Throughout much of last year, Europe’s equity markets suffered collateral damage as investors pulled out of the region amid fears that various countries — first Greece in the spring, then Ireland in the fall — would default on their debts. The quality of the abandoned stocks made little difference to many stakeholders, who in a hurried flight to safety dumped the good and the not-so-good and threatened to halt Europe’s tentative economic recovery in its tracks. In 2010, European stocks tumbled 22.1 percent in the first five months then recovered to end the year up 1 percent; during the same periods the Standard & Poor’s 500 index slipped 3.7 percent but bounced back to finish the year up 12.8 percent.
In such challenging times corporate executives with viable stories to tell redouble their efforts to get the word out to analysts — and thus to current and potential investors — that the outlook for their companies stands in sharp relief to the broader and gloomier economic picture.
No European company is held in higher esteem by the analysts who cover it than ASML Holding, which for a second consecutive year is the only outfit to take top honors in every category in its sector on the All-Europe Executive Team, Institutional Investor’s annual ranking of the region’s best chief executive officers, chief financial officers, investor relations professionals and investor outreach initiatives. This year’s most honored companies and the top-ranked executives and firms in each sector can be found in the complete online listing of the 2011 All-Europe Executive Team. Deeper data, including the ranking of top IR professionals and the survey methodology are also available. Survey results reflect the opinions of more than 800 money managers and investment professionals at some 435 buy-side firms and more than 1,200 sell-side analysts from nearly 150 institutions.
The executive team at ASML, a semiconductor-equipment manufacturer headquartered in Veldoven, Netherlands, is “very focused on the long-term investor,” according to Sandeep Deshpande, leader of J.P. Morgan Cazenove’s No. 1–ranked team in the Technology/Semiconductors sector on the 2011 All-Europe Research Team; those analysts have been bullish on ASML since 2008. “Of course, that involves running the business very efficiently, gaining share in end markets and so on. But it also means that the company does not worry about short-term trends such as whether orders are up one quarter or down, as some short-term investors do.”
Nevertheless, ASML has given even short-term investors much to cheer about lately. “Last year was an exceptional year for us,” declares Eric Meurice, 54, who joined the company as president, CEO and chairman of the board in 2004 after holding executive positions at Round Rock, Texas–based computer manufacturer Dell and Paris-based Thomson. He holds master’s degrees in applied economics from Sorbonne University and in mechanics and energy generation from Ecole Centrale de Paris, both of which he earned in 1979, and received an MBA from Palo Alto, California’s Stanford University in 1984. “We broke records with revenues of €4.5 billion [$6.2 billion] — triple what we achieved in 2009,” he says. In addition, ASML reported that its net income skyrocketed to €1.02 billion last year, after a loss of €150.9 million in 2009.
The ASML team keeps analysts informed of each development in its remarkable success story. “We provide them with an intimate knowledge of what could go right and what could go wrong,” Meurice says, adding that he meets with shareholders at least once every quarter; attends road shows in Boston, London and New York, where the majority of ASML’s investors are located; and participates in three or four industry conferences a year.
Analysts appreciate the effort that ASML executives make to keep them in the loop. “Management is extremely honest about how the end markets are doing, and thus investors are rarely taken by surprise by any financial announcement by the company,” Deshpande explains.
In a mid-October conference call, Meurice and CFO Peter Wennink — the sector’s top finance chief, according to analysts on both the buy and sell sides — noted that the company’s third-quarter results came in just above guidance, orders for the fourth quarter were robust and the company was in the process of hiring 80 new workers to help keep pace with soaring demand, primarily for photolithography tools that are used in the manufacture of computer chips.
Companies that had curtailed capital spending in the immediate aftermath of the global financial crisis had signaled that they were ready to add equipment and upgrade existing technology, and that meant good news for ASML. The executives said that they expected fourth-quarter bookings, or orders for future delivery, to exceed the €1.3 billion total for the third quarter but declined to estimate by how much — they did not want to promise more than they thought they could deliver.
“We have a track record over the past seven years for always having overperformed expectations,” explains Meurice. “We are always near our guidance, and that has created a sense of credibility.”
However, in early December, with demand outpacing even the executives’ expectations, the company raised its fourth-quarter guidance, anticipating quarterly bookings would top $2 billion — a record high for the company. That figure omitted orders related to ASML’s work in extreme ultraviolet lithography; the company was already working on second-generation EUV systems scheduled for delivery in 2012. “This is a technology for which we think we are going to have minimum competition for a fairly long period of time,” Meurice confides. “It gives us a fundamental strategic superiority.”
The upside surprises were not over. In January, ASML disclosed that orders placed in the fourth quarter shot above €2.3 billion. “We guided originally to a booking number, and it happened that we were wrong — we had twice as much booking as we had guided,” Meurice says.
Flush with cash, the company also announced that it would double its dividend, to €0.40, and buy back up to €1 billion in shares over the next two years.
Jürgen Hambrecht understands the importance of maintaining strategic superiority. “We are constantly looking to reshape our portfolio,” says Hambrecht, CEO of Ludwigshafen, Germany–based BASF, the world’s largest chemicals manufacturer in terms of annual revenue. “It is not just about research and development; planning our future also means proactively shaping our portfolio, and this is interrelated with acquisitions and divestitures.”
Hambrecht — dubbed the Best CEO in the Chemicals sector by analysts on both the buy and sell sides — and his associates saw the financial crisis as an opportunity to make key acquisitions to diversify BASF’s product offerings and increase its market share. In April 2009 the company completed its acquisition of Ciba Holding, a specialty-chemicals producer headquartered in Basel, Switzerland. The Sf6.1 billion ($5.5 billion) deal helped solidify BASF’s position in the market for paper additives.
The timing of the deal is noteworthy: BASF announced its intention to buy Ciba on September 15, 2008 — the same day that Lehman Brothers Holdings filed for bankruptcy protection, touching off a worldwide financial panic that froze credit markets and plunged the global economy deeper into its worst downturn since the Great Depression. However, the BASF executive team saw no reason to alter its expansion plans.
“Whenever there is a crisis, there is always a point of time when you will get out of it, and our strategy is always long term,” Hambrecht explains. He takes evident pride in pointing out that “in the midst of the crisis, we made one of the major acquisitions in BASF’s history.”
They didn’t stop there. In 2010, as sovereign-debt shocks reverberated across Europe and sent stock markets tumbling, BASF undertook another acquisition: Cognis Holding. Hambrecht’s company bought the Monheim, Germany–based outfit, which produces chemicals used in cosmetics and food, from Goldman Sachs Group, Permira Advisers and SV Life Sciences in an all-cash deal worth €3.1 billion, including more than €500 million in debt and pension liabilities; the takeover was completed in December. “It is an excellent fit with the BASF portfolio,” declares Hambrecht, 64.
Cognis had sales of about €2.6 billion and ebitda of €322 million in 2009, and on a pro forma basis, Cognis would have seen €3 billion in sales and €550 million in ebitda last year, he notes. BASF financed the acquisition, including the retirement of existing Cognis debt, with cash on hand and by issuing $1.5 billion in new commercial paper. BASF’s $12.5 billion commercial paper program is backstopped by existing committed credit lines of $6 billion, and the company had arranged a €3 billion bridge loan in case it needed to tap additional funds. No such need emerged, however, owing to the company’s strong cash flow.
Acquisitions are only one part of the BASF team’s vision. “If you want to proactively design your own future, you have to invest in R&D,” says Hambrecht, who joined the company in 1976, one year after earning a Ph.D. in organic chemistry at the University of Tübingen, Germany, and was appointed to the top job in 2003. “Innovation is the basis of our future promise. Otherwise, you are only reacting.”
BASF allocated €1.36 billion to R&D in 2008, spent €1.4 billion in 2009 and about €1.5 billion last year. One of its most successful recent product launches was the herbicide Kixor, which was approved by the U.S. Environmental Protection Agency in September 2009 and was brought to market last year; Hambrecht says the company anticipates annual sales of more than €200 million. By 2015, he adds, BASF expects to generate between €6 billion and €8 billion in sales of products that will have been on the market for five years or less.
The company also is developing products and solutions to help its customers save energy and resources; among these are special insulation materials used for energy-efficient construction, to help reduce greenhouse gas emissions. Last year the company introduced a new version of its Basotect foam insulation, which is lightweight, heat resistant, flame retardant and sound absorbent; its fiber-free properties meet strict emission requirements.
“Sustainability is about balancing three dimensions — the economical, the ecological and the social,” says Hambrecht. “We have one of the most diversified product portfolios in the market, offering the best sustainable solutions, which can be fossil-based or renewable-based.”
Over the next five to ten years, he adds, BASF will continue to focus on innovation. “To ensure profitable growth in the future, we have to differentiate ourselves,” Hambrecht says.
The company does not have a problem profiting. Last month, BASF reported fourth-quarter net income of €1.1 billion, more than double the €455 million it earned in the same period one year earlier, and sales growth of 25 percent, to €16.4 billion. Net income catapulted more than 220 percent, from €1.4 billion in 2009 to a record €4.6 billion last year. At the press conference to announce these results, Hambrecht told attendees that he expects sales this year to grow by about €3 billion, to €67 billion, once Cognis is fully integrated.
With such good news to report, it’s not surprising that Hambrecht spends about 20 percent of his time communicating with analysts and shareholders, a task he says is of “the utmost importance in demonstrating the long-term value creation of the company.” During these interactions, Hambrecht not only talks but also listens because he finds it helpful “to hear about what the competition is doing.”
Thomas Gilbert of UBS, who leads the No. 3 team in Chemicals on the All-Europe Research Team, is one of many analysts who sing the praises of BASF’s outreach initiatives. He cites as superlative the company’s “responsiveness to investor and analyst requests; clarity of earnings releases, given the above-average complexity of the company in a chemicals sector context; breadth of road show activities and educational events that cover a wide array of topics, from group strategy via specific segments to sustainability; and corporate governance.”
Hambrecht has left an indelible mark on BASF during his 35 years at the company, but this year will be his last: He plans to retire in May. The board of directors tapped CFO Kurt Bock to take over as top executive at this year’s annual shareholders meeting, which is scheduled for May 6.
Strategic acquisitions are one way to fuel a company’s growth, but the road to agreement can be anything but smooth — as Santiago Fernández Valbuena can attest. The CFO of Madrid’s Telefónica (and the favorite finance chief among buy- and sell-side analysts who track the Telecommunications Services sector) and his associates decided last spring that it made sense to buy out Portugal Telecom SGPS’ 50 percent stake in Brasilcel, the Amsterdam-based holding company for Vivo Participações that the two companies jointly owned.
In terms of number of subscribers, Telefónica was already the world’s third-largest integrated telecom company (behind China Mobile and London’s Vodafone Group), with roughly 288 million customers throughout Europe and in Argentina, Chile, Colombia and Peru. However, its penetration in Brazil — Latin America’s largest and most dynamic market — was limited; it owns Telecomunicações de São Paulo, a fixed-line unit, but did not have a controlling share in São Paulo–based Vivo, making integration of its fixed and mobile services impossible. “The move to secure control of Vivo was a strategic one — we were just missing one piece,” says Valbuena, 52, who joined the company in 1997 from Société Générale Valores, where he was a managing director, and was appointed CFO in 2002. He earned a Ph.D. in economics from Boston’s Northeastern University in 1984.
Convincing Lisbon-based PT to sell turned out to be more difficult than Telefónica executives imagined. “It was a convoluted process,” Valbuena says. To further complicate the situation, many of Telefónica’s shareholders also own shares in PT, and “the consequences and the bruises of that are inevitable,” he adds.
PT and Telefónica had been partners in Vivo for eight years; for PT selling Vivo meant losing its only stake in one of the world’s most booming markets. The country had a real gross domestic product growth rate of 7.5 percent in 2010, Brazil’s central bank reported this month, and is expected to grow by 4.5 percent this year; in fact, Brazil has racked up GDP gains in 17 of the past 18 years. It is a market that companies want to get into, not out of. “We knew this was going to be uncomfortable for them — it’s not the kind of thing you are going to find enthusiasm about on day one,” says Valbuena. “It would have to shake people out of their comfort zones.”
To some stakeholders the deal was too close for comfort. Telefónica at the time owned a 10 percent equity stake in the Portuguese telecom provider, making it PT’s biggest shareholder, and Valbuena sat on PT’s board of directors. “The offer started in a very uncomfortable place within Telefónica, and within Portugal Telecom it was unwelcome,” he says.
That’s putting it mildly. In early May, Telefónica offered €5.7 billion — well above the €3.5 billion that analysts estimated the stake was worth — but the bid was summarily dismissed. “They rejected the offer after 30 minutes,” Valbuena recalls.
Not the type of person to take a snub lying down, Valbuena shot back by reminding PT’s executive team that Telefónica could hold up the cash distribution of dividends at Vivo, since its consent is needed when payments come up for a vote, and that a hostile takeover was always a possibility.
“When that was revealed — and we spoke openly like that — our colleagues at PT did not take it lightly,” says Valbuena. “We were exposing that the emperor had no clothes, and many investors had independently arrived at that conclusion.”
PT issued an immediate — and strongly worded — response: “This attempt at blackmail over the Vivo dividends is unacceptable and does not intimidate us,” shot back Zeinal Bava, PT’s top officer since 2008 (and the Best CEO in the sector, according to analysts on both the buy and sell sides). He called for Valbuena to resign from PT’s board, owing to a conflict of interest.
The Portuguese outfit had its reasons for declining Telefónica’s offer. “We always knew the value of Vivo was significant — it was a very valuable asset for Telefónica and a very valuable asset to us,” Bava says. Although he concedes that the bid represented a premium in price, he says it did not reflect Vivo’s strategic importance: By selling its stake, PT would lose 50 million of its 70 million subscribers — and its growth engine. The company’s executive team had told shareholders that its goal was to achieve 100 million subscribers and to have two thirds of its revenues come from outside Portugal; losing Vivo would punch a huge hole in that plan.
The 45-year-old Bava, who joined PT in 1999 from Merrill Lynch International and earned a bachelor’s degree in electronic and electrotechnical engineering from the University College London in 1988, realized that he would have to convince analysts and shareholders that rejecting the offer was the right way to go. In mid-May he took to the road, meeting with analysts at Bank of America Merrill Lynch, Santander and other firms, and explained the board’s position — that as generous as Telefónica’s offer might appear, it undervalued the potential of Vivo and its importance to PT.
Bava had barely begun selling his story when, on June 1, Telefónica returned to the bargaining table with a new offer — €6.5 billion — and two options: PT could sell its stake immediately, or exercise that option — at its sole discretion — within three years.
PT’s board of directors swiftly called for an extraordinary general meeting to be held later that month. “When they made the offer of double what analysts originally thought the stake to be worth, we said, ‘Let’s refer this to shareholders,’” he explains. “But we continued to believe it’s worth more to Telefónica than €6.5 billion.” Within days they would be proved right.
Bava continued with his travels, participating in road shows and conferences across Europe and in the U.S. through the first half of June. Telefónica’s executive team, determined to win the coveted asset, embarked on a similar strategy; its leaders went out and talked to institutional investors, local shareholders and analysts in an attempt to convince them that the deal made sense for both companies.
“My job was to try to remove from investors’ minds the fantasy that Portugal Telecom had an asset in Brazil — they did not, they had a financial investment that they could not touch any more than we could,” Valbuena explains. “We were trying to pay a very steep price for a very valuable asset that we — and only we — could extract any synergies from, by combining it with our existing assets.”
On the eve of PT’s June 30 extraor dinary general meeting, Telefónica rang in with a new offer — €7.15 billion — and a deadline of July 2. PT’s stock price jumped when word of the latest bid was announced, and 74 percent of its shareholders voted to approve the deal. Telefónica got the asset it wanted, and PT had sold at a price far higher than the executive team expected.
But the story doesn’t end there. No sooner had shareholders approved the deal than the Portuguese government, through a representative who served on PT’s board of directors, invoked the veto power inherent in its “golden share” status to squash the deal, claiming that PT’s stake in Vivo was too valuable to sell.
Telefónica executives were floored. “A technicality allowed the government to issue this decision and basically voided the deal,” says Valbuena. “What the Portuguese government wanted, at the end of the day, was to negotiate and haggle like in a Turkish bazaar — which they did quite successfully. But frankly, the number we felt inclined to make prevail was the one approved by shareholders.”
PT asked Telefónica to extend the deadline, so the two sides could find a way to resolve the impasse. Telefónica agreed to a two-week extension.
Enter the European Union Court of Justice, which ruled on July 8 that the veto power assigned to governments with golden shares was unlawful, in that it precluded the free movement of capital and awarded the government undue influence over a company’s management. However, the court’s ruling was not retroactive, meaning that the veto of the Vivo sale was not overturned. Telefónica had two choices: It could engage in a protracted legal fight to force PT to honor the terms that its shareholders had approved, or it could continue to negotiate.
PT was ready to make a deal. Bava and his team were convinced that an agreement would be reached and began looking for ways to replace Vivo in their plan to grow their subscriber base and increase the allocation of revenue from outside their home country. They believed they found what they were looking for in Rio de Janeiro–based Telemar Norte Leste — more widely known as Oi — one of the largest fixed-line operators in South America and the fourth-largest mobile provider in Brazil, with 63 million subscribers. By acquiring an interest in Oi, PT would boost its subscribers to 83 million after selling its stake in Vivo — for a net gain of about 13 million customers in one fell swoop.
“When we looked at the Brazilian market, Oi was the obvious alternative for us,” says Bava. “This is a Brazilian national champion, and they were looking for a partner to bring to them expertise. The challenges Oi is facing are similar to those PT has had to overcome in the last few years, namely in the wireline business and the transformation of the business model from being a voice-only, single-play operator to a triple-play operator offering voice, video and data.”
PT and Telefónica returned to the bargaining table and worked out a deal that would pass muster with shareholders and the Portuguese government. In exchange for certain concessions, Telefónica agreed to pay €7.5 billion for PT’s stake in Vivo. That agreement gave Bava the green light he needed to move ahead with his Oi strategy.
“When the golden share and the €7.5 billion offer came in, it coincided with our agreement to invest in Oi,” Bava says. PT planned to invest €3.7 billion of the proceeds of the Vivo sale to acquire a 22 percent stake in Oi, which in turn would acquire a 10 percent interest in PT — replacing Telefónica as the Portuguese company’s biggest investor.
Bava and his associates set out to structure a second transaction that would win approval from shareholders and Lisbon. They needed to show that investing in Oi would allow PT to maintain its exposure in Brazil and create scale and growth opportunities. The plan won the necessary support, and PT had completed both the Vivo and Oi transactions by the end of July. “That’s never been done before,” Bava notes. “It transformed the landscape of the telecom sector in Brazil.”
After investing roughly half of the Vivo sale proceeds in Oi, PT used the remainder to offset a €1 billion shortfall in its pension, increase its dividend from €0.575 to €0.65 and strengthen its balance sheet. “We came out of the deal with our exposure to Brazil intact, while also strengthening our financial positioning of the company,” Bava says.
Meanwhile, Valbuena notes that Telefónica’s final agreement to pay €7.5 billion for PT’s stake in Vivo — an amount even higher than that approved by shareholders — warrants a note of explanation.
“The price conditions of the final agreement are substantially identical to the economic value of the offer supported by PT’s shareholders at the extraordinary general meeting, which included a cash payment of €7.15 billion plus other conditions with additional value, and we avoided a long litigation process,” he explains. “Taking into account that in the final agreement 40 percent of the price agreed will be paid to PT in deferred installments and that PT will not receive Vivo’s 2009 accrued dividends, the net present value is equivalent to €7.3 billion, which in turn leads to a €7.1 billion value if you were to exclude the value of the call option on our stake in PT that the previous offer included. All other obligations included in the previous offer disappear or are subject to noncompete conditions in Brazil.”
That last stipulation may prove to be problematic. In January the European Commission launched a formal investigation to see whether noncompete agreements held by PT and Telefónica violate EU antitrust laws. Although these laws do not apply to arrangements governing ways in which companies operate outside the EU’s jurisdiction — and thus any contract involving Brazil or other Latin American markets would not be subject to scrutiny, and the Commission is not probing the terms of the Vivo deal per se — the investigation will determine whether existing noncompete agreements between PT and Telefónica regarding operations in their respective home countries constitute a violation of EU regulations. Both companies have agreed to cooperate fully with the Commission and insist their partnership strategy does not run afoul of EU requirements.
The battle for Vivo was colorful and contentious, but all parties praise the outcome. “We ended tired but happy, but it took a lot of talking to investors and commenting and trying to dismantle the arguments of other side,” Valbuena says. “We had a very hectic and intensive three months. We joked that it looked like we had been on the road for three years, but it was just 86 days from inception to conclusion.”
And he has words of praise for those on the other side of the bargaining table. “PT played its cards well by driving up the price,” he concedes.
Bava attributes part of PT’s success in managing the “stressful” process of simultaneously negotiating the sale of one of its most important assets and establishing a partnership with a new strategic ally to management’s frequent interaction with analysts and shareholders. He typically spends about 10 percent of his time meeting with investors, although during the negotiations with Telefónica that figure jumped to 50 percent, he says.
“You should be talking to your shareholders all the time, not just when a major event occurs, so they feel that their voices are being heard and taken into account,” Bava observes. PT’s executive team conducts two road shows and participates in at least three major conferences a year, and it makes a point of speaking to bondholders as well as stockholders.
“Portugal Telecom has one of the most proactive and open investor relations teams in the sector,” insists Robin Bienenstock, who heads the Sanford C. Bernstein team that finishes in second place in Telecommunications Services in this year’s All-Europe Research Team. “They are excellent at consistently getting out in front of the news to give analysts factual information that puts the news flow in context. They are also willing to give a level of detail in technical disclosure — about wireline infrastructure and costs to build, for example — that most companies shy away from.”
That’s all part of PT’s plan, Bava notes: “If you keep your investors fully informed, with no surprises, they will give you the support you need.”
A commitment to transparency and disclosure as a means of forging strong relationships with stakeholders is a trait shared by all the members of the 2011 All-Europe Executive Team, which is no doubt why the analysts who know these companies inside and out say these corporate leaders are the best in their respective businesses.
