To increase the value of their businesses, more and more Russian entrepreneurs are putting their assets in order

Maria Krasnikova

Companies have always undergone restructuring – they did it five or ten years ago, and they will do it in future. However, while in the past Russian manufacturers saw restructuring as a set of deadly techniques for crisis management, such as cost reduction and mass layoffs, they now regard it as an efficient way to create and increase company value. There are two main areas for capitalization increase. The first is corporate governance, and Russians have already achieved some success in this area. The second is restructuring. All structural business changes are now considered in terms of capitalization increase. The fact that in 2003, Russia became the leader in Central and Eastern Europe in total mergers and acquisitions (more than 50 percent of all deals) is dramatic proof of a growing interest in this area.
Among the motives causing Russian entrepreneurs to start restructuring is the aim to fix their achieved results, to have an opportunity to transfer day-to-day management to professional managers, or even to pull out of the business altogether.

Diversification discount

There is no a single recipe for restructuring. The Expert Rating Agency recently conducted a survey, which included interviews of leading specialists in restructuring, both top executives and consultants. The advice varied so much that it was almost shocking. It ranged from the elementary requirements for audited financial accounts to radical options, such as dismissing the entire management and cutting staff to a third of its former size.
In the opinion of Oleg Danilin at Ernst & Young, selecting restructuring techniques depends, above all, on a company’s strategy, as well as such factors as its size, the geographical location of its subdivisions, and its structure and area of business. It depends on whether the company specializes in one product (a mono-product company) or its production is diversified. Nearly all respondents pointed out the importance of the “specialization versus diversification” factor. Investors, both domestic and foreign, are wary of conglomerates. According to Mikhail Broitman, Director of the Investment and Banking Activities Department at Troika Dialog Investment Company, “As a rule, a multiple-line company is always traded at a discount. Investors don’t want to buy stock in a group that owns, for example, breweries and metallurgical complexes at the same time.”
“Specialization has a number of advantages,” explains Sergei Bazoyev, Director of Capital Transactions Department at PricewaterhouseCoopers. “High-quality products are most important factor. Look at Italian industry. Most companies are highly specialized there. True, it took nearly ten years for Italy to reach such a degree of specialization.”
The US business went through the epoch of conglomerates, too. The US experience in 1980s demonstrates their utter inefficiency. According to McKinsey, 165 conglomerates were sold in the US in 1979: 33 percent of them sold non-core business lines and focused on their core businesses. Another 35 percent of conglomerates were taken over or liquidated. It became clear to American businesspeople that synergism within these structures does not always take place. Furthermore, diversified companies typically dissipate their resources on a host of business areas. As a result, a company operates less efficiently than its rivals in all of its business lines and loses to them.
According to the McKinsey survey, highly specialized companies are most dynamic, reaching record sales growth rates. Most of them concentrate on one specific product or one service. Only a handful of companies provide packages of closely related products and services to customers. Finally, there are no diversified companies at all among the leaders in terms of growth rates.

Bonus for the resolute

It is extremely difficult to assess the effect of completed restructuring. There are no statistics for Russia for the time being. In the West, successful structural changes may result in a threefold increase in company value. Moreover, the very news about the commencement of restructuring causes a 5-10 percent rise in stock prices on Wall Street, and a few months later, after changes are competently implemented, they could rise another 20-30 percent. In the late 1990s, US high-tech companies took successful advantage of a value growth strategy via business re-direction. Intel went from computer memory production to microprocessors. Today, Kodak plans to restructure and increase its competitiveness in digital photography.
There are some individual examples of effective results of restructuring in Russia, as well. The oil industry has become a pioneer in handling assets. According to Bazoyev, “It was and is still mandatory for large oil companies to deal with non-core assets in areas that don’t directly affect the interests of their thousands of employees. Since the value of an oil company depends on how efficient it management is and how well its assets are arranged. Besides, Western companies take a keener interest in partnership when a company’s balance sheet is not burdened with production units that have nothing to do with the traditional oil and natural gas business.” Thus, for example, YUKOS virtually has duplicated the Western vertically integrated company management. In doing so, YUKOS has carried out a huge amount of work to radically restructure non-core assets. The activity reduced costs and conducted massive layoffs. Just in three years after the start of its structural reorganization, the company’s capitalization increased by ten times (as of September 2003, before Mikhail Khodorkovsky’s arrest).
Among companies outside the natural resource commodity sector, Wimm-Bill-Dann’s example is perhaps most demonstrative. Before placement of its shares at New York Stock Exchange in 2002, WBD, following consultants’ advices, sold out its assets in beer and banking businesses. The deals were realized quite promptly. As a result, the company successfully carried out IPO and raised about $ 200 million.

The reasons for slowness

On emerging markets, the negative attitude towards diversified structures hasn’t caught on so far. The conglomerate remains quite viable in Asia, in Latin America and, basically, in Russia.
Russian business has a number of reasons why it is no hurry to follow global trends. Firstly, at present, diversification is believed to create more stability on local markets. It minimizes company’s operational risks. A variety of force majeure circumstances may have an impact on market conditions, and a company may suddenly become an outsider, at best, or even go bust.
Secondly, as Mikhail Shamolin, a junior partner with McKinsey, noted, “In Russia, the level of competition is quite low, whereas the level of corruption is quite high. Companies are consolidating and diversifying if only because by doing so, it’s easier for them to protect themselves from pressure from local authorities and officials.”
The third reason lies in the history and geographical specifics of many Russian enterprises. Finally, there is one more reason: poor-quality management. Often, management is simply not ready for innovations. As Oleg Alexeyev, Deputy General Director of Renova Company, said, “Over the last few years, I haven’t heard a single case of a new owner, after acquiring a company, keeping the previous team of managers at the companies. This is not only because the owner wants loyal managers but also simply because new requirements for efficient management demand a lot more from executives.”

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