001, Segulah acquired 80% of the Callenberg Group from

Expanda, obtaining the remaining 20% in April 2002.



2001 2002 2003 2004 2005 2006 2007 2008

Turnover (in SEK million) 133,804 119,297 88,827 98,031 127,557 158,992 n.a. n.a.

EBITDA (in SEK million) 222 -6,655 1,023 -1,144 412 1,865 n.a. n.a.

EBIT (in SEK million) -122 -7,213 980 -1,187 136 1,657 n.a. n.a.

Employees in Sweden 1,902 1,895 1,691 1,491 1,729 1,899 n.a. n.a.

whereof:

parent 141 206 399 715 1,003 1,467 1,363 1,432

subsidiary 1,761 1,689 1,292 778 726 432 n.a. n.a.

Employees in groupworldwide

6,732 6,922 5,935 5,549 5,821 6,425 n.a. n.a.

27



Segulah believed Callenberg lacked focus, as its five different operating entities basically acted independently. They

therefore believed that they could profit from creating a larger, more integrated business with a broader set of skills. The

primary goal was to gain an advantage by consolidating in a fragmented industry. Callenberg lacked proprietary

technology and products, so the focus needed to be on improving services. Segulah’s strategy therefore involved

replacing parts of the company board with experienced executives in the field of marine engineering as well as other

executives with relevant industry expertise.

Under Segulah’s ownership, Callenberg experienced major growth. Turnover increased by a factor of five, to around

SEK 1 billion in 2007. As is evident from Table 11, this was in large part related to the acquisition of other companies.

Segulah also utilised its industrial network to explore alternatives with regard to acquisitions and financing. Thus, in

2003 Callenberg acquired two Norwegian and Danish businesses, followed by the acquisition of a Swedish company in

2005. All three acquisitions involved other companies engaged in marine engineering and related operations. Profit

margins also developed positively. Furthermore, Segulah worked on financing, with regard to issues such as invoice

payments as well as negotiating new bank contracts. The final change involved the introduction of incentive schemes:

for instance, stock options were offered to top management in 2003, reducing Segulah’s share to 90%.

In November 2007, Segulah and all management shareholders sold their stock to the Wilhelm Wilhelmsen Group (LBR,

2007). Callenberg seems to be a success story, in which carefully targeted acquisitions enabled the group as a whole to

grow and consolidate. The benefits of the expansion for the parent company may however be limited and of a more

indirect nature. Employment thus remained relatively stable at the Uddevalla subsidiary, whereas some of the other

members of the group expanded. Turnover also fluctuated, even if it grew for the group as a whole. Thus, for the

Uddevalla branch, the benefits of the expansion seem mostly to lie in the fact that it is now part of a larger conglomerate.

Table 12: Key figures for Wilhelmsen Callenberg

Source: Amadeus of Bureau van Dijk (http://www.bvdinfo.com)

2000 2001 2002 2003 2004 2005 2006 2007 2008

Wilhelmsen Callenberg AB – Uddevalla, SW

Turnover (in SEK million) 5 4 142 147 110 112 122 129 162

EBITDA (in SEK million) -1 0 8 15 8 10 12 13 17

EBIT (in SEK million) -1 0 5 13 6 8 10 12 16

Employees n.a. n.a. 116 113 94 92 94 98 97

Wilhelmsen Callenberg A/S – Odense, DK

Turnover (in SEK million) n.a. n.a. n.a. n.a. 223 276 288 280 325

Employees n.a. n.a. n.a. n.a. 213 240 254 232 215

Wilhelmsen Callenberg AS – Lysaker, NO

Turnover (in SEK million) n.a. n.a. n.a. 8 121 147 151 194 209

Employees n.a. n.a. n.a. 26 26 n.a. n.a. n.a. 47

Wilhelmsen Callenberg Fläkt AB – Mölndal, SW

Turnover (in SEK million) n.a. n.a. n.a. n.a. n.a. 63 212 240 279

Employees n.a. n.a. n.a. n.a. n.a. 25 51 55 56

http://www.bvdinfo.com

28

C More, Nordic Capital and Baker Capital

C More is the largest pay-TV provider in Scandinavia, with branches in Sweden, Norway, Denmark and Finland. It

provides premium TV based on exclusive rights for sports, films and series, provided to subscribers through distributors

for a monthly fee.

After the introduction of terrestrial TV in Sweden by the Swedish national broadcasting corporation Sveriges Radio in

the 1950s, the Swedish TV market remained completely in public hands until the late 1980s. Cable TV then became

legal, and some providers added other programmes to the two public ones in their subscriptions. In 1987, terrestrial

commercial TV was also broadcast from the UK via satellite. This was followed in the late 1980s and early 1990s by the

founding of a series of new commercial terrestrial broadcasting companies, either in Sweden or abroad, as well as pay-

per-view companies.

One of the early cable networks was FilmNet, airing mainly American films from the major motion picture companies.

It was founded in 1985 and owned by the company Nethold. In 1997, when the company was broadcasting four channels

including a sports channel to the Scandinavian market, it was acquired by the French broadcasting company Canal+

(SOU, 1997).

Canal+ was in turn a branch of the French Vivendi group, and the acquisition was to be of the French company’s

Scandinavian branch. However, a couple of years later Vivendi had accumulated substantial debt, and was looking for

ways to divest (Schulz et al, 2008). An attempt was made to let Canal+ go public in order to divest the company at a

later stage. The attempt was unsuccessful, largely because Canal+ in 2002 had lost 70,000 subscribers in France alone

and the estimated value of the company had declined from €45 billion to €5 billion. At this time, Vivendi had an

outstanding debt of around €20 billion and was divesting a number of subsidiaries. Nevertheless, after registering losses

in the two previous years, Canal+ itself had turned a profit in 2002.

In October 2003, Canal+ was acquired by two private equity companies, the US-based Baker Capital and the Swedish-

based Nordic Capital. CANAL+ Television AB was then renamed C More Entertainment. The total price of the buyout

was €70 million, with the two investors each acquiring a 50% share of the company.

The primary motive for the acquisition of C More was the investors’ belief that the private TV market in Scandinavia

was an area with considerable growth potential. In addition, Sweden was about to introduce digital TV, meaning that

households would need to sign new TV contracts. A government decision had been made in 1997, and broadcasts had

been initiated in 1999. A second government decision in the spring of 2003 put an end to analogue broadcasting, with

regional transmitters closing down between 2005 and 2008. There was therefore an opportunity for expansion without

major strategic changes.

The two investors introduced a number of changes in management. They brought in a new CEO, introduced new board

members with substantial industry experience, and introduced stronger financial incentives for senior management.

However, when it came to operating decisions, their activities mainly involved the introduction of a new pay-TV

channel. Other operating decisions, such as pricing and programme selection, were left to the new management.

The takeover did not lead to redundancies; profit rose instead through a substantial increase in the stock of subscribers.

Within 14 months, C More was able to expand the number of subscribers by almost 100,000 to approximately 800,000.

Between 2002 and 2004, revenue increased by around 15%. Employment also grew, as did average labour costs. This

led to a dramatic increase in the value of the company, and in March 2005 Kanal 5, a branch of SBS Broadcasting,

acquired all shares of the C More Group for €270 million.



29


The acquisition by the two private equity houses, Baker and Nordic, took place at a very opportune moment, and since

the company was fundamentally profitable few changes were needed. The dramatic expansion in the number of

subscribers then allowed the investors to make a handsome profit.

Table 13: Key figures for C More Entertainment AB

Source: Amadeus of Bureau van Dijk (http://www.bvdinfo.com)


2000 2001 2002 2003 2004 2005 2006 2007

Turnover (in SEK million) 1,004 1,306 1,543 n.a. 1,775 1,960 2,103 2,197

EBITDA (in SEK million) -117 -18 147 n.a. 137 148 50 58

EBIT (in SEK million) -156 -62 126 n.a. 124 133 32 40

Employees 130 124 128 n.a. 145 144 162 146

Average cost of employee(in SEK thousand)

n.a. n.a. 402 n.a. 587 814 763 805

http://www.bvdinfo.com


Marazzi

Founded in the 1930s, Marazzi is currently one of Italy’s major multinational companies and the world leader in its

sector (the design, manufacture and sale of ceramic tiles, with a growing presence in sanitary fixtures). The Group, based

near Modena in Emilia Romagna, has long been controlled by the founding Marazzi family, now into the third

generation, holding the majority of the share capital. It has manufacturing plants in Italy, Spain, France, Russia and the

US, and employs 6,000 staff in its plants, commercial branches and showrooms.

The acceptance of private equity fund investment in the company in 2004 originates from mutual interest. In the first

half of the decade, the company found itself at a turning point: transforming itself from a multinational corporation to a

full-blown global player active in both developed and emerging markets. Filippo Marazzi saw the entry by private equity

funds as the leverage that, in addition to securing the finance necessary for the expansion strategies, would allow for the

modernisation of the management of the company and consolidation of leadership in the sector. In turn, the funds became

interested in Marazzi both because it was an already noteworthy brand within the sector and present in all segments and

because it was a healthy company with significant growth prospects.

In December 2004, the private equity firms Permira and Private Equity Partners (PEP) bought 33% of the capital of the

company from the Marazzi family (Permira 28% and PEP 5%) with the aim of going public within the next three to five

years. The volume of this sale amounted to €132 million (€3.89 per share), whereas the total value of the company was

estimated at €750 million. The investment of the two private equity funds is also closely connected to the strategic

acquisition of Welor Kerama, the leading ceramic tile company in Russia. This company offered a rich network of stores

throughout Russia in addition to production facilities.

In February 2006, Marazzi went public (on the Blue Chip segment of the Italian Stock Exchange). The company was

quoted at €10.20 per share on the basis of a valuation of €974 million. In agreement with the company, at the time of

quotation, the funds sold two thirds of their remaining post-quotation shareholdings, reducing their stake to 10%

compared with the original 33%. These funds earned substantial profits on this sale, since Permira and PEP bought the

shares for €3.9 each and sold them for €10.25. Both investors withdrew from Marazzi in February 2007 with a total profit

of €134 million in two years. After the investors left the company the stock price rose to €12 per share but then decreased

to €6 in 2008.

In May 2008, Marazzi was delisted in order to consolidate and expand the company. Once again Permira and PEP

invested in the company (€250 million) and created jointly with Marazzi the new enterprise Fintiles, a company

indirectly controlled by Filippo Marazzi, but with 49% participation of Permira and PEP through LuxELIT.

Marazzi represents the atypical case of a private equity investment without debt leverage and a minority partnership

(33% of shares). The decision not to use debt leverage was made jointly by Marazzi and the private equity funds. Using

debt leverage would have meant that much of the cash flow of the acquired company would have to be used for interest

and amortization payments and therefore would not be available for other uses. The case with Marazzi was different –

the cash flow was good, but so were the prospects for growth – which still required enormous financial resources. On

the part of the private equity funds, the investment therefore was in the growth and the globalisation of Marazzi. A

growing company absorbs cash flows. In addition to the abovementioned operation in Russia, other investments were

scheduled in factories and/or minority acquisitions. As one of the senior managers said in an interview, ‘What remained

free would have been insufficient for an operation based on debt leverage’. The investment of private equity without

leverage has given the firm the necessary flexibility to finance future acquisitions with debt, to bring already initiated

strategic investments to completion (such as the doubling of factory capacity in Dallas, US), and to modernise systems

in other factories. The latter is intended to reinforce the technological and commercial leadership of Marazzi in their own

sector.

Italy5

31


These developments can be traced in the company’s financial data, which is available up to the first quarter of 2008.

With delisting in July 2008, the publication of data also ceased. With this limitation, there is no doubt that the period

from 2004 to 2007 was one of strong growth for the group, mainly due to the acquisition of Welor Kerama in Russia.

The Russian business unit achieved excellent results year after year and contributed in a clear way to the overall positive

performance of the group: a 29.2% increase in proceeds in 2006 (against +6.7% overall) and 26.1% in 2007 (overall:

+2.1%), with and earnings before innterest, tax and amortisation (EBITDA) that in 2006 grew 30.7% (against an average

of 12.4) and another 13.1% in 2007 (overall: -2.9%). This brought the profit margins of this business from 39.7% in 2005

to 40.1% in 2006 and then down to 36.0% in 2007.

As already mentioned, the most evident consequence of the entrance of private equity funds into the ownership of the

company was the reorganisation of the organisational and managerial structure, which was desired and supported by the

entrepreneur: ‘The risk of family companies is that the leader often decides on gut feelings. Up to a certain point it also

has its positive aspect, but then, when the company grows, you can no longer allow it. A development model is needed.

The targets which we set now are much more important than those we can reach at once but serious evaluation criteria

are needed and the organisation and the controls must be impeccable’ (Filippo Marazzi, in Peveraro 2008).

The reorganisation of the company was conducted along two lines: the ‘managerialisation’ of the structure and the

adoption of principles and organs of corporate governance. The choice was to modify the organisational structure of the

group from a functional model to one based on business units in five geographic areas: Italy, France, Spain, the USA and

Russia. Each unit is managed by a country manager responsible for managing production and distribution activities in

each country. Accompanying the redefinition of the organisation structure was the formalisation of responsibilities and

the delegation of authority of the various levels and bodies, with two delegated administrators supporting the CEO (one

for production, the other for finance) and new managerial figures to reinforce the functions of the staff in various areas

(CFO, management control, human resources manager, etc.).

As regards industrial relations at Marazzi, they have always been characterised by a cooperative style and direct

relationships internally, even with the family owner. From this point of view, the private equity funds represent more

than an ‘invisible leader’. Employee representative bodies (Rappresentanza Sindacale Unitaria or RSUs) within the

company, and the unions on the outside, have no direct relationships with the private equity owners, but their influence

has increased in the current economic crisis. After the entry of private equity funds, no major restructuring processes

took place – at least as far as the Italian plants were concerned. Factories were modernised, but this was considered part

of a normal process and did not have a major impact on employment.

The situation changed following the world financial and economic crisis. In the first days of October 2009 Marazzi

announced a plan for restructuring its Italian plants which involved both a concentration of production and the closure

of two plants, and also investments totalling €90 million in the medium to long term. At the end of November, increasing

conflict with the trade unions intensified following the request by the company for the Ordinary Wage Guarantee Fund

– a fund that covers part of the wages of workers suspended from work due to company crises – for all employees of the

Group in Italy (more than 1,800). However, thanks to government mediation, the parties signed an agreement which

ensured the continuation of production at the Iano plant and avoided any redundancies.

In conclusion, the Marazzi Group seems to be a ‘virtuous case’, at least until early 2008. The private equity funds

enabled an already internationally active company to continue its course of consolidation and expansion. There are a

number of reasons for this. The entrepreneur and family consciously chose the private equity option to be quoted and

achieve growth. The decision was made to choose private equity funds – which was both a financial and an industrial

strategy. Operational staff led, with the funds themselves, but in a majority position, with clear industrial objectives for

medium- and long-term growth.


32



In addition, the characteristics of the company were important: it is a market and technological leader in the sector and

with strong features of a family company. It was economically and industrially healthy, but still with a traditional

organisational structure which evidenced strong potential for further growth, making it attractive to private equity funds.

And finally, also significant is the peculiarity of the Marazzi operation, which was conducted without using debt for the

acquisition of a part of the share capital of the company by the private equity funds. This allowed for the use of cash

flow to finance enormous investments over three years and with an eye to the medium and long term.

However, this analysis of Marazzi’s case essentially ends in 2007, because it is not possible to evaluate the company’s

current situation. Owing to its delisting, the financial data for 2008 and 2009 are not publicly available. Also in light of

the financial crisis, the question of debts and liquidity of the company remain open. Mediobanca supported the delisting

and the voluntary public tender offer of Fintiles with an additional credit of €285 million. The deal resulted in a doubling

of Marazzi’s debts to €550 million.

Seves

The Seves Group is a multinational world leader in two niche markets: electrical insulators for electricity generation,

transport, and distribution; and glass bricks for architecture and furnishings. The Group was created in 1997 with a

MBO, backed by Italian private equity funds, of the Florentine company Vetroarredo, whose origins date back to 1928,

followed by a subsequent policy of development by aggregation (including the acquisition of the Czech company

Vitrablock and the French Sediver with its subsidiary Electrovidro in Brazil).

SEVES Glassblock is the glass brick division of the group and produces and distributes over 36% of glass bricks

produced and distributed worldwide, with a share of over 40% of the world market in terms of value. The success of

Seves Glassblock is the result of a strategy that has transformed the old ‘cement glass’ into ‘glass brick’, a high-end

designer product for external and internal furnishings. This process uses purpose-built machinery, and raw materials of

the highest quality, but also ancient traditional colouring and treatment techniques. Moreover, the company is able to

offer bespoke solutions for the designer’s needs, which range from personalisation of catalogue products to the creation

of special glass bricks. This has allowed collaboration with world-famous architects.

Altogether, the Seves Group has 25 factories (10 in Europe, eight in Asia, and seven in the Americas) with a total of

about 4,500 staff (as at 2007). Of these factories, four are part of the Glassblock Division and are located in the Florence

area (where the head office of Seves Glassblock is situated), the Czech Republic, Germany and Brazil.

In April 2006 the Group was transferred via a secondary buyout from its owners (constituted by funds from Fidia

investment management, Interbank investment management, Intek share limited company, 3i Plc, and Athena PE) to the

private equity funds Ergon Capital Partners (Belgium), Vestar Capital Partners (Cayman Islands), and to the same Athena

PE (Mediobanca Fund based in Luxembourg) that reinvested. The value of the secondary buyout was estimated at €375

million. As described in the report of the Antitrust Authority on the acquisition,13

two Luxembourg-registered companies

were established at the same time: Arno Glass Luxco SCA (Arnosca), a limited share partnership, and Arno Glass Sa

(Arnosa). Arnosca, the special-purpose vehicle for the operation, is part-owned by Ergon, Vestar and several partners of

Progetto 26 (the holding company of the Seves Group), but it is controlled by Ergon and Vestar through Arnosa, which

is the unlimited partner. In fact, Ergon and Vestar have joint control of Arnosa. The control of Progetto 26, and therefore

of the Seves Group, was acquired by Arnosca.

13Guarantor Authority for Competition and Market, Provision No. 15414 26/04/2006, published in Bulletin 17/2006.

33



Reports at the time suggested that it was also a management buyout operation with the involvement of the then chairman

and the managing director, who owned 10% of the shares. In 2008, nevertheless, both suddenly left – or were forced to

leave – the company. With them went the management which had led the transitional and expansion phases. In

November, Seves unexpectedly communicated its intention to discontinue for a year the hot production stage at the

Florence plant, in order to reduce the high level of stock in trade. It justified the decision by referring to the difficulties

in the glass brick trade following the crisis (a fall of 32.5% in sales and 83% in operating margin in the previous two

years). At the same time, the company opened a procedure for a so-called Extraordinary Wage Guarantee Fund for 87

employees at the Florence plant, combined with the layoff of a further 20 workers. The announcement was equivalent

to the dismissal, immediate or forthcoming, of 97 employees out of the total 170 at the Florence plant.14

The numbers, though apparently small, are significant. First, they were not an isolated case, but are added to other crisis

situations. In the Florence area, recourse to temporary unemployment pay by companies in crisis grew significantly in

2009 and even more in 2010. Second, in the Seves case, this involved a highly specialised factory and labour force.

Moreover, this prefigured the possible closure of the plant. This explains the strong trade union reaction. For a detailed

account of the attempt to save the Florence plant, including a lobbying of private equity owners, see below.

January 2009: A first agreement was signed between Seves and the unions which prescribed a Wage Guarantee Fund

for 110 employees, but reduced from ‘extraordinary’ to ‘ordinary’, which implied the re-employment of staff; the

closure of the plant, which the company always denied, seemed finally to be averted; the company undertook to present

by 15 April 2009 a new industrial plan, based on the construction of the new blast furnace at the Florence plant.

May 2009: The plan prescribes the reactivation of the blast furnace in June 2010; this is rejected by the trade unions.

The local government offers loans for the construction of the new furnace, but the company prevaricates. A week of

strikes, some unofficial, is triggered by the attempt of the company to transfer equipment, with the fear that it might be

sent to the Czech Republic. This was denied by the company.

June 2009: An agreement is signed between the company and the trade unions, which reproduces the proposal of

mediation put forward by local government and brings the furnace reconstruction works forward to December 2009,

subject to verification of the reduction of stock in trade, of sales, and of financing. The agreement also prescribed

monthly information on the possible movement of materials and equipment between, sales trends, work undertaken by

other factories in the Group.

Autumn 2009: Despite the continuous reduction in stock in trade, and the approaching date for the start of construction

of the new furnace, considerable uncertainty remained about the future of the plant. Whilst the company played for

time, local networks also mobilised – the mayor of Florence convened the city council in front of the factory gates and

a delegation went to Brussels to meet the top management of the funds which controlled Seves. The unions pointed out

the good results of the Florence plant: they were better than those of similar plants in the Czech Republic and Brazil.

14The Wage Guarantee Fund is an intervention that operates for a set time and covers 80% of the wages of workers suspended from

work due to company crises. The Ordinary Wage Guarantee Fund (Cassa integrazione guadagni ordinaria) is introduced in short-

term situations and presupposes the return of the workers into production, whilst the Extraordinary Wage Guarantee Fund (Cassaintegrazione guadagni straordinaria) aims gradually to reduce redundant staff, avoiding the traumatic social repercussions caused

by collective dismissals. The use of this instrument very often precedes recourse to layoffs. Entry into layoff, in turn, is a

transitional measure that prescribes a subsidy in case of dismissal and incentives for companies that employ laid off workers.

34



In conclusion, the Seves case shows the impotence of the trade unions and also of local government in cases where

companies sign agreements but do not observe them. The lack of information on the ‘invisible finance’ of the private

equity funds and the current financial situation hinder a complete account of the case, but the economic data relating

both to the Seves Group and to the Seves Glassblock Division make the following hypothesis reasonable. Beyond the

difficulties generated by the economic crisis, this is not so much a case of the company in crisis but of the property in

crisis; a crisis made worse by the high indebtedness operations in its portfolio in view of which the Florence plant

represents only a means to save money and ‘make cash’. The real causes of the crisis in the Florence plant, and the

outlook for the future, remain as opaque as they did when ownership was first transferred.

Saeco

Saeco International Group designs, produces and markets coffee machines for household and professional use and

automatic vending machines for hot and cold beverages and snacks. Established in Italy in 1981 for the production of

domestic espresso coffee machines, Saeco has grown successfully over the years to have a presence in the world’s

leading markets, with 16 subsidiaries in Europe, the US, Latin America, Australia and Asia and a sales network in more

than 60 countries. A strategic step for the company was taken in 1999 with the acquisition of 60% of Gaggia SpA, owner

of a historic brand in the professional coffee machine industry, with 32% of the European market. Following the

reorganisation Saeco SpA changed its name to Saeco International Group SpA.

In December 2003 ownership of the Group passed from Sergio Zappella, one of the founders of the company in 1981,

to the French private equity group PAI. At the time Saeco’s situation was excellent: besides holding a market share of

65% in Italy and 30% in Europe, the company had very high profitability, with a gross operating margin equal to 20%

of turnover against an average for the electrical household appliances sector fluctuating between 10%–15%, an EBITDA

of 45 and an end of year turnover of €420 million with a profit of €21 million. The acquisition took place, with a

leveraged buyout operation for a total of €746 million. At first, PAI raised from the majority shareholders 66.9% of Saeco

International Group, listed in the Milan Stock Exchange, at the price of €3.80 (the original 2000 listing had been €3.36)

and created a special-purpose vehicle to which control of Saeco was transferred. Subsequently, in agreement with

management, this vehicle launched a friendly takeover bid on the remaining 33.1% of the ordinary capital for a total

equivalent value of a further €238 million, financing itself using debt. It then delisted. Altogether, out of the almost €750

million cost of the operation the risk capital amounted to €150–€200 million (the contribution of PAI was only €34

million); the remaining €500–€550 million used debt. Finally, the special-purpose vehicle merged with Saeco and

unloaded the contracted debt onto the latter. As a result, the debt was therefore higher than the entire 2003 turnover.

December 2009: Agreement for the restructuring of the debt between Seves and the banks which achieved board

representation (Intesa Sanpaolo, Unicredit and Paribas). Unofficial strikes blocked a new attempt to transfer machinery

to the Czech Republic. The company presented a new plan which confirmed the commitment to rebuild the blast

furnace by April 2010. After the plan was rejected, the company abandoned talks with local government and notified

its intention to spin off the Florence plant from the rest of the Group in order to transfer it to a new company.

January 2010: Seves began the procedure for putting 135 employees on Extraordinary Wage Guarantee Fund. Workers

tried to occupy the cupola of the Florence Duomo. At the end of the month, facing the risk of not being able to receive

income support, the majority of workers approved the plan presented by the company.

April 2010: The work on the reconstruction of the furnace had not begun, as prescribed by the agreement. The Florence

plant was now restricted to the processing of bricks produced in the Czech Republic.

35


In March 2007, SAECO announced the closure of production at the Gaggia site in the Milan area, which had

approximately 126 employees, and its transfer to a new Romanian plant. Only the technical and commercial departments

remained in Milan, with 26 employees. The company claimed that production in Milan was no longer sustainable

compared with that of the competition, which produced at lower costs. Its transfer was therefore necessary in order to

guarantee competitiveness. The trade unions insisted that in 2006 the plant had made profits of €2 million and the

transfer of production was therefore unjustified and was in response only to narrow financial logic. The subsequent

bargaining, nevertheless, did not lead to substantial changes to the decision. The workers were given Extraordinary Wage

Guarantee Fund assistance (Cassa integrazione guadagni straordinaria) and, in August 2008, the last 50 finally left the

company taking voluntary redundancy.

In September 2008 PAI was forced to recapitalise €185 million, but this did not avoid the developing economic crisis.

Subsequently, 740 employees (out a total of around 1,000) were given the Ordinary Wage Guarantee Fund (Cassa

integrazione guadagni ordinaria) for two days a week for three months. The unions manage to obtain the protection of

the lowest wages.

In April 2009 the crisis of Saeco was by now clear. The company was hampered by a number of factors:

� debt amounting to an unsustainable €660 million, even higher than the debt generated in 2003 for the buyout;

� a turnover that in 2008 was over a quarter less than that of 2003 (€318 against €420 million);

� losses that in March 2009 were over €350 million;

� a gross operating margin dropping from €86 to €14 million;

� a market share dropping progressively to below 30%.

A number of foreign (Philips and Electrolux) and Italian (De Longhi) competitors offered to buy the company. In the

end Philips won, with an investment of €170 million (plus a further €30 million subject to specific terms), but the

purchase was conditional upon the cancelling of €300 million of debt with the consortium of creditor banks (Italian and

foreign). The consortium finally accepted, believing that Philips’s proposal could ensure Saeco’s future.

The story of Saeco is a refutation of the existence of a presumed superior Italian approach to private equity. In 2003

Saeco was not only a reliable industrial enterprise that already held a leadership position in coffee machines for

household use: it was also a healthy company, with profitability and book values significantly higher than the average

for the sector. The leveraged buyout, with which PAI acquired control of the company, radically changed the sound

balance sheets on which a success story was being built, and wiped out the financial health of Saeco. A successful

company had been driven out of business. With the need to generate cash in order to repay debts and interest, it adopted

policies which brought performance in the short term, but which were incapable of ensuring the competitiveness of the

company in the medium to long term.

The industrial core was solid enough to resist five years of management geared towards financial logic, so that the

company was still attractive to its industrial competitors. But in this case the positive value represents, from an Italian

perspective, little consolation for two reasons. First, a healthy small multinational of the ‘Made in Italy’ kind became the

division of a Dutch multinational. Second, the price of the rescue of Saeco was very high. In a sector, that of espresso

coffee machines, which was dominated up to then by (medium–small) Italian producers (Saeco, Cimbali, De Longhi,

Lavazza, La Pavoni), the arrival of a giant like Philips with a turnover of €27 billion changed the nature of competition.

The brand will survive and may prosper, but not the former Italian company.



Netia: entering the mobile market

Netia SA is the leading independent fixed-line telephone operator in Poland. Established in the 1990s as an alternative

to the state-owned monopoly, Telekomunikacja Polska (TP), Netia started by building its networks in provincial areas

and by providing competitive cross-country and international connections. The company was initially funded by a

combination of private equity and a foreign telecom company (Swedish operator Telia). The latter’s decision to pull out

created an opportunity for the Iceland-based private equity fund, Novator Telecom, to acquire equity in the company and

secure control.

Novator Telecom describes itself as an activist private equity investor, focusing on developing strong management teams

in each of its portfolio companies. While granting them the autonomy to create value, it maintains a supervisory role,

principally through representation on the boards of its investee companies. It is a subsidiary fund of Novator One L.P.,

a business entity controlled by the Icelandic billionaire Thora Bjorgolfssona and registered in the Cayman Islands

(Bankier.pl, 2006).

Forced to re-orient its strategy because of the rapid growth of cellular networks in the 2000s, Netia was looking for

external sources to finance its entry into the cellular market. To this end, Novator Telecom announced in April 2005 that

it would partner with the company in order to acquire GSM frequencies. The objective was to develop Netia’s mobile

network through the company P4, at that time Netia’s subsidiary. The fund declared that it was considering staying with

the project for 10 years, expecting a 30% ROE rate. In May 2005, once the mobile telephony frequency tender was won,

the fund acquired 70% of P4’s capital, while Netia kept control of the remaining 30% (Netia, 2008a). P4 is not listed on

the Warsaw Stock Exchange, unlike Netia, which has been listed since 2000. Novator Telecom acquired an initial stake

of 10% in Netia in December 2005. The fund progressively increased its participation, eventually owning 31% of the

shares by October 2008 (Bankier.pl, 2010a).

The fund has played an active role in Netia’s strategy through representation on the board. In March 2006 the managing

director in Poland of the Novator fund, Constantine Gonticas, together with Bruce McInroy, a partner of the fund, were

appointed members of Netia’s supervisory board. Gonticas was later appointed deputy chairman (Netia, 2006 and

2008a). Bruce McInroy was also a member of the supervisory board of P4 mobile operator.

In February 2007 the company management board was reshuffled, and a new stock option scheme was established in

order to ‘strongly incentivise the management board and senior management to focus on value creation for the

shareholders’.15

The board announced a new operating strategy, focusing on the most profitable segments of the business,

with the goal of becoming the market leader for broadband services in Poland and introducing its mobile services offer

by leveraging the investment in P4 (Netia, 2008b).

In May 2007 Netia sold 22% of its stake in P4 to the Cyprus-based fund Tollerton Investments Limited, owned by the

Greek millionaire Pannos Germanos. In exchange, Netia gained total ownership in the Polish subsidiary of the telecom

equipment retailer Germanos, thus benefiting from access to its distribution network. Having signed a service provider

agreement with P4, Netia later sold all its shares in this entity (Reuters, 2007; Netia, 2009a).

Poland6

15Netia,2008b. A previous option programme had been put in place in 2002, i.e. prior fund involvement (Netia, 2008a).

37


In the summer of 2008, the company acquired Tele2 Polska, a subsidiary of the Swedish Tele2, thus becoming the most

important competitor of Telekomunikacja Polska, the country’s largest telecommunication provider (Netia, 2009a). Via

P4 and under the brand Play, Netia started offering cellular services in September 2008, finally entering the domestic

mobile telephony market as a fourth player.

Even though the company’s revenues reached record levels in 2008/2009, profits were limited in those two years and,

as in 2006 and 2007, would have been negative in 2008 had Netia not sold its participation in P4. Relative to its

competitors, in 2009 Netia had a 12% share of the fixed telephony market and 10% of the broadband internet market.

The launch of its mobile telephony network resulted in the company gaining 6% of the cellular market (2009 figure), the

rest being divided up in more or less equal portions between three competitors (Netia, 2010a).

In March 2009, despite statements from the private equity fund owner about being a long-term investor, the fund

abruptly exited Netia, selling all of its shares in the wake of the financial meltdown in Iceland. As a result, Third Avenue

Management became the new de facto dominant shareholder, controlling 24% directly and another 10% through the

affiliated fund SISU (altogether 34% of Netia’s equity). In the aftermath of Novator’s exit, a representative of Third

Avenue Management declared that its fund would start playing an active role in managing Netia. To date, Novator

Telecom still owns its shares in P4. However, the fund made divestment of these shares a key priority for 2010, as did

Tollerton Investments, the second largest investor in P4 (Puls Biznesu, 2005; Reuters, 2009).

Labour outcomes

Turning to effects on employment, the overall headcount of the company increased during the period of private equity

involvement, largely because of the ‘build and buy’ strategy pursued by the company. The acquisition of Tele2 Polska,

the purchase and integration of new Ethernet networks, and the conversion of 303 temporary positions into full-time

equivalents led to a significant rise in employment between 2007 and 2008. In January 2010 the company workforce

stood at just over 1,400 people, with around 700 employees working in operations, 200 in sales, 200 in Ethernet

companies acquired by the group, and 300 in other areas (Netia, 2009b and 2010c).

The company monitors wage levels in the telecom sector and claims to offer pay levels slightly above the market level.

Several bonus mechanisms exist, depending on employees’ functions and departments, and were apparently initiated

before fund involvement. Bonuses for salespersons, for example, are calculated on the basis of set targets (number of

new subscribers), which is typical for sales staff. All employees are entitled to an annual bonus, the amount of which is

based on individual performance and on general company performance. From the available information, this was already

the case prior to private equity involvement and no known change occurred regarding bonuses when the fund took over

(Netia, 2009b and 2010c).

The company hires temporary workers, mostly in the customer care and sales areas, and continued this practice under

private equity involvement. It organises training programmes and in 2008 established a Training and Development team

within its human resources (HR) department. A position of Organisational Effectiveness Manager was created the same

year with the task of improving the effectiveness of organisational structures The company contributes to employees’

retirement benefits as stipulated in the Polish labour code (Netia, 2008a; Netia, 2009a; Netia, 2009b). There is no

provision for trade unions in the articles of association.

In autumn 2008, following the acquisition of Tele2 Polska and given the developing crisis, Netia embarked on a cost-

saving initiative called the ‘Profit project’. A total of 267 employees were dismissed under the project, which was

implemented in the second half of 2008 and throughout 2009. Even though there was no dedicated severance

programme, 6% of employees who left the company did so on a voluntary basis. In addition to staff reductions, about

40 employees in management positions were forced to take lower-level posts, with lower remuneration. A partial wage


38



freeze as well as a recruitment freeze were also implemented. However, staff reductions were offset slightly by the

addition of employees from the new Ethernet networks acquired in the meantime. The headcount is expected to remain

broadly stable through 2010.

It is interesting to compare Netia with its main competitor, TP, owned by the French operator France Telecom. A former

state-owned fixed-line operator, which was privatised at the end of the 1990s, TP had a considerable advantage from the

outset over potential competitors. The company had stable revenues between 2000 and 2009 and recorded significant

profits in the years 2004–2008, at a time when the Novator fund was investing in Netia (Bankier.pl, 2010c). Despite TP’s

advantageous market position, Netia has progressively gained market share. Thus, losses suffered by the company in the

2000s can be interpreted as sunken costs necessary to penetrate the market while building infrastructure. In 2008 and

2009, Netia’s revenues set company records, reflecting the success of the group strategy.

With decreasing profits in 2009, Telekomunikacja also suffered from the crisis and, in agreement with trade unions,

started to implement voluntary redundancies. Out of a total workforce of 27,700 people (December 2009), 2,440

employees were due to leave the company in 2010 and 2011, the vast majority of them benefiting from a voluntary

redundancy scheme (TP, 2010). It is worth noting that the presence of numerous trade unions appears to be a factor

slowing restructuring at Telekomunikacja compared to Netia.

To summarise, Netia offers a good example of a twofold private equity acquisition: the fund, owning one-third of Netia’s

capital, was also the main shareholder of the unlisted partner company P4, whose role was to help Netia penetrate the

mobile telephony market. Overall, the strategy appeared to be successful: Netia successfully entered the cellular market

while expanding its broadband customer base at the same time. In terms of employment, the overall headcount grew

during the time of the fund involvement. Another characteristic of this case worth highlighting is the sudden departure

of the fund during, and most likely due to, the crisis. To date, Netia has nonetheless pursued the strategy enacted in 2007

under private equity involvement.

Table 14: Key figures for Netia

Source: Netia

Zelmer: A small household appliance producer

Established in 1951 as a state-owned company in the city of Rzeszów in southeast Poland, Zelmer’s main areas of

business are the production and wholesale distribution of small electric household appliances. Its products include

vacuum cleaners, microwave ovens, and food processors. Fully owned by the state as a joint-stock company during the

1990s, Zelmer was financially too weak at that time to be privatised at a good price. From 2001 to 2003, a new

management board undertook substantial downsizing activities, enabling the company to break even. In 2003, the board

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Turnover (in PLN million) 439.2 536.5 600.1 701.1 865.0 909.1 862.1 838.0 1121.1 1505.9

EBITDA (in PLN million) 50.5 -32.9 6.5 -559.2 321.6 338.8 68.9 170.7 170.6 312.8

Operating profit(in PLN million)

-129.0 -295.3 -273.0 -816.3 104.2 90.3 -341.4 -103.8 -99.7 14.2

Gross profit(in PLN million)

-495.0 -295.3 -750.0 -699.0 112.7 95.5 -371.1 -266.6 231.9 1.0

Employees - - - - - 1,221 1,111 1,281 1,673 1,432

39



suggested to the government that it be allowed to sell its shares through an IPO. This resulted in the entry of the Polish-

American private equity fund Enterprise Investors, as an investor in the company in 2005.16

As described below, under new private equity ownership Zelmer was able to strengthen its domestic market position and

to develop abroad. It became a leader in small household appliances in Poland, competing with other domestic brands

(Amica Wronki) and with foreign brands (Electrolux, Bosch and Braun). The company exports some of its products to

neighbouring central and eastern European countries. It is a leader in vacuum cleaners on the Polish market and an

important player in microwave ovens and irons.

In November 2004, the Polish Securities and Exchange Commission admitted the shares of Zelmer to public trading, and

they were listed on the Warsaw Stock Exchange in January 2005. In April 2005, the majority stake was acquired by

Enterprise Investors via its investment vehicle PEF V Zelmer Holdings. The rest of the shares were successfully sold to

other institutional and individual investors. Employees received 15% of the shares, while the state continued to hold a

very small part as well as a seat on the supervisory board. (The state’s shares were later sold in June 2009). From 25%

of the shares soon after the IPO, Enterprise Investors increased its participation to almost 49% at present. In addition to

the fund, three pension funds own significant portions of the capital (Bankier.pl, 2010a).

Prior to private equity acquisition, Zelmer was confronted with economic difficulties, a lack of a long-term strategy, and

a legacy of state interference. Enterprise Investors brought strategic insight and operational management capacities to

Zelmer. After an extensive financial and operational audit, a large-scale reorganisation was initiated. In November 2005,

a few months after the entry of Enterprise Investors, the management board was reshuffled (as reported on Zelmer’s

website). The fund involvement was particularly intense in this first year. Later on, however, the investor delegated more

and more operational responsibility to the company’s managers.

The strategy undertaken by the financial investor was to transform the company into a market-oriented competitive

enterprise and to achieve this by building the brand as well as expanding the product portfolio, resorting to Chinese

imports in this latter respect. The fund refocused the company on eastern and central European markets, selling under

the Zelmer name in order to build the value of the brand. This, in combination with programmes to increase

manufacturing productivity, was to increase value over time.

Under the leadership of Enterprise Investors, the supervisory board set the goals. Two important objectives were to

increase the company’s flexibility and to maintain an adequate balance between locally manufactured products and

imports. While investing in marketing, international sales, R&D, and to some extent in production, the strategy also

foresaw dynamic pricing and sales policies, strong brand recognition, and flexible logistics.

In fact, the return to profitability had occurred prior to private equity involvement. Focusing on operational fundamentals

in 2004 and 2005, Zelmer had started to expand its product portfolio in 2006 and to develop its exports, producing an

impressive growth in EBIDTA from PLN 38 million (€9.23 million at then current exchange rates) in 2005 to PLN 56

million in 2007.

16This case study draws extensively on the more detailed case in Wilke et al (2009). It is based on information obtained from the

company and the investor, and from interviews with management representatives.

40



Employment relations

One year after the private equity takeover, a number of changes in employment were implemented, as a consequence of

the new policy to increase flexibility and productivity. However, it is important to note that Zelmer had already been

restructured between 2001 and 2004 under state ownership, in view of its privatisation. Therefore, substantial

downsizing was not needed under private equity ownership.

The first change introduced by the fund was to increase the use of temporary workers. This practice became permanent

from 2006 onward, with temporary workers hired during peak production times. The next major change was to shift part

of the labour force from production departments to sales and support staff, a move considered necessary in order to

compete on the marketplace. The company also reduced its permanent workforce and sold off non-core activities.

(However, it should be noted that overall employment rose because of the temporary staff.) Headcount reductions

usually involved selected employees who were given early retirement benefits. In 2006 a Voluntary Departures

Programme was introduced, under which 147 employees left the company. The same year, 133 employees were moved

out of the group as a result of the spinoff of Meta-Zel Ltd, a company which took over Zelmer’s casting operations. All

of these changes were agreed with trade unions.

The pay system was also modified to keep wages just above the local average (in Podkarpackie Province) in order to

attract and retain qualified labour. As stipulated in the Polish Labour Code, the company contributes to employees’

retirement benefits (Zelmer, 2009b).

With respect to managerial staff, variable pay was introduced for board members based on the quarterly performance of

the company. In addition to variable pay schemes, an incentive programme in the form of stock options was set up in

2006 for board members and also for employees in managerial positions in the company and its subsidiaries.17

Work relations

The investor triggered a number of changes at Zelmer in respect to HR policy, starting specific programmes in 2007.

New policies focused on providing adequate support in key areas of the company’s activities. From production

departments to research activities, different types of training programmes and workshops were organised to upgrade

qualifications and skills. Incidentally, a by-product of these programmes seems to have been improved communication

between different groups of employees (workers, management, and unions). Overall, these policies helped build

employees’ commitment and involvement in the company, while at the same time increasing labour productivity and

efficiency.

Industrial relations

Private equity investment in Zelmer was viewed with concern by employees and trade unions. To allay these fears, the

fund entered into dialogue with workers, meeting with trade union representatives to inform them about its intentions

towards Zelmer, including decisions made, strategic and organisational changes, expectations related to these changes,

and so forth. Related to this, the investor progressively gave more local autonomy to Zelmer’s management.

The financial impact of the crisis became fully visible in the company in the last quarter of 2008 and the first quarter of

2009, during which net losses were suffered (Zelmer, 2009a and 2009b). Adverse movements in exchange rates and the

valuation of currency options were among the contributing factors to the deterioration in profitability. In 2009 a new

17In 2007, under this incentive scheme, the Supervisory Board granted stock options to 31 individuals in managerial positions, out

of a total of 99 eligible individuals in managerial positions.

41



Voluntary Departures Programme was introduced, similar to the one already implemented in 2006. It included training

to enhance employees’ skills and qualifications, partly financed by EU funds. In all, 244 workers enlisted in this scheme

and left the company (Bankier.pl, 2009).

It is interesting to contrast Zelmer’s story with that of its main domestic competitor Amica Wronki, a producer of large

household appliances, which was privatised in 1994. The comparison is all the more relevant since the markets of small

and large white goods have grown at a similar pace over the last years. Between 2001 and 2008, Amica’s situation was

similar to Zelmer’s with respect to the growth of its revenues, since it managed to increase domestic as well as export

sales. Like Zelmer, Amica also achieved EBITDA growth during those years. However, in contrast to Zelmer, whose

valuation increased considerably after its 2005 float on the Warsaw Stock Exchange, Amica lost market share and its

valuation fell during the same period. Meanwhile, under private equity ownership, Zelmer turned itself into one of the

best-known brands in Poland, becoming a leader in vacuum cleaners and an important player in new product categories.

The crisis hurt both companies, with revenues of both recovering only in late 2009. The disparities have now levelled

off, with both companies displaying sound financial and relatively strong market positions (Bankier.pl, 2010c;

Bankier.pl, 2010b, 2010d).

In conclusion, Zelmer is a good example of active private equity involvement where downsizing was avoided during

periods of revenue growth. Undoubtedly, promising growth prospects following the entry of Poland into the EU in 2004

considerably eased the task of the fund. While the old Zelmer management had not been able to develop and pursue a

stable growth strategy, the financial investor helped the company adapt to market demands and become a strong

competitor. There were constant gross and net profits (see Tables 14–18). The key lever of the strategy was the use of

the brand name Zelmer, which was well known in central Europe. A strong domestic marketing policy, combined with

expansion to other regional markets, led to improvements in profitability. Through changes in HR policy, the new owner

was able to create a solid group of middle-level managers devoted to the company’s objectives. To date, Enterprise

Investors is still invested in Zelmer, with no exit date foreseen.

Table 15: Key figures for Zelmer

Source: Zelmer

Table 16: Zelmer employment Levels, 2004–2008 (year-end)

Source: Zelmer

2003 2004 2005 2006 2007 2008 2009

Turnover (in PLN million) 275.8 310.8 299.3 340.4 420.5 465.4 504.4

EBITDA (in PLN million) 42.6 36.1 38.9 46.6 56.6 44.1 41.8

Operating profit (in PLN million) 16.7 27.5 30.2 37.6 47.1 32.3 26.7

Gross profit (in PLN million) 20.0 28.9 30.0 37.6 47.0 30.9 24.3

Employment 2004 2005 2006 2007 2008 2009

Regular 2,327 2,312 2,277 2,250 2,034 n.a.

Periodic n.a. n.a. 410 450 488 n.a.

Total 2,327 2,312 2,687 2,700 2,522 2,624

42



Table 17: Zelmer employment by Division, 2006–2008

Source: Zelmer

Table 18: Workforce reductions at Zelmer, 2004–2009

Source: Zelmer

Table 19: Average gross salary at Zelmer, 2003–2007 (PLN)

Source: Zelmer

Sygnity: A private equity backed merger in the IT sector

Sygnity is the second largest domestic information technology (IT) group in Poland, employing about 1,800 people. It

was formed through the merger in March 2007 of the publicly traded companies Emax (majority owned by the BB

Investment Fund, a domestic private equity fund) and ComputerLand (which had itself been the subject of a buyout in

the 1990s, financed by the private equity fund Enterprise Investors, which resulted in a successful IPO, the growth of

the company, and the broadening of the scope of its activities). Sygnity operates in various business segments, including

banking and financial services, manufacturing, telecommunications, utilities, and health care and public administration.

It controls a dozen smaller firms in Poland and elsewhere. The merger project encountered a number of implementation

issues with declining demand for IT services in the markets, particularly for ComputerLand. Following the merger,

Sygnity underwent a process of restructuring, reducing its workforce and disposing of non-profitable segments.

Before merging, the ComputerLand group had around 2,000 employees in a network of offices throughout Poland. The

group comprised over a dozen companies, including three entities with offices abroad. Emax’s employment amounted

to 1,000 workers prior to the merger, divided between six companies in over a dozen locations across Poland.

Being two of the largest domestic IT services groups, both companies had their own track record of successful mergers

and acquisitions (M&As) and their market profiles were largely complementary, in particular in the energy, banking and

telecom sectors. The rationale behind the merger was to achieve economies of scale and to develop the capacity for large

projects in a context of growing IT demand. The situation was also one where a number of domestic players were already

outpacing international ones on the Polish IT market. Having unified the management of both companies and merged

the marketing and foreign markets departments, the merger was officially enacted in March 2007.

Division 2006 2007 2008

Production 2,424 2,398 2,143

Sales 65 91 97

Support 198 211 282

Total 2,687 2,700 2,522

2004 2005 2006 2007 2008 2009

114 48 355 n.a. 178 170

Area 2003 2004 2005 2006 2007

Zelmer n.a. 2,341.97 2,487.92 2,678.84 n.a.

Podkarpackie Province 1,876.93 1,940.50 2,001.53 2,088.85 2,259.00

Poland 1,950.01 2,018.59 2,081.76 2,179.57 2,372.82

43


BB Investment, the domestic private equity fund behind the merger plan, was founded in the city of Poznań in the 1990s.

It was the majority shareholder of Emax, with 32% of the shares, and later transferred to Sygnity before the merger.

Intended to create the largest Polish IT company, the merger consisted of several transactions including purchases of

shares from ComputerLand owners as well as swaps. The private equity fund retained 9.4% of shares after the merger

and was the largest shareholder at the time.

The post-merger strategy of the group was to gain market share abroad and to broaden the product portfolio through

additional mergers and acquisitions (M&As). Rumours of restructuring in the aftermath of the merger were confirmed

later when the company initiated changes in product strategy, finances and employment structure. The overt intention

was to focus on the most profitable and competitive entities, to exit the less profitable ones through sales or liquidation,

and to simplify the overall group structure. Redundancies were foreseen in back office, front office and support activities.

Sygnity’s share started to fall when the merger was completed and kept doing so in the following months, compromising

the expected gains and synergy effects of the merger. In June 2008, the value of the shares reached a 12-year low. From

a financial standpoint, the group had to cope with net losses during the first three quarters of 2007. Because post-merger

performance fell short of expectations, at the annual meeting in July 2007, shareholders demanded a new president. The

supervisory board dismissed Michał Danielewski, president of Sygnity and former president of ComputerLand,

replacing him with Piotr Kardach, one of the founders of BB Investment, former president of Emax, and previously vice-

president of Sygnity. As the largest shareholder, BB Investment played a direct role in the negotiations to choose a new

president. In addition, earlier in June, Paweł Turno, director of the fund, had already been appointed member of the

supervisory board.

Two months after taking the lead, the new management board announced plans for a wide-ranging restructuring of the

group. In December 2007, wishing to concentrate on core activities, Sygnity sold two of its operations in the medical

sector (InfoMedica and MMedica) to ABG Spin. In the second quarter of 2008, further pursuing the streamlining

process, it sold its affiliate Global Services. As a result the financial situation of the group improved slightly in 2008,

with net losses experienced only during the first quarter. However, in 2009 financial results worsened considerably, with

record net losses of PLN 87 million in the second quarter.

Employment and labour considerations

Immediately after the merger, the newly created entity had 3,200 employees. In the process of restructuring, Sygnity laid

off nearly 500 permanent staff between July 2007 and June 2008. As of July 2008, the company employed 2,757 people,

with 74% of the labour force working in production, 11% in sales and 7% in administrative departments. At the end of

2008, the headcount had fallen further to around 2,500.

Following the reshuffling of the management board in July 2007 and subsequent to the announcement of headcount

reductions, one of the departments which developed products for the banking sector threatened to leave the company.

Employees finally dropped this plan after negotiating with the management board. However, a few weeks later around

30 employees from the Winuel subsidiary, a company controlled by Sygnity (and formerly by Emax), handed in their

resignations. In response to this crisis, and with several other teams threatening to leave, in the summer of 2007 the

management board decided to increase wages in a move to retain the workforce. The upward adjustment of salaries

continued throughout 2008 in an attempt to match the market standards in the IT sector.

As part of the restructuring process, the company introduced an incentive system for sales and production employees.

The purpose was twofold. First, it tried to reduce the risk of losing key employees by retaining them through motivation

schemes. Second, it aimed at facilitating the assessment and measurement of employee productivity in various different


44

jobs. A share option scheme for senior management and key personnel existed in ComputerLand before the merger and

continued afterwards under private equity involvement, apparently without undergoing any change.

Although there is no trade union in the company, groups of employees and sometimes whole departments took action on

several occasions, as illustrated above. By way of example, in September 2009, following the decision of Sygnity’s

management to dismiss the president and vice-president of Winuel, a subsidiary specialising in the utilities sector, a

majority of Winuel employees signed an appeal to the Sygnity management board to revoke the decision. However, the

petition had no effect.

With regard to the impact of the financial crisis, it is worth mentioning that the group started to record losses during the

merger year in 2007. It returned to profitability in the second quarter of 2008, beginning to reap some benefits of the

restructuring plan, which was completed in the summer of 2008. In the first quarter of 2009, owing to the general

slowdown, the group suffered record losses. Clients withheld investments, in particular in the banking and

telecommunication sectors, which are key markets for Sygnity.

Faced with a stagnating IT market and falling revenues, the group embarked on a second restructuring programme in the

fall of 2009. The plan foresaw headcount reduction in the permanent staff as well as among subcontractors (with 350

employees dismissed), a recruitment freeze, sending part of the staff on paid vacation, a temporary reduction of

employees’ remuneration, suspension of bonuses, and stricter control of expenses. As of October 2009 the group had

2,100 employees, down from 2,500 a year earlier.

In summary, Sygnity offers a good example of where a private equity fund owning a relatively modest amount of shares

put one of its members directly at the head of the company. The move was aimed at securing the implementation of the

post-merger strategy foreseen by the fund, but met with mixed results in practice, in part because of the financial crisis,

which added new losses to the company’s already burdened finances. There were also real implications for employment

and HR systems, though some of these would have occurred in the absence of private equity involvement.

For the time being, BB Investment does not foresee any exit strategy in the medium term and remains one of the strategic

shareholders, possibly because the merger did not bring the expected benefits in an economic environment made worse

by the crisis. Nevertheless, BB Investment has progressively decreased its participation, allowing Legg Mason Asset

Management to acquire a majority stake. In March 2010, the company president (and private equity fund founder) Piotr

Kardach resigned.

Table 20: Financial figures for Sygnity

Source: Sygnity, Emax, ComputerLand, Bankier.pl



2003 2004 2005 2006 2007 2008 2009

Turnover (in PLN million) 582.4 755.9 858.1 927.0 1,201.9 995.6 572.7

EBITDA (in PLN million) 56.6 69.5 55.8 55.1 -16.3 56.6 -60.3

Operating profit (in PLN million) 31.1 44.1 34.1 -13.4 -72.0 11.6 -94.8

Gross profit (in PLN million) 18.1 20.8 21.5 -20.7 -85.1 2.8 -103.0

Number of employees n.a. n.a. n.a. 3,438 n.a. 2,500 2,100


Falcon-Vision: a small high-tech Hungarian company

Falcon-Vision was established in 1996 and focuses on machine-vision solutions mainly concerned with automated

production processes for inspection. The motor car industry in particular is a major customer. One of the most important

developments by the firm is the QualiLine series of machine vision products. It aims to provide full no-contact inspection

for the machine industry and has become a supplier of high-quality control systems. Falcon-Vision permits companies

in the automotive sector to introduce ‘just in time’ style manufacturing by inspecting components from assembly lines.

The company is thus a relatively small and high-tech firm with only 30 or so employees, but its turnover exceeds €2.5

million. All employees are highly skilled and most have been with the company since its foundation. It is the sector

leader in Hungary and services a variety of important customers.

In 2002 Barings Private Equity Partners (BPEP) invested €2.2 million in the firm. BPEP was founded in 1984 in UK and

has a central European regional focus. The total amount of the funds managed reaches over USD 7 billion (€5.08 billion),

which makes it one of the major players in equity financing in central Europe. Currently, regional teams are the owners

of their respective management firms and function under the Baring Private Equity International brand. Besides BPEP,

the biggest investment in Falcon-Vision came from Edixia, a French machine vision supplier that acquired the firm in

2005 by buying the majority of the shares. Edixia employs 83 people in total, and has a turnover of €10.8 million. Both

of these investments aimed at increasing international activities and entering new markets.

In 2003, the company established a sales and service subsidiary in Germany, which was named Falcon-Vision GmbH.

The new subsidiary is based in Mannheim and headed by Thomas Simon. In 2005, it expanded further and opened up a

new office in Novi Sad, Serbia. The new branch was established with the goal of serving south-eastern Europe. The

expansion in the company’s subsidiaries and offices followed the investments by BPEP and Edixia. In addition to the

expansion of the firm into new countries, both investors allowed the company to implement the same production and

employment strategies. It was made clear that the funds invested in Falcon-Vision are aimed at increasing spread of

operations of the firm. Also, Edixia wanted to have a presence in the central European region.

Since Falcon-Vision is a small and partly employee-owned firm, the private equity investment and acquisition did not alter

employment, working conditions or industrial relations. Prior to 2005, BPEP owned the majority of the company and the

rest belonged to the employees. After 2005, Edixia gained control of the firm, while the employees retained their minority

ownership. There were no public discussions about the acquisition and in general employees of Falcon-Vision seemed to

be pleased with the additional financial resources provided. After the private equity investment, the company neither laid

off nor took on employees. The biggest change was the stepping down of one member of the board in 2005 after the

acquisition.

According to the Hungarian trade unions, there is little worker representation either by unions or works councils in small

and medium-sized enterprises. As an illustration, in 2000 the share of firms with fewer than 40 workers covered by a

collective agreement was only 3.1% (OMKMK, 2009). Falcon-Vision is a small company with only 33 employees, and

hence it was highly unlikely that such a company would have employee representatives who could possibly be consulted

by the private equity investor. Also, as mentioned before, the company is a high technology firm and employees are

highly qualified and skilled. Therefore, their employment and work conditions are more likely to be regulated

individually. The ownership and skills of the employees put them in a relatively strong position with regard to the

financial investors. Thus, they are not expected to go through considerable changes, at least in a negative direction, after

the acquisition.

At present, the ownership consists of the employees plus Edixia, which supplies machine vision systems to various

sectors such as the automotive, food and pharmaceuticals industries.

Hungary 7

46



Ster Century: private equity in the Hungarian cinema sector

Ster Century was originally a cinema chain in Ireland and the UK, which opened up more theatres in central Europe

under its brand name in Warsaw, Wrodaw, Brno and Budapest in 1999. The company is based in South Africa and had

expanded in Europe in the 1990s. In 2000, more cinemas were added in the UK, Spain, Greece and Slovakia and new

cinemas were opened in Poland and the Czech Republic. In 2002, the Hungarian Ster Century was sold by the parent

company to Palace Cinemas (Central European) BV, which was established as a joint venture with United Cinemas

International. The company is the sector leader in the region, with 20 sites and 170 screens. There are six members in

the top management team, of whom three are country managers and two are founding partners.

The Hungarian operations of the company consist of 13 multiplexes in multiple sites around the country. In total, there

are on average six million admissions annually, and the firm has grown over the years. In 2005, the firm acquired

Budapest Film multiplex, making Palace Cinemas the largest cinema network in Budapest. The following year the firm

acquired nine multiplex sites from InterCom, through an asset purchase agreement. By adding 61 sites with this new

acquisition, Palace Cinemas became the largest cinema network in the country. In addition to the expansion through

purchasing existing cinemas and sites, the company has also engaged in new operations such as developing its own box

office and concession management software system. Its market share of the company is around 50%–60% in the country

as a whole and 60%–70% in the capital city.

In 2002, ARGUS Capital Partners LP – together with the two founding members Arthur Goldblatt and V.J. Maury –

assumed control of the firm. The value of the transaction has not been disclosed by the partners. ARGUS Capital Partners

is a private equity fund based in the US with commitments in excess of USD 400 million (about €290 million)

concentrated in countries in central and eastern Europe. ARGUS owns 95% of Palace Cinema’s shares.

Palace Cinemas’ main goal and strategy is to expand aggressively by both acquiring targeted cinemas and building new

ones. These serve the long-term interest of maintaining the leading market position. Additionally, the firm creates value

by investing heavily in new technology. New three-dimensional (3D) theatres and sound systems are purchased after

acquisition. In addition, it managed to extend its business into advertisement sales and film distribution in all the central

European countries where it has a presence. Being the first-mover in these areas enabled the firm to develop long-term

strategies and use technologies such as 3D to its advantage. All these developments made the firm a leader in the movie

business in Hungary.

The company is still earning most of its revenues (around 65%) from ticket sales. However, revenues from concessions

and advertisement are also improving (Portfolio.hu, 2007). After the acquisition, there was an initial growth in ticket

sales and operations of the firm in 2003 and 2004. Nevertheless, in 2005 there were significant declines in the

entertainment industry in general and this affected Palace Cinemas, especially its operations in the Czech Republic. The

sector is recovering slightly but not much growth is expected in the next few years because the economic crisis has

reduced people’s disposable income.

At a later stage, the Hungarian Competition Council found Palace Cinemas guilty of building a cartel with the rest of the

Budapest multiplex operators. All the companies were accused of hiking ticket prices and price collusion. When the

litigation ended in 2007, Palace Cinemas was fined HUF 83 million by the Council.18

One of the main reasons why the

multiplex cinemas were engaged in price collusion was the constant under-utilisation of capacity. Multiplex theatres are

designed to have full capacity in peak times but otherwise lose money. Thus, there is permanent overcapacity and

cinemas lose as a result.

18The Hungarian forint (HUF) was pegged to the euro at the time.

47


When it comes to the effects of private equity investment on employment and working conditions, it is very difficult to

draw firm conclusions. Overall, the company employs 1,000 people at the sites and 10 people at headquarters. As such,

it is one of the largest companies in the region. After the acquisitions there was an expansion in the number of employees,

but these were mainly transfers from existing firms which were operating beforehand. Thus, it is not clear whether there

were cutbacks in employment due to the private equity investment.

In terms of work relations, changes were observed due to the transformation of the movie industry in general. With

privatisation at the beginning of the 1990s, the cinema sector in Hungary underwent major changes. First, there was a

decrease in the total number of cinemas. Second, there was an increase in multiplex sites at the expense of one-hall

cinemas. Third, these new multiplexes were situated in shopping malls rather than being at stand-alone sites. Private

equity investment in Palace Cinemas allowed these transformations to take place on a more rapid and extensive basis.

Therefore, employment and work relations in Palace Cinemas are expected to be radically different than they were under

single-hall independent operators.

Information on employee consultation is not available and, given low trade union density in the service sector in general,

employee organisations are not expected to be effective in the transformation of work and employment relations in the

entertainment sector.

Vivendi / Invitel Telecom: private equity in Hungarian telecommunications industry

Invitel, formerly known as Vivendi, has been active in Hungary’s telecommunications industry since 1994. Its main

business areas cover provision of telephone, internet and data services to residential and business customers throughout the

country. Until 2003, the company belonged to the French media group Vivendi Universal and was renamed after the sale.

It has 14 primary service areas and also serves as the leading alternative provider in many other areas. The total market

share of all services the firm provides amounts to 95%. The annual revenues of the company are around €340 million.

Besides its Hungarian operations, Invitel is present in the international telecommunications sector. By 2007, the company

had acquired 95.7% of the equity of Memorex Telex Communications, an Austrian-based company with a very strong

presence in fixed-line infrastructure. Since Memorex Telex Communications is a leading regional telecommunications

network infrastructure and bandwidth provider, this purchase enabled Invitel to become one of the leading alternative

telecommunications service providers in central and eastern Europe (the CEE region). Also, Memorex Telex

Communications was the biggest rival of Invitel and hence the acquisition placed the firm in the leading position.

In 2003, the Vivendi Telecom Hungary sale was completed between Vivendi Universal, AIG Emerging Europe

Infrastructure Fund (EEIF), and the UK-based GMT Communications Partners. AIG is a leading private equity investor

in the region with USD 550 million (approximately €399 million) in commitments. The fund was established in 1999

and since then has made 11 investments in infrastructure-related companies in Hungary. GMT is a private equity fund

specialised in the communications sector and since 1993 it has invested heavily in the CEE region. Its capital exceeds

€775 million and it has investments in 18 countries. One of the immediate changes implemented subsequent to the

private equity investment was an attempt to strengthen Invitel’s market position through further investments and

acquisitions.

Given that the Hungarian telecommunications industry has been liberalised, the fund managers aim to use this

opportunity to put Invitel in a leading position in broadband operations. Another area where there has been an immediate

change was the refinancing of the company’s debt. In 2004, €260 million of bonds were issued in order to refinance some

of the debt obligations as well as to partially repay shareholder loans. The ability of the firm to raise this amount of

capital was seen as an indicator of its success and growth potential.


48



In 2007, Hungarian Telecommunications and Cable Corporation (HTCC), which was a subsidiary of the Danish operator

TDC, agreed to purchase the shares of Invitel for €740 million. By 2009, TDC’s 64.6% ownership stake in Invitel was

sold to Mid Europe, a CEE-focused investor. The private equity investment firm is based in London, Budapest and

Warsaw, and has €3.2 billion of assets under management. By 2010, Mid Europe made an offer to purchase all of the

outstanding ordinary shares of the company. As a result, Invitel Holdings was delisted from the Stock Exchange in

February 2010. Currently, Mid Europe has 91.8% of the outstanding ordinary shares of Invitel Holdings, and the private

equity firm is planning to complete the acquisition of all of the shares by the summer of 2010.

The company’s board has eight top executives, with both the chief executive officer and chief finance officer having been

appointed after the acquisition of the firm. The current chief executive officer, who has been a member of the board since

2006, was appointed in 2009. Overall, Invitel employs 1,460 workers throughout its companies and its headquarters is

in Budaörs.

EBITDA figures for the company shows that there has been an increase since 2006, but of course Invitel became a part

of HTCC after 2007. In 2007, Invitel’s EBITDA figure was €77.6 million. The holdings’ EBITDA increased to €211

million in 2007 and increased further to €249.2 million in 2008. There was a 6% decrease in the EBITDA for the first

three quarters in 2009 compared to the prior year. Also, there was a decrease from €13.441 million to €720 million in

the net loss figures for the same period.

After the acquisitions in 2005, the company announced that there would be workforce reductions and new marketing

initiatives. After reaching agreement with the union, the firm announced that it would lay off 200 workers, almost one-

fifth of its workforce at the time. Employees were offered a voluntary severance package, and the reduction was expected

to be completed by the end of the year. The president and CEO of the company at that time affirmed that, with the

increasingly fierce competition in the Hungarian fixed telephony markets, ‘It is imperative that we streamline our

operations to achieve the necessary long-term cost efficiencies which will enable us to compete in this marketplace. I

thank the trade unions and works council for their cooperation and efforts in this workforce restructuring’. The unions

and works council accepted the downsizing with the offered benefits. However, the reduction in the workforce was not

concluded until the end of 2007. The workforce reduction increased to 250. Once again, Invitel and the unions came to

an agreement on a workforce reduction plan.

The acquisitions also brought standardisation of employment terms. All the companies held by Invitel Group in Hungary

now offer the same wages for the same type of work. Additionally, the companies have a single collective agreement

with the trade unions and the works councils. Thus, wage differentials in different firms were eliminated by these

changes.

Howard Gospel (Kings College University of London and Said Business School Oxford), Jakob Haves (WMP

Hamburg), Andrew Pendleton (University of York), Sig Vitols (WZB Berlin), and Peter Wilke (WMP Hamburg)

Authors of case studies:

United Kingdom: Howard Gospel and Andrew Pendleton

Germany: Jakob Haves and Peter Wilke

The Netherlands: Ewald Engelen

Sweden: Tomas Korpi

Poland: Stefan Dunin-Wasowicz and Perceval Pradelle

Italy: Bruno Catero

Hungary: Anil Duman


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The impact of investment funds on restructuring - Eurofound