Part 3: Companies in the news
This section contains 6 stories:
World’s largest steelmaker faces protracted slump in demand
Chapter links:
- Chapter 1
- Chapter 3
- Chapter 7
- Chapter 11
- CF 5.2
- CS 11.1
ArcelorMittal, the world’s largest steelmaker, is facing testing times as global demand for steel falls and prices likewise come down. Mittal built a global network of steel plants through acquisitions, adding capacity as the global economy grew. That growth has now gone into reverse. The World Steel Association, a steel trade body, estimates a fall in global demand of 15% for 2009. The largest falls will be in the US (36%) and the EU (30%). Causes are not hard to find. The global contraction of the car industry and construction industry, both key users of steel, are the main factors. Moreover, these users had amassed huge inventories at the end of 2008, which they are still whittling down. Lakshmi Mittal, ArcelorMittal’s chairman, CEO and main shareholder, owning 45% of the company, is keeping a watchful eye on the market. The company recorded a loss of $2.6 billion in the final quarter of 2008, in contrast to a net profit of $2.4 billion in the same quarter in 2007. The company’s debt amounts to $26.5 billion, and with falling sales, there is a risk that it would be unable to keep up its interest payments. ArcelorMittal’s earnings for 2009 are likely to be around $9 billion before interest, tax, depreciation and other items are taken into account, contrasting with $24.5 billion for 2008. The company's share price fell 75% from June to April, 2009.
Output at many of the company’s plants has dropped by 40% or more in the last six months. Tens of thousands of workers have been reduced to short-time working, out of a total workforce of 300,000. Many of the company’s steel plants have closed temporarily. Although the company has not as yet permanently closed down or sold a factory, these drastic actions might be considered in future. In June, 2009, the company agreed a deal with the Spanish government, under which up to 40% of the company’s 12,000 workforce in Spain could be laid off until at least the end of the year. With the help of funding from Spanish taxpayers, the staff affected could receive 90% of their salaries, even in periods when they are at home because of lack of work.
Bringing down the level of debt has become a priority for the company. It has considered a number of options for reducing debt by about $4 billion by the end of 2009. Dividend payments are being cut by half, saving $1 billion. It could issue more shares in what is termed a ‘rights issue’, or Mittal could sell a stake in the company to an outside company, such as a Chinese state-owned one. It is thought that the Chinese would be highly interested in such an offer, giving them a stake in a global operation. However, for the time being, he has not taken this radical step, choosing to raise funds in the marketplace. Share and bond issues amounting to $3 billion were announced by Aditya Mittal, the son of Lakshmi Mittal and corporate chief financial officer. The issuing of ‘convertible’ bonds allows the holder to convert them into equity at a later date. Lakshmi Mittal said he would take up a 10% portion of the offer. The issue was popular with the bond markets, being heavily oversubscribed. It has demonstrated confidence in the soundness of the company for the time being. Mittal had expected global demand for steel to resume growing in 2009, but the deal struck with the Spanish government suggests that he now envisages a longer slump. The longer the slump, the more seriously he will be thinking about drastic measures such as permanent closures in his vast steelmaking empire.
Find out more...
- Marsh, P., ‘Mittal steels himself for slump’, Financial Times, 27 April 2009.
- Marsh, P., ‘Arcelor seals Spain lay-off deal’, Financial Times, 4 June 2009.
< back to top
Online gambling’s future is getting brighter
Chapter links:
- Chapter 2
- Chapter 4
- Chapter 5
- Chapter 6
- CS 5.1
Online gambling companies have been confident for some time that there is much demand for their services worldwide, but legal uncertainties have cast a shadow over their activities. In many countries, governments have taken a hard line against online gambling, partly responding to moral and religious objections and also seeking to protect established land-based organizations in the sector, both private-sector companies and state-controlled betting organizations such as national lotteries. The online gambling companies tend to be set up on ‘offshore’ locations, such as Costa Rica and the Caribbean islands, targeting American customers. Some governments have sought to ban their activities, most notably the US, through legislation passed in 2006. However, the companies have remained optimistic that their services, allowing people to bet and enjoy gaming in their homes, will eventually overcome national legal restrictions. They are being encouraged by developments in two areas:
- Enforcement of international trade rules - The US lost a legal case mounted by Antigua and Barbuda through the WTO dispute settlement procedure. Now, the European Commission is threatening to take action against the US for restrictions on online gambling which violate WTO trade rules.
- Liberalization by governments - The European Commission is warning member states that it will take enforcement action if they continue restrictions. The pressure is beginning to be effective, as France is liberalizing its laws, allowing the industry to operate within a regulatory framework. As for the US, the industry breathed a sigh of relief in February 2009, when the Chairman of the US House of Representatives’ financial services committee, Barney Frank, announced the intention to repeal the 2006 ban on online gambling.
The 2006 legislation prohibited the use of credit cards to pay for online bets. Difficulties experienced by the finance companies in enforcing the prohibition in practice delayed the law coming into effect until January 2009. In the meantime, the US Department of Justice had been active in arresting and prosecuting executives of the companies under 1961 legislation. The co-founder of PartyGaming was one of the executives prosecuted. Now, with the new administration in Washington, D.C., liberalization is likely to take place, albeit slowly. Lobbying by some casino operators will attempt to halt repeal of the ban, especially as they have seen reduced revenues with the economic downturn. However, other casino operators have now themselves entered the online gambling market, and favour liberalization. The strongest point in favour of liberalization in the US is probably the fact that the ban encroaches on personal freedom, which is a strongly persuasive factor in contemporary America.
The growth of online gambling exemplifies key aspects of globalization. Companies which enter this market see themselves as operating a global business model from the outset, taking advantage of offshore locations to access markets. Despite legal setbacks, they have grown in size, largely by refining and improving their offerings to customers. They now offer a wide range of sports and games, and, thanks to improving technology, can offer these in languages specific to markets – all under the company’s global brand. For example, PartyGaming offers a Mission: Impossible game, to European customers. For the companies, their mission to enter more markets as broadband penetration expands now looks anything but impossible.
Find out more...
- Blitz, R., ‘A better hand’, Financial Times, 4 February 2009.
< back to top
Crisis-hit Citigroup struggles to survive
Chapter links:
- Chapter 4
- Chapter 5
- Chapter 11
- Chapter 15
- CS 4.1
Citigroup was formed by the merger of Citibank and Travelers in 1998, creating a global financial conglomerate which offered a supermarket-type range of financial services. Known as the ‘universal banking’ model, it not only combined commercial and investment banking, but offered other financial products, including credit cards and insurance, all under one umbrella. In theory, it would benefit from economies of scale in IT and access to capital, which would allow it to serve customers efficiently around the world. The universal banking model was thought to be a source of competitive advantage, especially by investment banks, which had been established as stand-alone institutions following the US Glass-Steagall Act of the 1930s, which was repealed in 1999. The reality of the expanded Citigroup, however, proved rather different. The new company retained two sets of executives from the merged companies, making it cumbersome to manage, delaying integration and adding to costs. Cultural differences between the two companies persisted. The bank embarked on an acquisition strategy, but integration of the acquired companies was often slow, and, because of the size and complexity of the parent company, strategic focus and performance goals were unclear.
The bank’s sheer size exposed it to crises and corporate failures, both at home and abroad. It was hard hit by the bursting of the dotcom bubble in 2000, and also by the bankruptcy of Enron in 2001, WorldCom in 2002 and Parmalat of Italy in 2003. In 2004, Japanese regulatory authorities shut down one of its banking businesses for market abuses which had not been put right. In 2005, the US Federal Reserve even barred it temporarily from making further acquisitions, due to its regulatory breaches. The bank began to look to financial markets to generate growth. These were markets in derivative products, in which hedge funds were active. Citigroup also moved into the risky market of subprime mortgages. However, this turned out to be another bubble, which, when the collapse came, left Citigroup again in trouble, only this time, the situation was nearly fatal. The company’s indulgence in mortgage-backed securities left its balance sheet burdened by tens of billions of dollars’ worth of suspect or ‘toxic’ assets. The bank’s share price fell 78% in 2008.
Citigroup has been forced to ask the US government for help in the form of a series of bail-outs, resulting in government ownership of a stake in the company which could be as high as 36%. The government guaranteed $306 billion of problematic assets and bought $27 billion of shares in the form of preference stock. Preference shares, which are non-voting shares and compel the company to pay a dividend, contrast with ordinary shares, which carry voting rights but no legal guarantee of a dividend. By initially issuing preference shares to the government, the company hoped to avoid the label of nationalization, which would technically occur if the shares are converted into ordinary shares, involving the possibility of government membership of the board. Citi was somewhat bolstered by results of the first quarter of 2009, which showed that it had made a profit, the first in six quarters. However, it became apparent that, after payment of a 9% dividend to the government for its preference shares, the company had actually made a loss.
The US government required the 19 largest US banks to undergo ‘stress tests’, designed to reveal whether they have sufficient capital to be viable, although the exact criteria were not revealed. The results for Citigroup indicated that the bank needed more equity, projected to be about $50 million. It urgently needed to streamline the sprawling company to raise funds, and wished to raise the money without having to ask the government for more. The CEO, Vikram Pandit, announced the group would be split into two, separating its commercial business from its global banking operations. The restructured group would need to scale back operations and reduce employee numbers, already down to 300,000 from 375,000 in 2007. The investment banking division, where business has sharply diminished, will lose the most jobs. Meanwhile, Citigroup is attempting to sell non-core businesses. It is seeking a buyer for Nikko Cordial, one of its largest acquisitions and Japan’s third largest brokerage business. This sale could bring in over $5 billion, but would significantly reduce its operations in Japan, formerly seen as a key market. On the other hand, the bank announced in May 2009 that it would rule out selling investments in China and India.
Citigroup has been described as ‘too big to fail’ and ‘too big to manage’ (Farrell, 2008, listed below). The first of these observations seems to have found support from the US government, which has bought into its equity. However, this still-sprawling bank will need to become slimmer, more efficient and less risk-prone to survive.
Find out more...
- Farrell, G., ‘Citi crisis has been brewing for 10 years, say analysts’, Financial Times, 18 November 2008.
- Larsen, P., and Cox, A., ‘Citi revived but its ills are not cured’, Financial Times, 25 November 2008.
- The Economist, ‘A supertanker in trouble’, 22 November 20008.
- The Economist, ‘Singing the blues’, 29 November 2008.
- Guerrera, F., ‘Citi scrambles to raise capital’, Financial Times, 29 April 2009.
- Guerrera, F., and Farrell, G., ‘Citigroup and BofA need most capital’, Financial Times, 7 May 2009.
- The Economist, ‘A ghoulish prospect’, and ‘Stress-test mess’, 28 February 2009. These articles appear in a briefing report on American banks in this issue.
< back to top
Lenovo stumbles as the competitive environment gets tougher
Chapter links:
- Chapter 2
- Chapter 4
- Chapter 7
- CS 2.2
Lenovo’s acquisition of IBM’s PC business in 2004 propelled the Chinese company to third place in the global PC market. Little known outside China until then, the company set about rapidly transforming itself into a global organization. The deal with IBM was designed to utilize the advantages of IBM’s size, experience and premium brand. IBM’s PC head was appointed as Lenovo CEO, and the company’s headquarters were shifted to North Carolina in the US. Sceptics questioned whether Lenovo could overcome the challenges, but the company was confident that it could compete globally. However, its sternest test proved to be the rapidly changing market, in which agility and rapid responses to changing demand were to prove essential. In these respects, Lenovo found itself losing ground to more nimble competitors, especially the Taiwanese companies, Acer and Asustek.
Lenovo inherited IBM’s rather bureaucratic management style, as well as its focus on premium business customers. These turned out to be disadvantages when the PC market started to change dramatically. Business customers have cut back on spending with the economic downturn, and the growth sector has shifted to low-end consumer products. Asustek quickly built market share with a low-end notebook. Furthermore, the low-cost ‘sub-notebook’, or ‘netbook’, has created a new fast-growing segment. Lenovo was caught unprepared for these developments. Its premium Thinkpad brand was in the weakening area of the market, and it was unable to adapt to the changed circumstances. It lost market share in 2008, as Acer became the third ranked PC maker. Lenovo reported net losses of $97 million for the quarter ending December 2008, in contrast to $171.75 million profits for the same quarter the previous year.
Management changes at the top followed early in 2009. The American CEO was replaced by Yang Yuanquing, a co-founder, who had been CEO from 2001 to 2004. He had been moved to the role of chairman at the time of the takeover. Replacing him as chairman is Liu Chuanzhi, the other co-founder. These changes signal a refocusing on the Chinese market and on cheaper products. The returning CEO stresses that other emerging markets (such as India and Asia-Pacific) will also be important, as these are where the greatest growth is expected. The company will aim to use its expertise in the Chinese domestic market to make strides in these other emerging markets. Staff reductions will be needed, and these will be mainly overseas rather than in China. The company does not envisage itself as returning to its former role as a mainly Chinese company, stressing that it still sees itself as a multinational. It has considered acquisitions as a means of expansion, and has targeted Positivo, Brazil’s largest PC company. Such an acquisition would help Lenovo to gain ground on Acer, which acquired Gateway and Packard Bell in 2007. The Brazilian acquisition, however, has not as yet materialized, and the uncertain financial environment has affected acquisition activity generally.
Critics might say that the return of the Chinese CEO to lead Lenovo indicates that the company was not ready for the role of a global PC maker. Yang Yuanquing stresses that ‘the IT industry...is changing frequently in terms of technology, pricing and products, and if you want to win, you have to adapt to those changes’ (Hille, 12 February, 2009, listed below). The PC unit Lenovo inherited from IBM had not been competitive, and Mr Yang now seeks to build competitive advantage from strengths closer to home.
Find out more...
- Hille, K., ‘Back to the future for Lenovo’, interview with Yang Yuanqing, Financial Times, 12 February 2009.
- Hille, K., ‘Left behind in the advance of the nimble’, Financial Times, 6 February 2009.
< back to top
Shell rethinks its strategy and structure
Chapter links:
- Chapter 7
- Chapter 11
- Chapter 12
- Chapter 14
- CS 5.2
Royal Dutch Shell will be welcoming a new CEO on 1 July, 2009. Peter Voser, who will take over from Jeroen van de Veer, is taking the helm at a particularly troubled moment for the Anglo-Dutch oil company, facing an array of both internal and external pressures. Shareholders are looking for improved performance from the company’s investments, downturn, both in the industry and the global economy, has squeezed profits.
The fall in oil prices to less than $33 a barrel, while good news in many industries, has been a cause of concern for the oil industry generally. The price is now on the rise again, but Shell’s calculations were based on a figure of $100 a barrel. Shell is looking for future growth to come from its huge, long-term investments, but many of these have been challenging and costly, such as the Canadian oil sands projects and investments in liquefied natural gas production. These investments have led to rising debt, putting pressure on cash flows. Shell has also been active in Nigeria, where instability and production losses have mounted. The new CEO, formerly chief financial officer, will be looking to cut costs and assure shareholders of future growth.
Shell has had three divisions: exploration and production, gas and power, and downstream activities (including marketing and chemicals). Perhaps following the lead of BP, which reduced its divisions from three to two, Shell announced in late May 2009 that it was to slim down to two divisions. Cost savings should result, but considerable upheaval is also likely, with the ensuing job cuts. Of the a total of 102,000 employees, 24,000 could lose their jobs, including 30% of senior executives. Such radical restructuring and swingeing job cuts are indicative of Mr Voser’s firmer management style, which contrasts with the more consensual style of his predecessor, Mr van der Veer. A slimming-down of the board is also likely. Shell’s executive committee consists of eight members, five of whom are members of the board of directors. The number of executive directors could be reduced to four.
Shell executives incurred hostility from shareholders at its annual general meeting in May 2009, when the company’s remuneration report was rejected. The board had decided to pay five senior directors €4.2 million in bonuses even though they had failed to reach targets. Mr van der Veer was given €1.35 million from the same discretionary fund, constituting a rise in pay of 58% from the previous year, and bringing his remuneration for 2008 to €10.3 million. More than 59% of Shell’s shareholders voted against the pay report, a proportion exceeded only by that at RBS. (see earlier feature on the UK in this update). Although the vote against the pay report is non-binding, it signalled to the company a high level of shareholder disapproval. Normally, institutional investors abstain when they are unhappy about executive pay, but in Shell’s case, only 2% of shareholders abstained, in an indication of the general perception that excessive pay is no longer tolerable, especially in the context of weak performance and job losses.
In its operations, Shell has suffered from a range of recent problems. Workforce deaths in 2007 were higher than those in operations run by rival Western oil companies. Shell’s death rate was over twice that of BP. Operations in dangerous locations, such as Nigeria and Russia, accounted for a number of these deaths. The company must now look to improving health and safety, and also security. In Nigeria, the government has launched military operations to quell the militant groups who systematically threaten production and disrupt pipelines. Shell’s earlier operations in Ogoniland in the Niger delta have now come back into the spotlight as the Nigerian national oil company is hoping to resume production. Shell ceased production there in 1993, when mass protests and repression by security forces led to the company’s withdrawal. A leading activist and author, Ken Saro-Wiwa, along with 8 others, were hanged after leading a campaign against the company. Shell has long been accused of complicity in these events, which it has strongly denied, stating that it had urged the government to show clemency. The executions led to legal attempts to sue the Shell in the US. Finally, in May 2009, a trial in New York began, brought by Mr Saro-Wiwa’s relatives against Shell, its Nigerian subsidiary and its then chief executive for damages. However, before the trial got fully under way, Shell agreed to pay $15.5 million in a settlement with the families. Some of the money would also go to a development trust for the Ogoni people. Admitting no wrongdoing, the company felt that paying the compensation and funding development in the region would be the most constructive way forward. The death of Ken Saro-Wiwa, who became an iconic figure for the Ogonis, led to a rethink among oil companies about their responsibilities in local communities. Shell suffered reputational damage as a result of the events in Ogoniland. The episode is a reminder of the possible legal liability that MNEs face for harms which occur in foreign locations.
Find out more...
- Green, M., ‘Nigeria hopes to learn from Shell “mistakes” in oil-rich region’, Financial Times, 26 May 2009.
- Burgess, K., and Milne, R., ‘Floored boards’, Financial Times, 2 June 2009.
< back to top
Other corporate news in brief
B&Q in China
Chapter links:
- Chapter 2
- Chapter 3
- Chapter 7
- CS 4.2
- CF 8.1
The Kingfisher group of Britain, which has invested heavily in building its B&Q do-it-yourself outlets in China, has now had to radically alter its expectations for growth in the Chinese market. B&Q’s expansion in China has rested on a booming housing sector, which had been growing at 40% a year. With economic downturn, housing is now contracting at about 10% a year. As most of the company’s market is in the furnishing of new homes, this reversal has come as a huge blow. In addition, the company found that expanding from the middle- and upper-income groups into the lower-income groups was proving more challenging than anticipated, especially in the more diverse urban centres away from the main centres with which it has become familiar. B&Q’s CEO now recognizes that over-expansion is partly to blame, reflected in the losses these operations are incurring. The company now plans to reduce shop space by 40% in China over the next two years. Twenty-two of the company’s 63 stores in China are due to be closed by the middle of 2010. It will revamp the remaining stores and reduce their size, allowing the firm to rent out the surplus space to other retailers such as Carrefour or Tesco. B&Q aims to keep its presence in China, maintaining operations on this lower-profile level until the Chinese market recovers.
Inditex plots cautious expansion
Chapter links:
- Chapter 8
- Chapter 10
- CF 10.1 on Spain
Inditex of Spain has been hailed as having revolutionized supply chain management in the clothing industry. Its success is evident in its thousands of retail outlets under a variety of brands including the most well known one, Zara. The company has 4,300 stores worldwide, and is Europe’s biggest clothing retailer. But how would the market for middle-range, designer-inspired clothing hold up in the midst of severe economic downturn? One would expect sales to dive, as consumers cut back on non-essentials and trade down to lower-cost alternatives. The fact that sales of Primark, a low-cost fashion retailer, have weathered the downturn, are an indication. But Inditex’s performance for 2008 was not as gloomy as might have been expected, showing same-store sales to be roughly at the same levels of the previous year. This comes at a time when many of its competitors have seen sharp declines in revenues and profits. Nonetheless, Inditex’s CEO realizes that its strategy must be adjusted to take account of the downturn, especially in its home market of Spain. Expansion plans are therefore being revised to reflect the areas where growth is more likely, and to curtail expansion in those where recession has taken a strong grip. About 95% of new store openings in 2009 will be outside Spain, and half of the 100-plus new stores would be in China. In addition to Zara, the Bershka, Massimo Dutti, and Pull and Bear brands would feature. Under a joint venture with Tata, Zara will be rolled out in India. The CEO is taking a realistic perspective on potential growth in these markets, realizing that the next year or so could show little progress, but he feels that long-term potential over 10 years makes these investments sound.
< back to top