Europe's Top Executives Succeed In Finding Opportunity Amid Recession
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Europe's Top Executives Succeed In Finding Opportunity Amid Recession


The worldwide recession has hit Europe harder than most regions, but top executives are turning the crisis into an opportunity.

Many investors were skeptical 18 months ago when the Anglo-Dutch consumer products maker Unilever designated an outsider, Paul Polman, to take over as CEO at the start of 2009. Not that Polman didn’t have fans. The Dutchman enjoyed a strong reputation, having risen during 26 years at Procter & Gamble Co. to head of U.S. operations and later winning plaudits for bolstering transparency during a two-year stint as CFO of Switzerland’s Nestlé. But Unilever had embarked on several restructuring programs over the years only to disappoint investors each time. The company’s repeated pledges to become as profitable as its rivals appeared to have a shorter shelf life than many of its products.

[Click here to view the complete rankings for The 2010 All-Europe Executive Team .]

Polman, who had lost out in the race to become Nestlé’s CEO the year before, was determined to prove he was up to the job. Taking charge in the midst of the worst recession in decades, he used the economic crisis as a tool to force through fundamental changes in personnel and strategy. He jettisoned sales targets that the previous regime had established and almost always failed to meet. Instead, he told his managers and investors that the only target that mattered was volume growth. Then he made wholesale changes to his management, replacing about 60 of the company’s top 100 executives. To underscore the urgency of implementing change, he gave the new team 30 days to produce turnaround plans for underperforming ­businesses.

“This company needed to accelerate its change in the right direction to become truly competitive,” Polman tells Institutional Investor in an interview. “And the crisis provided a burning platform.”

As part of his turnaround program, Polman did his fair share of pruning. Unilever reduced its global workforce by 6 percent in 2009, to 163,000, and cut costs by €1.4 billion ($1.9 billion). But the executive isn’t the simple slash-and-burn type. He increased spending on advertising and promotion by €350 million last year and redesigned Unilever’s global distribution structure in a bid to generate growth. No longer would local subsidiaries (Unilever operates in 170 countries) be able to decide whether or not to market a new group product. Instead, they would be expected to push all new products unless they could demonstrate that a particular item wouldn’t suit local tastes. Under this new “One Unilever” campaign, as Polman calls it, the company for the first time began globally marketing a product developed in China — small tubs of Knorr bouillon in a jelly paste instead of the traditional cube.

“These things would have been unheard of two or three years ago,” says Polman. “Without the pressure from the economic crisis, I never could have made this kind of change. The crisis gave me the excuse to make fast decisions.”

Polman’s regime change at Unilever, which sells everything from Dove, Pond’s and Vaseline personal care products to Hellmann’s mayonnaise, Lipton tea and Ben & Jerry’s ice cream, is having an impact. Unit sales growth accelerated in 2009, hitting 5 percent in the fourth quarter, compared with the same period a year earlier, outpacing analyst estimates. Sales fell 1.7 percent last year, to €39.82 billion, but were up at an underlying rate of 3.5 percent after stripping out the effect of exchange rate changes, acquisitions and disposals. Earnings fell 30.8 percent in 2009, to €3.7 billion, but the previous year’s income included gains of €2.2 billion on the sales of several ­businesses.

“Polman has had a galvanizing impact on Unilever,” says Jon Cox, analyst at Kepler Capital Markets. “He has insisted that every loss in market share is combated and the company does not give in.”

In today’s climate of economic uncertainty and market volatility, such bold leadership is vital for restoring growth. For that reason, both buy-side and sell-side analysts rank Polman as the top chief executive among Food Producers in the 2010 All-­Europe Executive Team, II’s exclusive ranking of the best CEOs, CFOs and investor relations teams and professionals.

The economic and financial crisis has provided a stern test to all of corporate Europe. Although the crisis began in the U.S., the subsequent recession has been deeper in Europe and triggered other problems, such as the political standoff over Greece’s massive debts.

Many companies appeared to freeze when the global economy tanked in the fourth quarter of 2008, so uncertain was the outlook, but “the better organizations soon moved to a more positive, decisive approach,” says Marcus Alexander, adjunct associate professor of strategic and international management at the London Business School. These companies used the crisis “as a way of really looking hard at their assumptions and processes, and focusing heavily on improving efficiency and unit costs, and also using some of their spare human capacity to work on new things,” he adds.

Europe’s top executives haven’t been merely cutting back in response to lean times. For the most part, they helped their companies enter the crisis in good shape, with strong finances and leading franchises, and they have managed to keep their focus on long-term growth even as they dealt with short-term weakness. Moreover, many of these executives have been able to take advantage of their rivals’ woes to make opportunistic acquisitions and bolster their market positions.

Maintaining solid financing before the crisis set Switzerland’s Holcim, one of the largest cement makers in the world, apart. While many rivals were piling on debt to undertake acquisitions during the boom years, Holcim CEO Markus Akermann decided to stay on the sidelines. His prudence is now paying off. When Mexican rival Cemex put its Australian business up for sale last year to help refinance $14.5 billion of acquisition-­related debt, the only buyer to come forward with the firepower to do a deal was Holcim. It bought the business for $1.6 billion and financed the deal with a secondary share offering. The purchase price reflected a multiple of 6.6 times the Australian business’s projected ebitda for 2009, Akermann said at the time of the deal. By comparison, analysts say France’s Lafarge paid twice as high a multiple for Orascom Cement of Egypt in 2008.

“Everyone is cutting costs now,” says Nicolas Godet, an analyst with Exane BNP Paribas. “What makes Akermann stand out is that he made the right strategic moves before the crisis. The Australian deal was an impressive opportunistic acquisition and makes strategic sense.”

The purchase also helped Akermann, voted the top CEO in Building & Construction by sell-side analysts, to better align his production with the realities of today’s market. Demand from Holcim’s customers in the U.S. and Europe was down 20 percent in 2009, but cement orders in emerging markets fell by only 7 percent. “In many Asian countries we even had growth in demand,” says Akermann. “Last year 52 percent of our sales and 70 percent of our profits before earnings and tax came from emerging markets. By 2020 we will probably generate 60 percent of our sales in emerging markets and just 40 percent in mature markets.”

Akermann hasn’t hesitated to cut where necessary. Since the second half of 2008, as the economic and financial crisis caused construction activity to slow dramatically around the world, he has slashed Holcim’s production capacity by 10 million tons of cement a year, or 5 percent. The move, which involved shutting or mothballing plants from Spain, Russia and Thailand to Mexico and the U.S., enabled Holcim to cut its workforce by 10 percent, to 81,498, and reduce its fixed operating costs by Sf857 million ($826 million). But even in slack markets, Holcim is preparing for a rebound by replacing some older plants with modern, more efficient facilities. Last year the company opened a state-of-the-art cement plant outside St. Louis, and it expects to open a new kiln this year at an existing plant in Shurovo, Russia, north of Moscow. Additional projects with annual capacity of about 16 million tons are due to come on stream by the end of 2011. “We are expanding capacity in growth markets,” says ­Akermann.

Few sectors have been hit as hard by the crisis as banking. And few European CEOs have been as opportunistic in taking advantage of the fallout as BNP Paribas’s Baudouin Prot, who wins top marks from buy-side analysts. The big French bank sailed through the crisis relatively unscathed, having little exposure to the U.S. subprime market and operating a policy of limiting the size of its investment banking business relative to its retail banking activities. When the Belgian government was looking for a buyer for Fortis, the bank it bailed out in 2008, BNP Paribas was the only serious buyer to step forward. The acquisition, completed in May 2009, has made BNP Paribas the ­largest bank in the euro zone by deposits, with €414 billion.

Prot says BNP Paribas is on pace to achieve €900 million in cost savings at Fortis this year by combining procurement and shifting Fortis’s operations in Belgium and Luxembourg onto BNP’s European information technology platform. It helps, of course, that BNP Paribas has a strong track record of executing mergers and acquisitions successfully. The French bank is itself the product of the 1999 merger of Banque Nationale de Paris and Paribas. In 2006, BNP Paribas acquired Italy’s sixth-­largest bank, Banca Nazionale del Lavoro. The bank had just completed the integration of BNL when it launched its bid for Fortis. That merger experience gave Prot the confidence to make an acquisition in the midst of a global banking ­crisis.

“We have acquired a lot of integration skills,” says Prot. “These are skills you can only acquire in practice, by doing acquisitions.”

Germany’s RWE also added to its impressive record of acquisitions last year. The German utility bought Dutch electric company Essent last year for €9.3 billion, including assumed debt. It was the third-­largest acquisition by a publicly listed company in Europe last year. The deal furthers RWE’s strategy of expanding outside Germany and makes the company Europe’s largest energy trader. CEO Jürgen Großmann, ranked the top CEO in Utilities by buy-side analysts, is reshaping the big utility to adapt to changes in the European energy market. Increasingly, utilities are not just power generators but have to manage the demand for electricity by providing power at the best available price. Often that power is bought in spot trading rather than generated from the company’s own power stations.

“Once, installed megawatts were the main issue,” says Großmann. “Now it’s all about flexibility of power station to balance renewables, which are volatile, and to manage fluctuating energy prices. Trading is not just a part of RWE but is at the center of our thinking.”

RWE boosted earnings by 5 percent last year, to a record €3.5 billion, thanks largely to a doubling of profits from its energy trading division, to €821 million. “We saw the crisis coming and were able to sell forward at relatively high prices,” says Großmann. “We also increased market share among big corporate ­customers.”

The Essent deal boosted RWE to fifth place in Europe, with a capacity to generate 50 gigawatts of electricity, but Großmann is not about to go on a big shopping spree. The majority of RWE’s shareholders are German municipalities that do not want to reduce their stakes in the company but do not have the firepower to take part in capital increases to finance more deals. “Issuing shares is not on the agenda for us,” says Großmann. “We are focused on organic growth.”

Achieving such growth won’t be easy. The company has committed to building a 3,000 megawatt hydropower station in Serbia and has teamed up with German rival E.On to build a nuclear power plant in the U.K. But building new plants, especially in Eastern Europe, a key growth market for the company, has become more difficult because of the region’s weak economies and debt problems. Last year, RWE backed out of a project to build a nuclear power plant in Bulgaria.

Other companies faced equally daunting commercial pressures but managed to keep their eyes on the long term. ASML Holding, the Dutch company that makes equipment for manufacturing ­semiconductors, is used to the industry’s sharp cyclical swings and was determined to use the recession to bolster its leading market position, says Peter Wennink, voted the top CFO in Technology/Semiconductors by both buy- and sell-side analysts. (ASML is the only company that ranks first in every category.) But even he was stunned by the collapse in orders after the failure of Lehman Brothers Holdings. “For about six to nine months, there were virtually no orders. Nothing moved,” he says.

ASML didn’t sit around waiting for things to improve. The company took advantage of government subsidies to keep staff on the payroll and retrain its key engineers. It also sought to gain a step on its rivals in developing the next generation of immersion lithography technology to enable chip makers to produce ever smaller components. Then the market started to show signs of life, as some big producers such as South Korea’s Samsung Electronics Co. geared up to make a new generation of chips. At the end of August, Wennink was expecting 15 orders in September. “By the end of September, there were 35 orders,” he recalls.

With the semiconductor cycle now firmly in the upswing, analysts estimate that ASML has an 80 percent share of worldwide orders and stands ready to dominate the market for the next 18 months or more. “We have been able to gain market share at the cutting edge of our industry’s technology,” says Wennink. “We have come out of the crisis as ­winners.”

In addition to streamlining and strengthening operations in the midst of recession, companies also need to make extra efforts to keep their investors on board.

Actelion, Europe’s largest biotech company by sales, has long been a favorite of investors, who like the no-­nonsense approach of CFO Andrew Oakley. “He gives you the real story, no gloss,” says Andrew Smith, a fund manager at AXA Framlington.

But even Oakley’s popularity couldn’t help Actelion last month, when it announced that Tracleer, a drug for pulmonary arterial hypertension that generated 85 percent of the company’s sales last year, had failed to win U.S. regulatory approval for wider use. The company’s stock plunged 16.2 percent the day after the announcement. The finance chief says he spent that entire day on the phone with analysts and investors. “The market overreacted,” says Oakley, whom buy-side analysts rank as the best CFO in Biotechnology. Although Tracleer’s patent expires in 2015, the company has other promising products in its development pipeline, he adds.

Few investor relations teams have faced the type of challenges that Alcatel-­Lucent’s has. Sharp declines in telecommunications equipment orders and skepticism about the 2006 merger between France’s Alcatel and Lucent Technologies of the U.S. have dogged the company. With losses mounting, its stock price plunged to a low of €0.91 in March 2009. When the company recruited Bernardus (Ben) Verwaayen, the former head of BT Group, to take over as CEO in September 2008, he overhauled strategy and the way the company communicates with investors. “When Ben arrived the clock was reset,” says Rémi Thomas, a former sell-side analyst and head of investor relations at Alcatel-Lucent.

Verwaayen adopted a plan to slash operating costs and return the company to profitability. He also sought to woo investors by replacing quarterly conference calls with face-to-face presentations. “He thought the quarterly conference call was too impersonal,” says Thomas. Those efforts have been appreciated. Both buy- and sell-side analysts rank Alcatel-­Lucent’s IR team as the best in Telecommunications Equipment and Thomas as the best IR professional. And over the past 12 months, Alcatel’s share price has jumped 93 percent, to €2.39 on March 19, outpacing the CAC 40 index, which was up 44 percent in the same ­period.

“We have really tried to be as transparent as we could be,” says Thomas. “There is nothing more annoying than talking to an IR guy who is in denial.”


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