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Growing Pains

Companies in fast-growth mode have to beware of getting over-stretched.
Tony McAuley, CFO Europe Magazine
October 10, 2006

On December 11th last year, a huge explosion ripped through the Buncefield fuel depot in Hertfordshire, 56 kilometres northeast of London. The local fire chief described the blast at the depot, the main fuel hub for Heathrow and other airports around the city, as the largest of its kind in peacetime Europe. Among the rubble were the remains of a brand new 6,300 square metre distribution centre belonging to ASOS.com, a young internet clothing retailing company.

"We had to shut the warehouse for five weeks and lost our most profitable trading period," recalls Jon Kamaluddin, ASOS finance chief.

ASOS, an acronym for As Seen On Screen, had grown exponentially since it was founded in 2000 on a marketing concept—to retail via the internet brand-name clothing based on ensembles that celebrities had been photographed wearing. The company, which is chaired by Lord Waheed Alli, a media entrepreneur best known for producing the UK version of reality TV show Survivor, went public in 2001. Since Kamaluddin joined in 2004, sales have doubled each year and they are forecast to reach £40m (€60m) this year.

The Buncefield incident threatened to slam on the brakes just after ASOS had made a substantial investment in expansion. In the event, as Kamaluddin says, "we were lucky. We were fully insured and our PR company did a great job getting out stories about ASOS and the damage done to the warehouse, so customers understood." However, the incident underlined a major vulnerability for the company and led to an overhaul of its risk management strategy. ASOS has since outsourced its warehousing, as well as back-up for its websites and order processing, to logistics company Unipart, and put in place a detailed disaster recovery plan, Kamaluddin says.

The ASOS experience was a particularly stark illustration of a fact of life for CFOs of fast-growing companies: while they're trying to ensure their company stays on a fast-growth path, they must also have systems that anticipate what might blow it off course.

As Mark Keatley, CFO of Actavis, a Reykjavik-based generic drugs maker that has tripled sales to €1.4 billion in the past year, puts it: "We will double our company in the next five years even without acquisitions. The biggest challenge for me and my team is to build the capacity and organisational systems to make sure that finance is ahead of the game."

A survey of 1,400 managers of fast-growing, mid-sized European companies earlier this year by the Economist Intelligent Unit, a sister company of CFO Europe, bears out this dilemma. They identified their top concerns as controlling costs and maximising operating efficiency, while also trying to diversify the customer base and the product offering. (See chart below.)

Disaster Radar
Though less dramatic than an explosion taking out an entire distribution system, failure to anticipate the risks resulting from an over-reliance on one product line or customer base also invites disaster, as Peter Krumhoff knows. When he arrived as CFO at Basler Vision Technologies in 2001, the €50m Hamburg-based maker of industrial optics equipment was teetering on the brink of bankruptcy.

Founded in 1988 by scientist Norbert Basler, the company was a market leader in optical media, providing quality inspection equipment for makers of CD and DVD players and others. The company enjoyed a compound annual growth rate of 50% through the 1990s and debuted on Frankurt's Neuer Markt in 1999. However, as Krumhoff says, this one market segment accounted for 80% of revenue, and when the tech bubble burst in 2000 and the downturn hit, the optical media segment halved in size.

Basler had been investing to incubate new product areas but was caught unprepared. "As a manager, if you live for such a long time in an environment of non-stop growth, sometimes you don't think of crisis," Krumhoff says.

After securing survival finance from existing shareholders and stabilising the company, Krumhoff began to speed up investments in new product areas and put in early warning systems, including close monitoring of customers' end-product prices, such as the ex-works prices of DVD recorders. "However, the difficulty is that many of these industries have little experience of what a cycle is, so we need to be very close to customers and their forecasts and react very quickly. It's a face-to-face indicator," Krumhoff says.

To implement these systems, Basler's finance department identified best practice for its four business units. "Their risk assessments are then challenged by the executive board when we do quarterly budgets. Once a year we do strategy checks with the business units, especially the younger ones, to check for 'flop risks,'" Krumhoff says. A product or a whole business unit can be a flop. For example, one potential new business called Web Inspection was quickly axed when it was barely able to break even, and its technology was subsumed into another area.


Stretch Capital
Despite its hiccup, Basler was a mature enough company to be able to foster a diversification strategy, a route that often is not available to very young technology companies, making financial management that much harder.

Take Powerlase, a London-based maker of high-powered industrial pulse lasers developed by two researchers at London's Imperial College before it was put into the hands of professional managers three years ago. Early financing came from a number of venture capital firms and the technology was a hit with potential customers.

However, the first customers—Korean makers of plasma display panels—tend to place their orders just one week in advance, according to Julia Collins, Powerlase's head of finance. That's a headache for Collins. "We can't raise finance on purchase orders that customers send in only a week in advance," she says. "We're on a 90-day production cycle; we have to make these products in advance so that we're ready to go when these orders come in. That's had an impact on working capital, obviously."

Powerlase sales have gone from £1.1m in 2004 to an estimated £11.5m this year and are projected to reach £25m next year. Despite this rapid ramping up, the only available finance so far has been from the venture capital investor base, which has been funding the company since 2001. A £2m venture loan was raised to meet short-term needs. But these investors are now aiming for a trade sale or a listing on London's AIM market within the year.

During this tight cashflow period of growth, Collins has been pressing both customers and suppliers to improve working capital management. "We've been doing a lot of work with our suppliers to get on 60-day accounts," Collins says. "Also, we've had visits from our Korean customers recently and they are helping out." Meanwhile, the company has been selling in Japan, China and other parts of Asia, though results of those efforts won't be felt until next year. "It's all hands to the pump," says Collins.

In Transition
CFOs of fast-growing companies often find that they are managing several transitions at once. Braemer Seascope, for example, has been morphing from an old-line London partnership of shipbrokers in 2002—the year finance director James Kidwell joined—into a publicly listed diversified shipping services company that has trebled sales to £68m in the last three years. At the same time, the company has started to expand internationally and diversify its range of services.

"The centre of gravity in shipping has been moving east for some time now and we've had to respond by setting up offices there in the last four years," Kidwell says. New sites have been opened in China, Singapore and India, and a 40-broker operation was acquired in Australia, over the last four years.

The company's main business is acting as a middleman between ship owners and leasers, such as oil companies or iron ore importers. This is a booming but volatile business, Kidwell says. That's why the company has also been diversifying into ship agency to handle port logistics, such as customs and fuel purchase, and consultancy in areas like contracting naval architects to supervise shipbuilding.

The expansion has raised a number of challenges, including governance. Kidwell says that moving from the fledgling market on the London Stock Exchange into the Small Cap Index at the end of 2004 "was quite a significant event for us. It meant that quite a number of tracking funds had to buy our shares and it expanded the depth and breath of our investor base." This was a positive development but it raises the company's profile and puts more demands on management, and particularly the finance department, for timely information. Other governance considerations include diversifying its board, which is still mainly made up of shipbrokers.

There also have been the challenges of international expansion. "As we've expanded, there has been a very definite need to ensure our reporting systems are robust, particularly as we've set up overseas offices," Kidwell says. In most cases, Kidwell hasn't been comfortable setting up autonomous operations and has opted instead to open only representative offices. "You don't always meet someone in China or India who thinks the same way about systems. With invoicing and banking done out of London, it means more risk is managed where my team and I are based," he says.

Indeed, as Jordi Canals, dean of Spain's IESE Business School, points out, globalisation has meant that growth companies like Braemer, Powerlase and Basler have had to look to international markets sooner than companies of an earlier era might have. One of the most difficult issues for these companies is dealing with the "soft" issues—that is, the human relations and cultural issues that can be crucial to running successful operations. Keatley, CFO of Actavis, voices a common concern when he says, "One of the things I spend a disproportionate amount of time on is personnel."

Nonetheless, the "soft" issues cover a gamut and are an essential finance concern for companies in international growth mode, says Paula Hadjisotiriou, CFO of Eurobank EFG, Greece's largest financial services company with 2005 income of about €2 billion and a market cap of €9.5 billion.


Tightly Knit Teams
Eurobank was created in 1990 by the Latsis family, whose patriarch, Yiannis Latsis, was one of the original Greek shipping billionaires. The concept of the bank, which is controlled by a Switzerland-based family holding company, was to anticipate Greece's membership of the EU and the deregulation of Greek banking that followed. The company was listed on the Greek Stock Exchange in 1999 and, according to Hadjisotiriou, it is the only Greek public company whose management is not either related to the shareholders or appointed by the government. Eurobank led consolidation of the Greek banking market in the late 1990s and looked to neighbouring countries for expansion, starting with Bulgaria and Romania, later Poland, and moving this year into Ukraine and Turkey.

One of finance's key functions, Hadjisotiriou says, has been to sometimes temper the enthusiasm of the board and the business operations side to enter some markets (for example, Albania—too small; Croatia—over-banked).

For the markets that it does enter, finance must lead the transition, which is mainly about creating the right culture, particularly the right control systems. "You're not going to find the mini-Eurobanks, you're going to have to create them," says Hadjisotiriou. "It's a huge project and you need a tightly knit team of at least 50 people. In Poland, where we started a 'greenfield' operation [Polbank EFG], we had 100 people." Expansion of Polbank has been rapid—from the first branch opening in February of this year to 70 throughout the country now.

Showing Restraint
Most companies in the EIU's survey said they prefer to grow organically rather than through acquisition. However, companies in rapidly moving global markets, such as banking and generic drugs manufacturing, often are compelled to acquire. It is then that finance's dual role of aggressively pursuing opportunities while exercising caution comes to the fore.

For Actavis, it meant deciding last month that it would not raise its bid for Croatian generic drugs maker Pliva when US rival Barr Pharmaceuticals bid $2.5 billion (€1.9 billion), or 3% more than Actavis' bid. Not an easy decision given that Actavis had lined up €4 billion in financing, the largest acquisition arsenal ever raised by a generic pharma company. "We are almost always in competition with someone," says Keatley. "But we have a very clear view of the correct price for Pliva and we never win on price. We win on speed, execution, fit and cultural affinities."

At Eurobank, Hadjisotiriou also emphasises a need for a deep understanding of the countries and cultures into which expansion takes the bank. Ultimately, it's what determines the right price for assets. "That is this 'soft' thing, a question of mentality and attitude, that is harder to achieve and requires a lot of personal time. It is important not to waste this effort on something that will not produce results," she says.

For this reason, Eurobank has decided to tiptoe into neighbouring Turkey, while its rival National Bank of Greece has jumped in with both feet, she argues. Eurobank will soon close its acquisition of 70% of Tekfenbank, a small, 40-branch lender to SMEs, for which it's paying about $260m, while National Bank of Greece has agreed to pay $2.9 billion for a controlling stake in Finansbank, Turkey's eighth-largest bank.

Does such a cautious approach say a lot about what Eurobank thinks of Turkey's prospects? "Not necessarily," says Hadjisotiriou. "But it says a lot about how we spend shareholders' money."




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