Companies in the news
In this section, we give brief accounts of some of the changes taking place in the organization, strategy and operations of companies featured in the case studies. The section contains X stories:
SALVAGING BP’s RUSSIAN JOINT VENTURE
Chapter links:
- Chapter 1
- Chapter 2
- Chapter 3
- Chapter 5
- Chapter 15
- CS 5.1
- CS 13.1
TNK-BP is a 50:50 joint venture company launched by BP and its Russian partner in 2003. By 2003, it had become Russia’s third-largest oil company. Based in Moscow, its output was largely responsible for BP’s growth in the following two years, and it is crucial to BP’s replenishment of oil and gas reserves.
Management and governance issues have created problems for the running of the company, however, especially in the context of increasing influence of the Russian government in the energy sector. The Russian shareholders in TNK-BP consist mainly of three billionaire oligarchs, two of whom are executive directors. In March 2008, the Moscow offices of TNK-BP were raided by Russian security officers in an investigation of tax evasion and alleged violation of labour laws. Robert Dudley, the TNK-BP CEO was called for questioning, and in August, appeared before a Moscow court on related charges. The court suspended Dudley as CEO, and the authorities refused to renew his visa, but he intended to appeal, and BP announced that he would carry on running the company from a secret location. The Russian oligarchs said they were not involved in the actions against Dudley, but it was clear that they wished to see him replaced by an independent CEO. For its part, BP wished to see the two powerful Russian shareholder managers step down.
To salvage the joint venture, BP’s CEO, Tony Hayward, held talks with their Russian partners. They agreed to keep the 50:50 equity split, but Dudley would be replaced by an independent Russian-speaking CEO, who must be approved unanimously by the board. Moreover, the two shareholder executives would keep their places on the board. BP had feared that the conflict within TNK-BP would result in a reduction of their equity stake, but, although their ownership stake has been maintained, the control of the company has arguably shifted towards to the Russian owners.
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BATTLES OF THE GLOBAL INTERNET COMPANIES
Chapter links:
- Chapter 1
- Chapter 2
- Chapter 5
- Chapter 11
- Chapter 12
- Chapter 15
- SX 5.2
- CS 15.1
Microsoft has long been concerned about Google’s rise to dominance in internet search business and eyed the lucrative advertising it generates. Both companies have attempted to link up with a third major player, Yahoo. A difficulty faced by links among these global companies is the possible infringement of competition law. Here we update readers on the latest developments.
Contrary to expectations, Microsoft decided to appeal against the record fine imposed by the European Commission in March 2008. The appeal coincided with the Commission opening fresh investigations into the company’s alleged abuse of a dominant market position with its Office software and integration of its Internet Explorer browser into Windows. The March decision had required that the company offer technical information to rivals on ‘reasonable terms’, but had not specified what prices would be reasonable for the licences. The appeal would offer the opportunity to clarify the terms.
Microsoft has sought expansion into the internet search business, launching a bid for Yahoo, whose search engine and advertising offered prospects of mounting a serious challenge to Google, the dominant player. Microsoft was bolstered in these ambitions by support from Carl Icahn, an activist investor in Yahoo who has been unhappy with the leadership of CEO, Jerry Yang. Yang robustly fended off the advances of Microsoft, asserting it was not in the best interests of shareholders. Meanwhile, Yang negotiated with Google on a deal to allow Google’s search advertising to appear on Yahoo search results. This proposed Google-Yahoo alliance, in which Google would clearly be the stronger partner, ran into regulatory storms with both the US and European competition authorities. Efforts to complete the deal were therefore dropped, leaving Yahoo in a precarious position, made worse by a slump in advertising due to the economic downturn.
On 18 November 2008, the embattled Jerry Yang stepped down as Yahoo CEO, clearing the way for Icahn to exert control. Microsoft is renewing interest in a deal with Yahoo, which could potentially create a large player, able to provide stiff competition to Google in internet search and advertising activities.
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PORSCHE SEEKS GREATER CONTROL OF VOLKSWAGEN
Chapter links:
- Chapter 1
- Chapter 2
- Chapter 11
- Chapter 14
- Chapter 15
- CS 1.2
In September 2008, Porsche increased its stake in Volkswagen (VW) to 35%, and announced its intention to raise it further to more than 50%. However, in the meantime, it had been active in options trading activities. It had acquired options on VW shares, taking its stake to 74.1%. (see section on derivatives, pp 404-5). Porsche’s sudden disclosure of this news on Sunday, 26 October, stunned markets and meant that the free float was reduced from 45% to only 5.8%. This had dramatic implications for hedge funds, which have been in the habit of ‘shorting’ VW shares, a practice by which shares are lent out to the shortseller, who buys them back later at a lower price, making a profit before restoring them to the owner. The shortseller, in effect, bets on the stock market price falling. With free-floating shares so scarce, VW shares quadrupled in value in two days, making VW temporarily the second largest company in the world by market value, hitting a peak of €296 billion on Tuesday, 28 October. This would make it worth more than Wal-Mart or Microsoft. Meanwhile, hedge funds, forced to buy shares to cover their positions from a shrunken pool of free-floating shares, were left licking their wounds.
Two issues have emerged. First, Germany’s financial regulator, Bafin, announced it was investigating the huge rise in VW’s value, as the workings of Germany’s capital markets and corporate governance have come under the spotlight. Porsche was within the law in its derivatives activities: it was not obliged to disclose its positions as they were settled in cash, rather than shares. Porsche had consulted Bafin as it was planning its takeover, and strongly denied allegations of market manipulation. Nonetheless, Porsche has used tactics which many would consider unethical in mounting a takeover by stealth, by using options to get around disclosure requirements.
Secondly, Porsche has been criticized for its options trading activities. Is it a carmaker or a hedge fund in disguise? Porsche makes three times more profits from options trading that it does from making cars. The company made €3.6 billion from trading in VW options in 2006-7, and only €1 billion from making cars. Some politicians in Germany have taken a dim view of hedge funds and private equity groups, calling them ‘locusts’ (see p. 420). However, it has emerged that other German family-owned businesses have also been active in derivatives trading, with its attendant financial risks. A winner to emerge from the recent movements in VW’s share price was the government of Lower Saxony, which saw its stake of 20% rise to a value of €47 billion.
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US CAR MANUFACTURERS STRUGGLE TO SURVIVE
Chapter links:
- Chapter 2
- Chapter 3
- Chapter 5
- Chapter 11
- CF 2.1
As US banks were breathing a sigh of relief over the $700 billion bail-out package passed by Congress, American carmakers were approaching the brink of collapse. Although rising costs have accounted for many of the woes of Detroit’s ‘big three’ – General Motors (GM), Ford and Chrysler – the companies’ senior executives have taken steps to deal with them, for example, in devising new deals with the trade unions. The current crisis seems to more about simply running out of cash. GM announced on 4 November 2008 that it would run out of cash before the end of the year. Ford could last longer, and but the situation is unclear at Chrysler, which is now a private company (80% owned by Cerberus, the private equity group). It is expected that Chrysler is too weak to remain independent. Lack of consumer demand and the closure of the credit markets have left these companies on the brink of disaster. There are few options. One would be to seek protection of Chapter 11 bankruptcy, and another is to seek bail-out funds from the federal government. Both are fraught with difficulties.
The option of Chapter 11 bankruptcy, in theory, would look appropriate. GM and Ford have good long-term prospects when the markets recover. Their businesses are successful in Europe and in emerging markets. Following painful restructuring, their production is efficient, and they are producing more fuel-efficient cars than they have in the past. However, surveys indicate that consumers would be loathe to purchase a new car from a company which has filed for bankruptcy. They were happy to fly with airlines in this situation, but buying a car involves a longer term relationship with the manufacturer, for service, parts and warranties. In addition, worry that used-car values could plummet would weigh with consumers.
Bankruptcy would have huge economic repercussions in the US, hitting component makers, and impacting on the foreign car manufacturers. The ultimate toll in jobs lost could be in the millions. This prospect is helping to persuade politicians that a $50 billion bail-out from federal funds is needed. The bail-out is supported by president-elect Obama, but many in Congress would feel that the TARP legislation was not designed for this purpose. Loans have been proposed for long-term support, in projects such as building fuel-efficient vehicles, but raising support for short-term relief will be more of a challenge for the legislators.
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BOEING AND AIRBUS ENCOUNTER TURBULENCE
Chapter links:
- Chapter 1
- Chapter 2
- Chapter 6
- Chapter 7
- Chapter 9
- CS 6.1
Competition to win a lucrative contract to provide in-flight refuelling tankers for the US Air Force has pitted Boeing against a partnership of Northrop Grumman of the US and EADS, the owner of Airbus. In February 2008, Northrop and EADS were awarded the $35 billion contract, to the surprise of some analysts, who doubted that the Pentagon would award such a large contract to a European-US partnership over US company, Boeing. The Northrop-EADS partnership had significant support within the US, however, as the planes would be largely constructed there, mainly in Alabama, which welcomed the result of the bidding contest. The saga of the contract for the refuelling tanker goes back many years. Boeing was awarded the contract in 2002, but political objections to the costs (in which Senator John McCain was vocal), as well as a corruption scandal between Boeing and an Air Force weapons buyer, led to the re-opening of the bidding. Both the Boeing chief financial officer and a leading Air Force weapons buyer pleaded guilty to corruption charges and received prison sentences.
Disappointed at losing out the second time round, Boeing appealed against the decision to award the contract to Northrop-EADS. Its case is being investigated by the General Accountability Office, which has criticized the process by which the contract was awarded. Boeing is hopeful that it will be third-time lucky in winning the contract. However, labour troubles have rather dampened its outlook in recent months.
A strike by machinists halted production at key Boeing factories for much of the autumn. Members of the machinists’ union at Boeing, numbering 27,000, have been in dispute with the management, and commenced strike action on 6 September. In addition to pay and conditions, the dispute concerns the company’s wish to outsource work to other companies. The union strongly opposes outsourcing of any work which has traditionally been done by machinists. In particular, they object to deals which allow components to be delivered directly to the assembly lines, as many machinists’ jobs involve receiving parts for the factory floor. They highlight Boeing’s use of a non-union logistics company, New Breed Logistics, which delivers parts to the 787 production line.
This bitter labour dispute has halted production on Boeing’s 737, 747, 767, 777 and 787 Dreamliner aircraft. The 787 Dreamliner was already behind schedule, and the strike has dealt a further blow to the company, which saw falls in its income in the third quarter of 2008, when the strike was in its seventh week. The two sides in the dispute had had little contact with each other directly, and attempts to settle it rested on government mediators. A tentative agreement was reached on 28 October 2008. A 15% wage rise over four years was agreed, and Boeing agreed to limit the amount of work given to outside contractors. Nonetheless, executives have stated that the agreement gives them sufficient flexibility to outsource, which they feel is imperative to remain competitive.
EADS is hoping that the tanker contract will lead to further business in the US, giving it added confidence internationally. The company has suffered delays in the development of the A380 super-jumbo jet, aggravated by tension between its dual German and French management structure. It now has a revised corporate governance structure, with a single CEO in place of the French and German co-CEOs.
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EDF’S TAKEOVER OF BRITISH ENERGY ADDS TO ITS INTERNATIONAL PROFILE
Chapter links:
- Chapter 1
- Chapter 2
- Chapter 3
- Chapter 5
- Chapter 11
- Chapter 13
- CF 5.2
French utility giant EDF owns stakes in foreign energy groups in Italy and Germany, but has yearned to make a large acquisition to establish its credentials in growing nuclear energy markets. The sale of British Energy presented an excellent opportunity. The UK government made it clear in its 2006 energy review (see p. 504) that it wanted to invest in nuclear power. British Energy, 35% government owned, owns eight nuclear power stations and several sites for new ones. It approached a number of large European companies in search of a bid. The main ones which came forward were EDF, Centrica (the British utility company which owns British Gas), RWE of Germany and Suez (a French-Belgian group). Although the British government stayed out of the negotiations initially, it soon became clear that its influence was shaping the outcome of the sale.
EDF emerged as the leading contender in July 2008, having bid £12.3 billion for British Energy. The deal seemed to be secure, but objections from British Energy’s two largest institutional shareholders led to rejection by the board. The two institutions had backed a Centrica deal and felt EDF’s offer price was not enough. EDF was disappointed, but found that their offer was not entirely ruled out. More negotiations followed, and seven weeks later, they secured the deal for a price of £12.5 billion, just 1% above their earlier offer. EDF gained the majority of British Energy’s nuclear power stations, and committed itself to investing substantially in building four large new ones.
The key to EDF’s successful bid, it became clear, was the UK government’s influence behind the scenes. The government was convinced that nuclear power was to play a major role in future energy needs, and EDF was their preferred bidder. Nuclear power has always entailed a huge long-term commitment, in which governments, have a crucial role to play, directly and indirectly. It is possible that EDF is expecting some indirect aid or incentives from the UK government, which would enhance the deal.
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CORPORATE NEWS IN BRIEF
Ranbaxy, the Indian pharmaceutical company
Chapter links:
- Chapter 2
- Chapter 7
- Chapter 12
- CF 2.2
- CS 12.2
Ranbaxy, India’s largest pharmaceutical company, with a reputation as an aggressive generics manufacturer, agreed to be taken over by Daiichi Sankyo of Japan, for $4.6 billion. Though it seemed an improbable match, the rationale for the Japanese company (which is a research-based organization) was to gain access to Ranbaxy’s low-cost manufacturing facilities. For Ranbaxy, the move could smooth entry into the Japanese market, which is the world’s second-largest pharmaceuticals market, and one which has traditionally been resistant to generic drugs.
Tata Motors of India
Chapter links:
- Chapter 4
- Chapter 5
- Chapter 8
- Chapter 10
- OV, Chapter 8
Tata has been compelled to shift proposed production of its Nano ‘people’s’ car away from West Bengal. Even though construction of the factory was nearly complete, violence from local farmers jeopardized the safety of workers. The state of communist-led West Bengal had been keen to acquire the factory, with the prospect of 10,000 jobs, and offered numerous incentives, including a free plot of land, low-cost electricity and tax concessions. However, protests by poor farmers led to violence, and Tata eventually decided to move to Gujarat, which is more industrialized. Here, perhaps paradoxically as the state government is Hindu nationalist, the political climate is more favourable for such projects.
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AP Møller-Maersk, the Danish shipping giant
Chapter links:
- Chapter 2
- Chapter 7
- Chapter 10
- SX 10.2
Like other large shipping companies, Maersk has seen falling volumes due to economic downturn. It has changed its strategy in two significant ways.
- First, it has appointed its first CEO from outside the company. The new CEO, Nils Smedegaard Anderson, is former CEO of Carlsberg, the brewer.
- Second, it has announced that it will modify its vertical integration policy, by which the company’s line would use its own ships, carry its own containers, dock at its own ports, and even use its own tugs and trucks. APM Terminals will now be looking to bring in more business from third parties, and Maersk’s logistics operations will choose the best shipping line and container supplier for each contract, not just those owned by the parent company.
ABC Learning Centres forced to scale back global ambitions
Chapter links:
- Chapter 5
- Chapter 11
- SX 5.1
In April 2008, ABC Learning Centres sold most of its US business to a US private equity group. ABC had seen a 42% decline in half-year profits, triggering fears that it would be unable to pay off its debts. Charismatic CEO, Eddy Groves, was confident that the deal would help restore confidence in the business.
Cadbury and Schweppes demerge
Chapter links:
- Chapter 7
- Chapter 11
- CS 11.2
The demerger of Cadbury Schweppes took place on 7 May 2008. Cadbury will now focus on confectionary, and Schweppes, now a separate company, will focus on the drinks businesses.
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