Are You Ready to IPO?

While a slowdown in IPOs is to be expected given the volatility in the global economy, plenty of chief executives will be keeping their options open over the course of 2016. Should they decide to go public, current market conditions serve to reinforce the need for a business to be in the best possible shape.

Although the number of IPOs on the London Stock Exchange in 2015 (92) didn’t match the highs of 2014 (137), there were plenty of significant flotations. It shows that investors will continue to back companies provided the fundamentals are in place, such as a strong growth story, sensible pricing and a good blend of skills and knowledge between the executive and non-executive team.

As ever, sound preparation ahead of a flotation is going to make a world of difference in terms of business performance. Tom Beedham, Director of Programme Management at Criticaleye, says: “In the 12-18 months prior to a listing, the executive team needs to be fully aligned and aware of what it takes to go through the IPO process. Certainly, securing an experienced non-executive chairman and creating an effective board will also help to fill any of the executives’ gaps in knowledge about what it’s really like to run a Plc.”

Here, a number of leaders share advice based on their own recent experiences of conducting an IPO:

Work hard on investor relations
Ron Kalifa
Vice Chairman and Executive Director 
Worldpay

The payments processor joined the London Stock Exchange in October 2015. It was the UK’s largest IPO of the year and the largest ever Fintech IPO. It floated at £2.40 a share with a market value of £5 billion and £2 billion in proceeds. 

Investor relations are critical and it’s important to start planning well in advance of the IPO. Being a carve out of a bank, we were little understood and not very visible, so it was crucial that we spent time and resources telling investors what we do.

We set very clear objectives in terms of the investor relations strategy to promote the company’s activity and reputation to external stakeholders, helping them to understand how the business would be run post-IPO.
In the build up to the IPO we met with about 400 potential investors, which seems a lot but because the business was little known on a global stage it was really important we did that.

One way we communicated well with our stakeholders was by producing a range of data and corporate information on Worldpay – factsheets for the media, presentations for the analysts and a very regular and intense set of commercial updates to highlight our drivers and business performance.

We then started to anticipate the needs of the stakeholders, which was key. We spent time with all of our analysts and investors to ensure we knew their expectations of us, and how we can have the right data and content to address any specific questions they have. It’s a case of being prepared for the issues that may emerge in the process of the IPO.

Build momentum in your growth story
Richard Segal
Chairman
On the Beach Group

The short-haul package holiday firm, On the Beach, floated on the London Stock Exchange in September 2015. The listing valued the company at £240 million and raised £90 million at £1.84 a share.

Our business has a first rate management team with a proven track record, so my key task as Chairman was to ensure there was no cap on their ambition. It was about making sure the management team took the business to a higher level as quickly and efficiently as possible.

On the Beach had grown at a very exciting rate and on the back of that, a number of banks started approaching the private equity owner, Inflexion, saying that it was ripe for the capital markets.

The market then came alive with IPOs of digitally disruptive businesses such as Just Eat and AO World, and the capital markets were putting attractive valuations on businesses.

We’d only been under Inflexion ownership for about a year. We spoke to advisors more seriously towards the end of 2014 and agreed to have a limited number of introductory and educational meetings with selected investors. Based on the feedback, we concluded it would be slightly premature in going to the market. So, we put our head down and focused on delivering impressive financial results and expanding the business.

Come 2015, after a strong performance, we re-engaged with our advisors. It was clear that the business had achieved a lot in that period. Our performance was ahead of what we had told investors we would achieve and we had a highly compelling story. That gave the board the confidence to fire the starting pistole

Select the right help
Mark Payton
CEO 
Mercia Technologies 

Mercia provides seed capital to support high-growth UK technology businesses. It listed on AIM in December 2014 at £0.50 per share, raising £70 million to expand the business and had a market capitalisation of £106 million.

There are a number of planets that you hope will align to make your transition to the public markets smooth, and ours had thoroughly aligned. We had the dream team in terms of advisors, a perfect share register and the capital markets were open.
I had quite a large shopping list of ‘must haves’ to ensure the IPO happened.

Based on the context that we were going onto AIM, we were looking for a best-in-class Nomad and broker. Somebody who had an excellent reputation of raising capital and supporting businesses as they prepared to come to market was fundamental.

Second was the accountancy firm. Moving from a limited liability to a Plc requires the implementation of a raft of new accountancy standards, so we needed a top-tier firm in that regard.

We required a legal company that was absolutely cognisant of the needs of our share register, the City, our business model and aspirations of the management team. We picked the very best of all our advisors from an extensive beauty parade.

We also needed to build our share register wisely; we wanted shareholders that understood our business and our model, and were with us for the long-term as we started the next phase of our growth story.

If we couldn’t have achieved the level of capital raised from such a high quality share register, we wouldn’t have floated – and we wouldn’t have those shareholders without our advisors.

Motivate and manage your team
Nicola Pattimore
HR Director 
Equiniti

Equiniti, which provides payment solutions, was carved out from Lloyds Banking Group in 2007. It floated in October 2015 at £1.65 a share, netting around £315 million and giving it a market capitalisation of £495 million. 

The right leadership team is crucial to the successful sale of the business. If you’ve got leaders with the right drive and ambition they will naturally want to – and be able to – do a good job.

They need to be resilient because they’ll be working really hard to juggle the IPO with business as usual. Don’t underestimate how tough it’s going to be. The ability to prioritise is key. Understand in advance how intense the process will be so that you can prepare your team and loved ones at home for what’s coming.

Everyone focuses on the IPO but actually what comes after can be even more critical. Depending on the timing of the sale you may have a really intense three or four months after the IPO. You’re fully back in the business and need to focus on performance and delivering the year-end numbers you’ve committed to your shareholders.

You need to motivate your team, not just through a successful IPO, but to maintain a successful business after you’ve floated.

If you’re looking at incentive and reward arrangements for the senior team, they absolutely have to align with the shareholder value. You also need a balance of reward for today and a lock in for tomorrow.

Read more on recent AIM activity following its 20th anniversary 

Or, find out more from EY’s Q4 2015 IPO report. 
By Mary-Anne Baldwin, Editor, Corporate

What are your thoughts on IPOs? If you have an opinion that you’d like to share, please email Mary-Anne on: maryanne@criticaleye.com

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The Global Outlook for 2016

With unease over interest rates, plummeting oil prices and China’s stock market plunge, business leaders had to navigate many economic factors last year. Now, Criticaleye takes a look at the current global economy and asks leaders about their focus for the year ahead.

“Concerns about potential economic fragility in emerging markets commanded considerable attention in the second half of 2015. In particular, the possibility of slower growth in China as it moves to a consumer-led economy,” says Barry Naisbitt, Chief Economist at Santander UK.

The other headline-grabber was the US Federal Reserve’s decision to raise interest rates – the first increase since 2006. “Contrasted to this, the European Central Bank (ECB) is still undertaking quantitative easing and has cut deposit interest rates,” Barry comments.

“As 2015’s drop in inflation was due to the sharp fall in oil and other commodity prices – which started back in 2014 – unless those falls are repeated, it looks most likely that inflation will pick up again in 2016.”

Economic growth in both the US and UK is expected to continue, although not at a storming pace. “The IMF expects growth of 2.8 per cent in the US and 1.6 per cent in the Eurozone,” Barry notes.

When it comes to the UK, household earnings have increased due to the sharp fall in inflation, according to Barry. “If productivity growth picks up, then employment is likely to rise and result in a stronger overall economic position.”

Matthew Blagg, CEO at Criticaleye says all eyes are on China as it “addresses its structural issues” and he expects ripples to appear globally in commodity and oil prices.

Global wage inflation, and specifically the UK’s national living wage, is set to have a big impact on many industries, notes Matthew.

“Productivity will be hugely important. I think the tactical capability of leadership teams will be challenged. Organisations that haven’t aligned the strategy with capability will struggle,” he says. “Well-run businesses that get the balance right between income, reward, productivity and profit will do incredibly well.”

We spoke to a range of business leaders to find out what challenges and opportunities they expect to face this year:

Sandy Stash
Group Vice President, Safety, Sustainability & External Affairs
Tullow Oil 

In 2015, the largest challenge was the steep and rapid decline in the price of oil. The challenges that’s brought have included a need for fairly quick action on everything from capital budgets to operating expenses. All indicators say that challenge will continue this year.

But this also brings an opportunity to catch our breaths and work on making the business more efficient. We’re figuring out how to do more with less; how to simplify processes. One thing we did last year was to integrate all of our management systems into a single common one. That allowed us to streamline and clarify what we do.

As a leader, it’s a great time to knock down organisational barriers and encourage the team to explore better ways of doing things. It’s easy to get duplication and overlap when a company grows quickly.

When I look back on my career, some of the biggest opportunities came during downturns as people get the opportunity to enhance or expand their skills.

Phil Smith
CEO, UK&I
Cisco Systems 

The biggest opportunities for Cisco in the year ahead lie with cybersecurity and risk, the software-defined data centre and the Internet of Things (IoT).

The IoT is a big drive for Cisco because connecting things is the essence of what we do. Over the next five years, the number of connected devices a typical country might have is set to rise from tens of millions to tens of billions; this is happening faster in the UK than elsewhere. I also think we’re going to see big growth in the use of robots and autonomous systems.

In 2015, we acquired 11 companies and formed many great partnerships including one with Apple, optimising our networks for iPads and iPhones to function better in the work environment. There’s a recognition that while as consumers we’ve all got devices in our hands, when it comes to business we only use a fraction of their capability.

We’ll continue to look for opportunities in the year ahead and with $50 billion on the balance sheet in cash, we’ve got strong buying power in an interesting and evolving market.

Chris Riquier
CEO
TNS Asia Pacific 

The ongoing challenge for the market research industry is how to capitalise on new data sources created by the digitalisation of business and media. Today, we are presented with exponentially increasing volumes of data from new sources and new skills are required to monetise the opportunity.

We’re witnessing a huge number of start-ups in the industry, primarily focussed on analytics and new media. Many of the skills we require have been built within start-ups, so we’re constantly looking at increasing the number of partnerships with capabilities that complement our strengths.

China will also continue to be a key driver of growth. Five years ago, our client base was heavily dominated by Western multinationals whereas today the majority of growth is coming from local Chinese firms.

We’ve seen a greater degree of stability in our Chinese business this past year. Previously, there were significant fluctuations within individual sectors that were booming and then plateauing, making it difficult to manage supply and demand.

Now we know demand is mainly driven by domestic consumption, so it’s easier to predict the direction of our business and the degree of investment needed.

John Duffy
CEO 
Finsbury Food Group 

In 2014, our UK speciality bakery Group made £256 million in sales, which was ahead of expectations. The food service market typically grows at about five per cent per annum compound, but our organic growth in 2014 was about six per cent and our food service growth was close to ten.

We made two strong acquisitions in 2015, which broadened our channel offering. We welcomed Marks & Spencer as a large customer, plus moved into the food service channel through our acquisition of Fletchers and into the coffee shop sector with the acquisition of Johnstone’s Cake Business.

As an employer of over 3,000 staff at eight UK sites, we’re having to get our heads around increases to the national living wage, pension contributions and the new apprenticeship tax, which could be half a per cent on your payroll.

As well as prioritising further strong growth, planning for that through automation, skill development and productivity improvements is going to be quite a key thrust for our sector and Group. To address this, we increased our capital spend from just over £7 million in 2015 to about £11 million for 2016.

Anthony Fletcher
CEO
Graze 

I’m watching Europe like a hawk. Graze has been able to successfully internationalise into one country; of course it’s something we want to look at repeating. However, legislation seems to be getting more complicated. My worry is that there are more barriers to companies that want to transact over multiple territories.

Last year we launched in supermarkets including Sainsbury’s, Tesco, Asda and Waitrose. The roll out has been rapid. We’re also trialling in Odeon cinemas; that’s doing very well.

Being in more than one channel is an advantage. It’s more convenient for customers and sales have been strong. We’re absolutely looking to roll out to more retailers this year.

We’ve also made new senior hires. This links to our future vision for multi-channel expansion; we’re bringing in executives with skills to drive that. For instance, we’ve brought in someone from Expedia with a lot of experience in an international technology business.

Lucy Dimes
Former COO, Equiniti
Non-executive Director, Berendsen

Last year, in my roles as Chief Operating Officer at Equiniti and Non-Exec for Berendsen, technological advancements and digital channels featured continually as methods of competitive advantage, as well as potential threats and sources of industry disruption.

Financial services are at the very beginning of disrupting business models by using technology and digital channels to give customers what they really want. I expect to see a lot more of this in 2016.

More broadly, as the Internet of Things becomes a reality, I envisage lots more ‘machine-to-machine’ innovations and apps coming to market.

For investors 2015 was a mixture of confidence and cautiousness − capital was there but investors were looking for less risk and more certainty. So, while IPOs like Equiniti’s were successful and plentiful, multiples were more realistic than previous years and I expect that to continue in the year ahead.

Justin Ash
CEO 
Oasis Healthcare 

We’re going through an exciting growth phase. Back in 2014, we bought 110 new practices on top of the 200 we had before, which we’ve been busy integrating. It’s gone very well and in 2015, we bought an additional 40 sites.  We’re going to exceed £300 million turnover for 2015… which is a dramatic growth on prior years.

Branded dentistry is a growing global trend, so I’m certain we’ll internationalise at some point… but we’ll do that when we’ve consolidated more of the UK opportunities.

The world of healthcare is going digital and we see a lot of potential there for winning patients, building relationships and keeping them informed.

We offer very clear, national, single price points; the ability to book online and out of hours opening. I think the reason why we’re growing faster than the market is because we’ve led on this. The consumer feedback is very positive. It will challenge the market to consider these things.

 

By Mary-Anne Baldwin, Editor, Corporate and Dawn Murden, Editor, Advisory

 

Do you have a view on this subject? If you have an opinion that you’d like to share, please email us
Join Mark Gregory, UK&I Chief Economist for EY, at our Executive Breakfast where he will open a discussion on this year’s key business challenges and opportunities.

 

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India’s Big Idea

Following last year’s election of Prime Minister, Narendra Modi, India has seen a raft of changes, including tax incentives, plans for privatisation and lower caps on foreign investment. It’s hoped that collectively, these pro-business measures will help to accelerate growth and cement the country’s position as an economic powerhouse. But one year on, how much has the market really changed?

“Modi knows he has no option but to make it interesting for foreign businesses to invest,” explains David Horlock, Managing Director for Asia Pacific at standards and training provider BSI Group. “I don’t think there’s any going back now. It’s just going to be a matter of time, of unwinding the bureaucracy and the red tape. There’s a political determination to get that done.”

According to the most recent World Investment Report, India received $34 billion of FDI in 2014, up 22 per cent on the previous year. By comparison, while investment flows into China only rose by four per cent, it still received just under four times as much FDI ($129 billion).

David sees Modi as a one-man army who must quash resistance from bureaucrats, even within his own team, the Bharatiya Janata Party (BJP). The challenge for India’s leader is whether he can embed regulatory changes fast enough to realise the country’s potential and successfully compete against China.

A burgeoning middle class and widening pool of talent suggests it can be done, but speed is another matter. Andy Dunkley, CEO of jeans brand Lee Cooper, says: “While the Government is putting through a lot of aspirational changes and it’s moving in the right direction, that’s not really filtering through into real business yet.”

The brightest sign is India’s economic growth, which is predicted to hit 7.5 per cent this year, yet few would understate the obstacles ahead. Crucially, there is the need for regulatory consistency across India’s 29 states, the lack of which is one reason why India sits so far down the World Bank’s Ease of Doing Business Index. Its latest assessment puts India at 142 out of 189 economies.

Understand your market

Inconsistency between India’s states means it pays to study the various regional characteristics. “Get to know the consumer,” suggests Arbinder Chatwal, Leader of Indian Advisory Services at BDO International. “Selling to Mumbai is very different to selling somewhere in Delhi and vice versa. So do that research up front and understand some of the smaller cultural nuances.”

Arbinder cites a motorbike manufacturer that had success in South but not North India. It didn’t realise the difference in consumer tastes: North Indians prefer a kick-start engine, which they perceive as masculine, but it sold a key-start motorbike. It’s a small detail that had a significant effect.

Going in with assumptions about how business is done can have serious repercussions. Shanthi Flynn, Criticaleye Board Mentor and former SVP for HR at Walmart Asia, explains: “India has lots of potential for businesses if they are willing to invest in the future and build at a steady pace. But companies that attempt to launch their brand in multiple states at the same time run much greater risks. The states have different laws and local politics and can vary in how much they support foreign businesses and certain business types.”

A joint venture (JV) with a domestic company can provide new entrants with the local insight needed to navigate through such issues. According to Lee Cooper Brands’ CEO Andy, whose business in India is worth $100 million − up from $20 million five-years ago, “Going in on the ground yourself is nigh on impossible”.

Yet such partnerships can add another layer of complexity, particularly when executive teams don’t fully understand the terms and conditions or set-out a clear break clause. “It’s easy to rush in and do a deal and then find you’re in bed with the wrong person; how you exit from that is very difficult,” he adds.

Additionally, JVs can leave you open to IP theft as regulation is lacking. Lee Cooper Brands protects its product by recording designs, using holograms and talking to customs officers to determine if their products are being illegally exported.

“When we do see counterfeits, which we do, we make a point of going to the end of the legal process, which can take years but there is a pain barrier in knocking off our product,” says Andy. “If you don’t go through that process, the knock-offs will multiply and you’ll lose control of the brand.”

One of the best ways to protect your business in India is to have the right local staff on the ground. Thankfully, one of India’s selling points is its talent, but sometimes aspiration outstrips experience.

“India has a lot of smart, English speaking talent. You’ll find more people who feel ready to be CEO here than anywhere else in Asia. The challenge is that the number of managers with broad experience are limited, so they’re expensive. Salaries at the leadership level don’t always match experience,” Shanthi explains.

Getting the right local talent is essential. “There’s no point flying an expat in to do these bits for you,” says Arbinder. “You need to have your own man on the ground who’s got your interests, wearing your logo; essentially, has got your interests at heart.”

According to Andrew Minton, Executive Director at Criticaleye: “One thing to bear in mind is how Indian employees expect to be led and inspired. India’s successful leaders often have a long-term, internal focus. This means a deep investment in people instead of looking first to the shareholders. Western leaders should bear this in mind when considering how they lead in the subcontinent.”

Indeed, longevity is the best approach. “India is a long-term, strategic play as opposed to a ‘get rich quick’ investment, so set your expectations,” instructs David.

Fast economic growth and increasing FDI suggest that may be starting to change. Executives, entrepreneurs and investors certainly hope so.

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By Mary-Anne Baldwin, Editor – Corporate

The Landscape for Private Equity

All exit options are open for private equity-backed businesses in 2015. Expect acquisitions, corporate carve-outs, IPOs and the continuing carousel of secondary and tertiary transactions. It means that PE firms can count on the competition hotting-up for quality assets, while the management teams of high-growth companies should be in a strong position to make operational improvements and increase market share.

The general opinion among those in private equity is that businesses should be able to build on the momentum that was gained in 2014. Criticaleye spoke to a range of executives, advisors and PE houses to identify the five trends that will shape the space in the year ahead:

1) A Mountain of Dry Powder

The biggest factor impacting the PE space in 2015 will be the availability of capital. As a result of quantitative easing programmes in North America and Europe, as well as the increasing influence of Asian funds, the market has been flooded with capital, which is inflating the price of assets.

Bridget Walsh, Head of Private Equity for UK & Ireland and Greater China Business Services Leader at EY, comments: “The industry now has $470 billion of dry powder. This is unprecedented… for the industry but investors are certainly choosy about selecting quality assets. That said, I think we’ll have a very busy start to the year, the capital is there to do deals and there’s going to be a lot more M&A activity – we’ve seen some large corporate divestments announced.”

With competition increasing, sponsors may have to work a little harder. Simon Tilley, Managing Director of corporate finance firm DC Advisory, says: “The valuation gap is still there, which is frustrating deal-making. Firms might need to be a bit more creative: it might be that they have to pay a little bit more for an opportunity that really is in their sweet spot.”

For Steve Parkin, CEO of 3i backed FMCG concern Mayborn Group, management teams looking for investment need to demonstrate a growth trajectory and a strategy that’s resilient to macro volatility. “We’ve got an election in the UK, the dollar rate is tumbling down and there’s instability in some of the Eurozone.

“Private equity firms will be looking for quality of earnings and businesses that can show they are able to weather some of these challenging conditions. Very high-performing assets will go at a decent multiple but those that are in that mushy middle will continue to struggle.”

2) An International Outlook

A global perspective is sweeping through the PE space and, while international expansion is hard to get right, the scope to open up new markets is unrivalled. Bridget comments: “If you take European GDP levels, top line growth isn’t going to be achieved by simply looking at the domestic market. I think management teams need to be very mindful of emerging markets and operational improvements.”

Gary Favell, CEO of Bathstore, which is backed by American billionaire Warren Stephens, says: “More and more PE houses are looking for that international development, a brand that travels internationally. We’re working to get into either the emerging markets or those markets that are very liquid: the Arab States, India and so on.”

Of course, there are plenty of opportunities across Europe too. Justin Ash, CEO of Bridgepoint backed Oasis Healthcare, a provider of dental care in the UK and Ireland, says: “More than ever, international expansion [should] be seen a good opportunity. Obviously it’s complicated, so it’s not to be taken for granted, but our acquisition of Smiles Dental in 2014 took us into Ireland and has proved to be very successful. It’s good to have a market with different dynamics.

“Our market is a growth market in most parts of the world and we tend to benefit from environments where there has been a lack of consolidation and a lack of branding. So for us, that’s what a new market needs to have to make it attractive.”

3) Where’s the Exit?

Both trade and secondary exit options are open, and despite a subdued Q4 the IPO market is likely to pick up once again. This means 2015 will be a year of decision-making because there is no longer any excuse for firms to ‘sit’ on assets.

Paul Brennan, Chairman of OnApp, a cloud infrastructure software provider which is backed by LDC, says: “I think everyone’s looking at what is a possible exit strategy or the dilution strategy in the context of where the market is. PE houses are asking, ‘You know what, do we double down re-invest, or do we look at perhaps letting other people lead the next round of funding?’

“I’m not seeing everyone going: ‘Oh, we don’t want to invest,’ but they’re not all saying: ‘Yes, let’s put loads of money into these businesses,’ either.”

Martin Balaam, CEO of Jigsaw24, an IT services company backed by Northedge Capital, adds: “There will be pressure on PE houses to start to show some realised gains before they look to raise their next funds towards the back end of 2015, so yes I would anticipate a few exits. I also feel that there is more corporate activity starting to happen so there will be an increasing number of trade sales.”

Foreign buyers are definitely on the lookout for deals and they’re prepared to pay a fulsome price. Charlie Johnstone, Partner at private equity firm ECI, says: “If you are a business in North America… looking for a launch pad in Europe, you understand the language, the legal system is not too dissimilar and there’s a huge degree of trust that what you’re investing in is what you think it is. The UK is a great place to be buying a business and that will continue.

“You’ve then got US private equity firms coming over here that pay 13 times for a business and think that’s cheap. We’re looking at the same business and would probably pay ten times, but they’d have to pay 15 in the US. That arbitrage, from their point of view, is available, and we’ll see more of that. As such, we know we have to match them on the best investment opportunities.”

Following a bumper year for sponsor backed IPOs, raising over $104 billion (Q3 2014 YTD), the public markets are set to remain a credible exit route. Tim Farazmand, Managing Director of mid-market private equity firm LDC and Chairman of the British Venture Capital Association, says: “The IPO market has been buoyant for much of 2014, with a number of PE-backed companies floating, including one of our own portfolio, Fever Tree, which is a premium mixers business.

“More recently, economic concerns have weighed down on the IPO market but hopefully, with a more benign economic environment… it will open up again.”

4) Taking the Sustainable Approach

As a result of slow growth and potential buyers taking extra care with due diligence, PE firms have had to embrace a more mature, long-term approach to strategy. Gary says: “I don’t think you can go in anymore and just say, ‘Look, we’ll take the cost out, strip it back and then move it on.’ People are coming in looking for a sustainable plan.

“You’ve got to be able to show that the business you want to sell has a robust platform for growth, fully supported by both a strategic and operational plan.”

For sponsors, it’s a case of becoming more creative around the services they provide. “There is certainly a longer-term view in the industry,” says Bridget. “A number of private equity funds have invested in good operational teams which means they can identify assets that may be operationally challenged… and can really help turn it around.”

According to Charlie, ECI has had particular success with this approach. It set up a Commercial Team six-years ago which acts as resource for management teams to draw on when they need guidance with difficult operational dilemmas: “The number of projects they run for our portfolio is huge and the results have been impressive – putting our growth at 20 per cent per annum, that’s an underlying earnings growth well above GDP.”

5) All Important Alignment

Given it’s not so easy for financial engineering to gain a quick win, many PE firms have had to adjust to that longer-term view on how to drive growth. It’s made the role of the chairman even more important in terms of managing expectations around the exit between the executives and sponsor.

Paul comments: “When I’m talking to PE houses about my role as a chairman, what I am finding is they are increasingly asking about how I can be that bridge between the management team and the PE house.

“They are very happy for me to go in there and try to help bring them and the management team together. I think chairmen need to be more hands-on now than they have ever had to in the past.”

Sam Ferguson, Group CEO and President of EDM, an information management provider which is backed by LDC, says: “Too many people do deals just because somebody comes along with money…

“My experience tells me that you have to be able to work as a team, and… you must share common directional agreement. There’s nothing more frustrating than having aspirations or a certain direction for [the company] but not getting the backing from the investment group.”

***

Expect 2015 to be a busy year for private equity. Firms have a huge quantity of funds to invest and they will be on the hunt for buy-outs and acquisitions. Global trade buyers will also be in the mix, seeking to capitalise on cheaper finance. As Simon says: “2015 will be progressive – there’s more confidence and hopefully we can continue to build on that.”

I hope to see you soon

Matthew

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The Mindset of the CEO in 2014

Image

For returning CEOs, January will be about keeping energy levels high, ensuring goals and objectives are communicated clearly and paying close attention to the balance and make-up of the senior leadership team. As the year progresses, momentum is going to be everything as there is an increasing sense that the time has come for businesses to go on the attack.

A common refrain from executives is the need to have the right people around them. Matthew Dearden, Regional President for Eastern Europe, UK & Ireland at outdoor advertising company Clear Channel, explains: “My [New Year’s] resolution is to remember that it’s not about [me], it’s about the team; ultimately, the goal is to make sure that everybody in my team is in a place where they don’t really need me.”

Marnie Millard, Group CEO of soft drinks business Nichols Plc, comments: “The main thing I’ve got to focus on now is the development of our leadership team, because I’ve inherited [it]… and I’ve got people at very different levels. If myself and the FD had to step out of the business for a period of time, not only would I want it to be able to continue to function, but [I’d want] the development of the organisation and the business strategy to continue too.”

Likewise, Mark Wood, SVP and Managing Director of EMEA for US-based cosmetics firm Revlon, stresses the importance of engagement: “Create the right environment, where people see that they can make a contribution to improving the business… [because] giving people more rewarding jobs and careers should be [fulfilling] for leaders.”

Solid foundations

For Jim Waller, who became Commercial Director at Italian food manufacturer Sacla last September, it’s a case of building on what’s already been put in place: “I’ve done a lot of graft in my first three months, setting people’s objectives for the year ahead and driving some common and consistent behaviours and ways of working. This will hopefully get people operating much more as a cross-functional team… so that every single person has consistency in their targets for the year.”

Communicating objectives and goals in a transparent way is vital. Paul McNamara, Managing Director of Insurance and Investments at Barclays, comments: “Make sure that the strategy is not forgotten in the New Year… [and] remind yourself of the key messages: what do we want to achieve and what does success look like?”

Don Elgie, CEO of insight and communications agency Creston, agrees: “Be clear, either in your own mind or by constantly referring to your business plan, about what you want to achieve… there’s no point having goals that you won’t be able to succeed in, otherwise it’s just wishful thinking.”

According to Martin Balaam, CEO at IT services concern Jigsaw24, staff will already be fired up because of the greater optimism about the economy. “The key thing will be to direct that positive energy in the right areas and prioritise the things that are going to add the most value [to the business],” he says.

Fundamentally, if performance is to be maintained, it comes back to CEOs having a team of people around them who are going to be able to provide insights, take on responsibility and challenge where appropriate.

Mark comments: “If I’m going off kilter, then I would expect the team to pick me up and say: ‘Where is this on the objectives? How does this fit into the three-year plan? Where are we going with this?’

“You’ve got to have those continuous feedback loops in place so that the leader doesn’t get carried away and lose the team. Actually, I think that’s the acid test for leadership: it’s whether you can continue to take the team with you.”

It’s a point that certainly rings true for Paul Walsh, advisor and former CEO at global drinks business Diageo: “You need great people around you and they will only be attracted and retained if there is a collegiate environment… [That’s why] you have to be prepared to listen and learn. A leader who thinks they have all the answers will very quickly come unstuck.”

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

 

The Outlook for Business in 2014

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If the winds of change haven’t been felt already, business leaders should be tacking hard and plotting a course for growth. Boards that have learned valuable lessons over the last five years around managing budgets, investing in technology and growing talent, and who have made the necessary strategic and operational recalibrations to take advantage of new opportunities, will be the ones who prosper.

Criticaleye spoke to a number of Members from around the globe, operating in a variety of areas, from consumer goods and construction to private equity and investment banking, to examine what their expectations are for 2014 and how they are planning to take advantage of resurgent growth.

According to Mark Spelman, Global Managing Director at Accenture, the broader picture is certainly optimistic: “My bottom-line message is that I think 2014 will be better than 2013 in terms of macroeconomic growth rates… because, if you look at the three major trading blocs, the US, the European Union and China, I think they’re all going to see some positive upturn in 2014 relative to 2013.”

The US remains the world’s largest economy, with upwards of $16.5 trillion in GDP, and the Bureau of Economic Analysis’s second estimate for GDP in Q3 of 2013 saw figures revised upwards from an annualised rate of 2.8 per cent to 3.6 per cent. That said there are still considerable issues to sort though.

Paul Danos, Criticaleye Thought Leader and Dean of Tuck School of Business at Dartmouth College in the US, comments: “You have all those drags like the tremendous public debt. In the US alone, they’re projecting $20 trillion by 2020, and that’s going to have to be brought down… so we can expect periodic clashes in Congress on the debt ceiling, which will create uncertainty, not to mention the question around whether the Federal Reserve will scale back its programme of quantitative easing.”

Likewise in Europe, there will be plenty of bumps along the way. “The European elections in May are going to be very important,” says Mark. “Mainstream parties are going to struggle… and the more fragmented the European Parliament becomes, the more difficult it’s going to be to drive a reform agenda in Europe.”

Those seeking to expand into Asia’s high growth markets must be fully committed to their strategy. Hellmut Schutte, Vice-President and Dean at China Europe International Business School in Shanghai, comments: “Growth [in China] will continue and markets will become more transparent due to the continuing fight against corruption. This means more of an equal chance for foreign firms… [and] business will be better for multinational companies than before.

“But running operations in China will also become more demanding. Constant upgrading of technology and improving management skill in Chinese companies erode the competitive advantages of many foreign firms. In many industries, standards in China have reached international [levels]; so, depending on the size of a particular market, the outcome of competition in China will determine the success or failure of firms in global markets. This means half-hearted engagements in China have little chance of success.”

Andy Dunkley, CEO of jeans brand Lee Cooper, who completed a $72 million (£47 million) trade sale to US company Iconix earlier this year, says: “With a business such as ours, which is 95 per cent outside of the UK, we see lots of opportunities in global growth for 2014… We have an excellent base in the Middle East, India, China and South Asia [and] we have foundations that can grow at double digits in these markets.”

The key pressure points for 2014 will be, in Andy’s view, unexpected changes in the patterns of growth: “A discussion of the reduction of tapering relief in the US [in 2013] has had a dramatic impact on currency movements and values in India and across markets that are seemingly unrelated. [Therefore, as we grow] we continue to seek a balance which means we are not over exposed in any one market.”

For Giles Derry, Partner at mid-market private equity firm Dunedin, business leaders need to bold without being foolish: “I think there’s a tightrope to walk in terms of making sure you’re investing for expansion, but without betting the farm on certain assumptions having a specific outcome… how brave you’re feeling probably depends on your end markets and which areas of the global economy you’re exporting to.”

Appetite for deals

In terms of M&A, research from Big Four firm EY suggests an uptick in deal activity after a five-year period of declining transactions globally. A survey of 1,600 senior executives in more than 70 countries conducted by EY finds that 69 per cent expect deal volumes and deal sizes to improve over the next 12 months.

David Barker, Head of Transaction Advisory Services for EY’s Financial Services division, says: “Banks continue to search for yield and therefore remain enthusiastic financiers of good deals which we think will continue to drive positive trends in M&A…

“In particular, M&A activity among banks will increase significantly following the ECB-led Asset Quality Review programme and the associated balance sheet stress tests, a process which begins in April and continues on through the summer. We’d certainly expect M&A activity to grow off the back of that… particularly around central and southern Europe, as banks choose to reposition which countries they want to operate in as core and in which they will consider reducing their levels of activity.”

Steve Pateman, Head of UK Banking at Santander, comments: “For the banking industry in its broadest context, there’s this massive regulatory agenda in 2014 because it’s the year when mortgage regulations change fundamentally, and all banks will have to adapt to a new system called MMR [Mortgage Market Review]. So, as they head into Christmas, most are probably thinking about whether they going to be ready for MMR on the 26th April.”

Reconnecting with customers is also vitally important for Steve: “[This] will hopefully be the year when banks start to rebuild trust and perform the role we’re supposed to perform in supporting the economy. If it continues to grow and recover from some of the lows of the last few years, it will be easier for the industry to do that.”

Funds for growth

On the public markets, the IPO renaissance over the last six months looks set to continue. Alastair Walmsley, Head of Primary Markets at the London Stock Exchange, says: “Q4 of 2013 is going to be the best quarter for overall capital-raising in the UK market for more than four years… [and] we are expecting the level of activity to continue, potentially even accelerate, into the New Year.

“Investor risk appetite has increased significantly which is being recognised by international companies… so cross-border IPOs, which have been pretty muted around the world this year, are looking likely to pick up going into 2014.”

Proper access to finance combined with a healthy set of accounts will certainly help most businesses that are looking to grow, not least in the property sector.Alison Carnwath, Chairman of Land Securities, says: “Because we have a strong balance sheet and are able to build into a development cycle, and because London, in particular, is under-supplied with first-rate property for occupiers, we see 2014 as being a good year for the property industry. It won’t be so easy, of course, if you’re not well-financed, because accessing funds from banks and alternative sources still remains a problem.

“Another trend we see is that, if interest rates start to rise, retailers will find it increasingly difficult because they haven’t enjoyed a particularly buoyant period. Furthermore it’s going to be testing for consumers who’ve got big mortgages to decide where they’re going to restrict their expenditure. And we expect quite a lot of it to come from them spending less in retail.”

Steve Cooper, Head of Personal and Business Banking for the UK Retail & Business Bank at Barclays, comments: “The housing market is definitely improving, albeit it is largely driven by London and the southeast. But there is improvement elsewhere as well. If I look at business turnover, what they are generating in terms of cash and sales, that’s now gone back to above where it was pre-downturn. It takes a long time to get there, but businesses are definitely generating more sales.

“What I’m not yet seeing is enough businesses investing cash for growth. I’m still seeing [them] generate and hoard cash. It’s not that they’re fearful about the future, just that they… can’t see sufficient opportunity to invest for growth.”

All change

As ever, talent and skills will be a pervasive issue for CEOs in 2014. David Stokes, Chief Executive for IBM in the UK and Ireland, says: “A key issue facing business leaders today is skills. Press coverage over the last few weeks indicates that the UK is lagging behind foreign counterparts in building core skills and estimates predict an annual shortfall of 40,000 science, technology, engineering and maths graduates causing significant problems for business if not addressed now.

“Investment in initiatives which enable young people to build the skills that are valued by the market – thinking particularly about skills that will enable the digital world – will help businesses safeguard their own future as well as the future of our economy.”

Martin Balaam, CEO at IT services concern Jigsaw24, comments: “Talent will be an issue because… anybody that’s come up through the ranks in the last five years or so will have never really been in a period of growth…

“We’re just in the throes of recruiting a new graduate intake and, also, we’re actively working with the local authority in terms of apprentices. There’s been a bit of a lull in terms of investing in the next generation, and we’re certainly turning that tap back on… so we’re bringing on people who, in addition to our existing workforce, can learn on the job and ultimately fill those roles that we believe are going to become available as we grow next year.”

***

Just from these snapshots of business sentiment it’s clear that as we go into 2014 the mood among the Criticaleye Community is markedly sunnier than at the same point last year. There will be some real areas of growth to capitalise on over the next 12 months, just so long as leaders are prepared to take a punt and have the gumption to make it happen.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

Can Banks Win Back Trust?

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The banking industry faces a huge task ahead if it is to restore trust and credibility. While it’s understandable that much anger and suspicion is directed towards ‘bankers’ for their role in the financial crisis, it has always been too simplistic to blame this group entirely for what happened. It’s time to move on, not least because a strong banking system is in everyone’s interests if the economic recovery is to gain momentum.

Getting there is another matter. The measures taken by regulators, such as the introduction of the Dodd-Frank Act in the US and Basel III in Europe, are necessary to reduce some of the remarkable risks that were being taken with unwitting customers’ money. There does need to be a limit, however, so that the political necessity to be seen to act in order to satiate public opprobrium, combined with a very rational need to reduce alarming behaviours, does not result in throwing the proverbial baby out with the bathwater.

Brian Stevenson, Non-executive Director of Agricultural Bank of China and former Chairman of Global Transaction Services for The Royal Bank of Scotland, says: “If you look at the new regulation that’s being put in place in Europe and the US, together with the FSA in the UK and the new authorities being given to the Bank of England under the new structure of regulation, when you add all of that together, you could legitimately argue that in combination it is going too far. If you’re a large international bank operating in a lot of countries around the world, you’re currently facing a multiplicity of new regulations and new regulators, and they’re not the same.”

The lack of standardisation around the world is a problem, creating a serious competitive disadvantage for some international banks, whereas at least the country-focused banks know they’re competing on a level playing field. “For domestic banks in the UK, it is very difficult to argue that the regulations have gone too far,” adds Brian, citing the issues around payment protection, liquidity and capital planning, to name but three.

Within this, there is also the question of the false sense of security that can occur in the clamour for safeguards and buffers. Steve Pateman, Head of UK Banking at Santander, says: “I may be wrong, but I don’t see that capital and liquidity management in isolation will effectively prevent another banking collapse. It has to be seen in combination with risk management. Anglo Irish would have gone bust with 30 per cent Tier 1 capital, so let’s not kid ourselves that if you’ve got Tier 1 capital of 10 per cent, you won’t go bust.”

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Tone at the top

Risk management has to be right – it’s no use, for example, having a well diversified mortgage book if there’s a massive concentration of exposure in highly leveraged corporate entities, as HBOS discovered to its cost. Omar Ali, Partner and UK Banking & Capital Markets Leader at Ernst & Young, says: “In terms of the issues we’ve had since 2007, fundamentally it comes down to a few critical questions; what is the organisation’s attitude to risk?; its culture?; how does it operate? Because, let’s be clear, all banks had rules and policies and regulation was in place already – regulation by itself is not the answer.”

Mary Jo Jacobi, Criticaleye Associate, former MD of Lehman Bros and advisor to the board of HSBC Holdings, says: “The banks need to clean up their own act and demonstrate that they are capable of occupying a position of public trust and of managing their own affairs responsibly. That doesn’t necessarily mean chasing huge profits through highly risky ventures. Of course, one of the reasons we got into the current situation was because the banks were coming up with more and more complex instruments to make money out of basically repackaging the same things. I’m a capitalist and I believe in the profit motive, but I also believe that businesses have a responsibility to understand what they are doing and address the potential consequences of what they are doing.”

Rebuilding faith in the competence of banks will not be easy. According to research from E&Y, some 40 per cent of banking customers globally have lost trust in the industry over the past year; customers are also becoming less loyal and increasing the number of banks they use, with a third of them now dealing with three or more banks.

At least banks now realise they actually need customers and success depends on winning back their trust. Paul Staples, Head of Corporate Finance at BNP Paribas, says: “Regaining public confidence in the provision of banking services will require progressive, visible changes in how we deliver value to our clients. The pursuit of shareholder returns must be blended intelligently with a tangible commitment to social responsibility.

“The project has begun and the next stage is genuine engagement with stakeholders to ensure that key initiatives are better designed through proper consultation. Clarity of communication is essential to regain credibility and to rebuild progressively an enduring trust.”

Over time, banks have been the most ruthlessly profit-focused of businesses. It’s now time for them to reconnect with customers and get back to basics, which means looking at how to provide the best possible service with transparency, such as being clearer about pricing and charges. Whether that is going to occur can be debated long and hard, as the aforementioned cultures within many organisations is entrenched, but given the public’s cynicism towards the industry, those banks that do respond will be at a distinct advantage.

“When you boil it down, banks only really do five things,” says Brian. “They provide a vehicle for customers to make investments; finance for customers; move money from A to B; risk management services; and information and advice on all of those services.

“So, in each category, they have to be careful enough to make sure that what they’re actually providing for their customers is ultimately what they want and there isn’t any form of grand deception or sleight of hand involved in the process.”

Helping first-time buyers, supporting businesses, making services quick and accessible across a variety of channels, that’s what people want to see and, if done in the right way, banks should not be pilloried for making profits. “The most important task we as an industry have ahead of us is to show that banking done well is a good thing, but it’s not a battle we’ve done a particularly good job with so far,” says Steve.

Omar suggests that it should be an enormous wake-up call for banks to appreciate the role they have to play in society: “This could create an industry that is better for everyone. Better for shareholders, taxpayers, regulators, customers, the overall economy and the country we live in. I think we have a unique opportunity to improve banking for all stakeholders and I just hope there is the collective will to do so.”

Why the US Still Packs a Punch

For all the long-term potential of the emerging markets, it’s easy to forget that the US has a mighty $15 trillion economy tailor-made for the express purpose of doing business. So if you’re serious about competing with the best globally, chances are the so-called ‘land of opportunity’ is either a core part of your operations already or, for younger businesses looking to scale the heights, it certainly ought to be.

“I wouldn’t ignore America,” says Lady Barbara Judge, Chairman of the Pension Protection Fund and a former Commissioner of the US Securities & Exchange Commission (SEC). “It’s a big market and there are many people with vast amounts of wealth. The developing markets are important but it’s also vital to understand the optimism and economic potential of America.”

Gary Kildare, Vice President of HR for the Americas, Europe & Asia Pacific at IBM, comments: “The US continues to be one of the most important markets in the world. For many businesses it is attractive because of its size and scale, ease of doing business, language, receptivity to new ideas, innovation and products.

“The prospect of cornering or conquering the US market is certainly included in the growth plans of many businesses – big and small. Clearly, a lot depends on product, services, industry and market. It’s a fiercely competitive environment with an economy facing many of the same problems and issues as Europe and the US – though tackling them in a different way.”

Wise decisions

With a domestic market of over 300 million consumers, the ability to rapidly achieve scale in the US remains hard to beat. But, that said, the fierce regional differences, bureaucracy and culture of litigation can come as a surprise to those who imagine the country to be open, homogenous and easy to navigate.

Robin Buchanan, Non-executive Director of asset manager Schroders, warns: “Far too often Europeans make some fundamental mistakes when competing in the US. The most common involve underestimating the speed, innovativeness and intensity of competitors’ responses in the most competitive nation on earth.

“Then there is the assumption that the US is the world’s purest free market when hidden tariff barriers and complex, expensive regulations abound… If, however, you have the resources, skills, appetite and stamina to compete, the economic and strategic rewards can be enormous.”

David Wither, CEO of UK-based technology company Sarantel, says that with the right relationships and an offering that is not merely a ‘me-too’ product, even smaller businesses can make impressive in-roads: “If you’ve got people that are good and can make personal connections with customers then, I think, in a way, the US can be one of the easiest places to do business.”

Success takes planning, investment and having skilled and trustworthy staff on the ground who understand a particular market. Lady Judge says: “You have to be a little more focused than just saying: ‘I want to go and do business in America.’ Whether you’re a branded business or not, you have to decide whether you want to be regionally focused or to cover the whole country.

“There are regional differences in tastes and the scale of the opportunities. Texas thinks it’s its own country, so does California. One of the risks is in not understanding that cultural difference and the various ways of doing business.”

When Andy Houghton was in the US, driving the expansion of YSC, an international organisation of business psychologists, he believed clarity of purpose was essential if the company was going to succeed. “You have to decide why you’re going and why you’re putting your business there,” says Andy, YSC’s Managing Director.

In the beginning, this entailed opening offices in the North-East and in Texas to meet the needs of clients already there, but the next stage involved a test of the company’s ambition. Andy explains: “The two bets we made were in the West Coast and the Midwest. In part, I think to be treated seriously in the US you need to have reach in the key commercial markets and, actually, adding a presence in Chicago and San Francisco were entirely for that reason. Without those offices, we looked like a regional as opposed to a global player.”

Don Elgie, CEO of the UK-based insight and communications company Creston, led the acquisition of two healthcare companies to expand into the US. He explains: “Our view is that, in order to be credible, you need to have some scale in the States because it is such a huge market and, therefore, we decided on acquisitions rather than being a pure start up.”

When it came to selections locations, Don says the preference was for the East Coast: “That was simply because of management time and time zones. We’ve already got two companies in New York, so adding more there was easier to manage than buying something on the West Coast.”

Rule of law
The regulatory regime, especially for listed companies, is not to be trifled with. Although wrongdoing cannot be condoned, the fact that territorial boundaries count for little these days if a business has operations in the US or, for that matter, dealings with US citizens, is a worrying development.

Nicholas Fell, SVP Corporate Services & General Counsel for BW Maritime, who practised law in the US for 12 years at a different company, comments: “The difficult thing about the US legal system is on the criminal side as they do like to make examples of companies.

“As for the prosecutors, one gets the feeling that some are in it to make a name for themselves, not just to administer justice. You see a lot of successful politicians who started out as prosecutors and they’re looking for cases to enhance their careers.”

According to Andrew John, Group Legal Director and Company Secretary at TUI Travel, which has around twenty subsidiaries spread throughout the US, the legal framework is unlike anywhere else in the world. “Risk management in the United States is very important,” he explains. “Particularly if you are selling a product or service to American consumers where you are likely to be sued from time to time. You need to understand how your risk management strategy interacts with your litigation management strategy.”

For the majority of businesses coming to America, the real headache in setting up a business will derive from the cost of HR and the relationship between employer and employee. Don gives an example of some of the differences: “When you’re negotiating new terms and conditions for employees that you’re particularly keen to keep, the typical notice period that we offer in the UK would be at least six months.

“You would think that would be welcomed because America has a ‘hire-and-fire at will’ policy. However, when we bought our first company in New York, people thought six-months’ notice would be a handicap for them in getting a new job as and when they wanted. It was extraordinary; we imagined it would be a no-brainer in terms of security of employment, but it took a lot of selling.”

Andy says that the setting-up costs in the US are significant, particularly around healthcare. “Sometimes the employment relationship in the US can feel like it can be structured on an explicit understanding of the benefits an employer will give an employee. It’s not unusual in an interview for people to ask you to talk through your private healthcare scheme or how your 401k [pension plan] works, whereas the equivalent of that in the UK would probably never really raise its head until the final stages of the conversation.”

Think big

Expanding into the US needs commitment, but there’s a reason why it continues to be the UK’s largest non-European Union export partner (accounting for 25.8 per cent of trade) and its largest non-EU import partner too (15.9 per cent of the total value of trade).

The risks aren’t to be underestimated but for those companies not in the firing line of regulators in an Election Year (think financial services), the bureaucracy and legal framework is manageable. Nick says: “The Europeans do have fears because of all the scare stories. But it’s not the Wild West completely when it comes to the application of the law, so people shouldn’t be put off by what they hear.”

Although Lady Judge does recommend that businesses new to the US hire a good lawyer, she doesn’t believe that the differences in regulation between the UK and US are so far apart. “There seems to be more regulation in the UK because you have to add on the numerous regulations of the EU and their constantly changing nature,” she says.

Opinion may be divided, but there must be something right about the business environment in the US, stretching as it does from Silicon Valley to Wall Street, given the ease with which it regularly creates companies that go from start up to blue-chip status in the blink of an eye.

“It is such a great market, full of conspicuous consumers,” says Andrew. “There is nowhere else like it in the rest of the world.”

Joined-Up Thinking in China

A joint venture can often be the best way to crack the tough nut that is China. Such partnerships allow you to leapfrog the dangers of being an unknown challenger in an aggressive, highly competitive environment. But for all of the perceived benefits, you need to know exactly what you’re getting into and have a clear idea of what constitutes success.

Brian Stevenson, Non-executive Director at the Agricultural Bank of China, says: “A joint venture with a local firm gets you into the market with someone who is already experienced with the culture and behaviour there, and if it is a regulated environment, you are more likely to get an approval if you go in with somebody who already holds it.”

As with any JV, it would be foolish not set parameters. Martin Bloom, Non-executive Chairman of Chinese solar wafer manufacturer ReneSola, says: “Over time people’s objectives change. In any business relationship it is essential to have a break clause because whatever one thinks today, things won’t always move in the same direction… [such a clause is essential] even if people feel it may show bad faith to look at how the JV will break, because it has negative connotations about the partnership.”

A similar note of caution is struck by Marc van Grondelle, Head of the Joint Venture Practice for KPMG UK and Europe: “Some of the largest companies in the world struggle to be effective in today’s joint venture space – particularly in the emerging economies. Even if a good joint venture agreement, which is a rarity in itself, is signed, this is no guarantee of success, as cultural differences continue to be potentially disruptive long after the ink is dry, and value-destructive issues frequently only emerge two to four years into the venture.”

Clearly, there’s a reason why The World Bank recently ranked China 79th out of 183 countries in its ‘ease of doing business’ rankings. Mike Howe, Managing Director at Stannah Stairlifts, which is building a joint venture with an existing Chinese supplier, says: “It’s a different kind of relationship when you go into a joint venture [with a supplier] as what worked well as an arms-length relationship suddenly has to be buttoned-up much more tightly… Although we have experience in Europe and the US of setting up our own businesses from scratch, our intuition and the advice we got [was to seek a JV].

“We wanted good advice from legal and financial organisations that understood both the UK and Chinese culture and practices, which meant there were significantly higher costs than if we’d used simply a Chinese organisation… But it’s worth paying the money, particularly if you have concerns, because crisp, clear advice – albeit at a price – helps you move forward that much faster.”

Know thyself

The excitement of international expansion through an alliance can get the better of cold hard reason. Nandani Lynton, a Criticaleye Thought Leader and Adjunct Professor of Management at CEIBS, Shanghai, says: “Lots of people don’t stop to think about exactly what they want a partner for: is it for government relations, channels to markets, or both? You need to be clear, because companies have often found to their disappointment that you may have a partner who has fantastic access and channels, but who is only in one province and is almost as incompetent crossing the provincial boundary as a foreign company.”

Brian says: “The sorts of things a Western, capitalist joint venture partner may be looking for, such as return on equity, may not be what your partner necessarily wants, at least in the short term, and that will influence things like reinvestment decisions. Those sorts of issues are critical arguments for getting it right up front.”

Viewing a JV as a shortcut can also be a mistake. Peter Lorange, President Emeritus of the IMD and a Criticaleye Thought Leader, says: “Looking at joint ventures as a way to overcome cultural differences could be a disaster as you are abdicating the development of your local understanding. [Entering a new market] is a matter of developing the understanding to exploit it, not exporting your view there.”

Jon Dymond, Director at management consultancy Hay Group, argues that it’s important to go beyond whether the agreement makes financial sense. He explains: “There’s a need to pause and acknowledge differences, so apply some of the due diligence into the ‘soft’ cultural issues: how a different culture, norms and rules will impose time costs on you…

“Far more time and effort [than you expect] needs to go into building a proper picture of where you do and don’t overlap. If you don’t do that kind of due diligence work, the thing will founder, no matter how compelling the business logic for it to happen.”

It’s a lot to consider given how much can go wrong. Marc says: “The average life of a JV in China tends to be less than in more mature markets, so business leaders must question whether they are creating something that has long-term strategic value.”

Complex it may be, but business is always a case of nothing ventured, nothing gained. Mike says: “What always makes me laugh about these situations is that you spend most of your time on the legal issues, dealing with what could go wrong. But all the time that you’re talking about the negatives, you’ve got to remember that what’s driving you [to do] this is a big positive

The Eurozone: What’s Your Plan B?

Focus on the world’s fastest growing economies – that’s the message from business leaders on how to deal with Europe’s currency calamity. With Greece remaining mired in debt, and Spain, Italy and Portugal relying on the positive signals coming from the European Central Bank to buy sovereign bonds, the fact is that businesses simply cannot afford to adopt the equivalent of austerity measures if they want to prosper.

Jim Wilkinson, Group Finance Director at online gaming company Sportingbet, has needed to act quickly as Spain and Greece accounted for about 50 per cent of the European business. “We have withdrawn any cash balances out of those countries on a frequent basis and have reorganised our European business to match costs to revenue in local terms.”

Part of the solution, for Jim, has been to develop a standalone business in Australia: “It is well away from what may be happening in Spain and Greece and completely separate and immune to the currency troubles in Europe, to the extent that other currencies ever can be immune.”

Stephen Dury, Strategy & Market Development Director at Santander Corporate, Commercial & Business Banking, says: “Many of the SMEs that we have been working with are looking at the fast growth markets in China, India and Latin America to diversify outside the eurozone [and]… deliver more stable and sustainable income growth.”

The crisis reaches across all sectors. In British farming, for instance, there is a particular threat through the weakened currency. Tom Taylor, Chief Executive of the Agriculture and Horticulture Development Board, says: “The weak euro is giving imported pig meat a price advantage when compared to the UK product, and European pork is 12 per cent cheaper, just because of the euro, than it was a year ago, so the ability to sell UK products is being affected.”

In response to this, British farmers have also been looking to Asia. Tom says: “We’re actually now exporting to 50 countries where the currency isn’t having as big an impact… The first contract for pig meat to go to China was signed only a month ago for a £50 million deal and the first shipment went last fortnight.”

With there being so many variables to the crisis, each leadership team will need to devise their own solutions. Mary Jo Jacobi, NED at Mulvaney Capital Management and a Criticaleye Associate, says: “This macroeconomic uncertainty forces businesses to reconsider their plans yet makes developing new ones nearly impossible.

“Leaders need to remain focused on their primary objectives, factor in what has changed and what is changing and be confident that their strategy is sufficiently flexible; snap decisions based on today’s headlines are unlikely to yield positive results.”

Crystal ball gazing

Naturally, international expansion won’t necessarily be right for every business, but it does make sense to factor in and reduce exposure to particular eurozone risks. Nigel Burbidge, Risk Advisory partner at professional services firm BDO, says: “We have worked with economists to provide tailored workshops and economic forecasting for specific businesses, looking at the key risks for them and possible ways to mitigate those and gone from there. The problem is there is no one-size fits all answers for this – you have to form judgments for your case.”

Fortunately, leaders are recognising the scale of the risks, especially around areas like supply chains, and are taking the initiative to combat them. Paul Staples, Head of Corporate Finance at BNP Paribas, says: “The level of contingency planning being implemented by corporate clients with existing operations or exposure to the eurozone has accelerated markedly during the last six months.

“[From] how companies achieve access to funding, to reviewing the local banks who are deemed to be suitable counterparties, [and] how they seek to protect their own infrastructure and investments in a volatile market environment… this level of preparedness is no longer seen as overly conservative, which is testament to increasing concern over weakening economic data across both the European periphery and major Northern European economies.”

Mark Spelman, Global Head of Strategy at Accenture, notes: “While a combination of the European Central Bank’s action on liquidity and the European Union’s rescue funds have bolstered the fiscal system, the key structural problems of competitiveness [in the Union] remain unanswered… Business leaders must look into the abyss and have a base case for how they manage continued uncertainty.”

As ever, the best defence will remain a calm and confident leadership team equipped with a sound understanding of their business, its risks, and agility when it comes to strategy.

David Garman, Chairman of commercial laundry suppliers JLA, takes a pragmatic approach amid the endless speculation: “I don’t know what’s going to happen in the future and neither does anybody else… Decide what you want to do about any particular scenario when it becomes a reality, rather than wasting time that you could be spending on improving the fundamentals of your own business.”

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.

Matthew