final thesis on private equatiy companies

8/7/2019 final thesis on private equatiy companies

1/36

School of Business, Economics and Law

at the University of Gothenburg

Are Private Equity Companies necessary

when we have the Stock Market?

Author:

Leif Derenstrand651106-5010

Counselor:

Gert Sandahl

Table of contents:

1


2/36

Table of contents:................................................................................................................. 1

1 Introduction....................................................................................................................... 31,1 Background................................................................................................................ 3

1,2 How do the PE companies work............................................................................... 7

1,3 Problem discussion.................................................................................................... 9

Figure: Introducing Change....................................................................................... 111.4 PURPOSE................................................................................................................ 13

1,5 Limitation................................................................................................................. 142 Method........................................................................................................................... 16

2.1 Chosen method ........................................................................................................16

2,1,1 Inductive and deductive method....................................................................... 17

2,1.2 Qualative method .............................................................................................172.2 The practical Method............................................................................................... 18

....................................................................................................................................... 19

3.1 Leverage buy out (LBO)......................................................................................... 203.2 Management buy out (MBO)................................................................................... 22

3.3 Turnarounds ............................................................................................................243.4 Privatization............................................................................................................. 264 Enterprise of the Company............................................................................................. 28

4.1 Lindex...................................................................................................................... 28

4.2 Cevian Capitals........................................................................................................ 295. Analyze.......................................................................................................................... 30

6. Conclusion.................................................................................................................... 32

7. List of references ...........................................................................................................35

2


3/36

1 Introduction

In this introduction chapter I will give a background why studies in changes in private

equity industries are important.

Why I chose an object like private equity are the following reasons. I have a great interest

for this subject because it influences the economical environment and society a lot. The

private equity sector has been like an industry and we can see companies in different

sectors, everything from small companies to big companies. We can also see that a lot of

companies use different management strategies about which company they will buy. One

PE-company is a specialist in Biotech and another in Telecommunication. However, the

two biggest company in Sweden are EQT (Wallenberg) and Nordic Capital, work with all

kinds of companies but they have a limit about the size of the company. The target

companies typically have sales of more than EURO 50 million that they will buy.

1,1 Background

Are the private equity companies good for the society and are they good for the

shareholders value.

Private Equity (PE) investments are all about changes without changes there is no future

and the change agents is the angel of tomorrow.

The private equity industry started in the US since a lot of the financial products came

from the US. However, US are the lion share of financial products and of course the

capital1. Hence, when we talk about financial products and the demand for them, these

products are not, as you may say a shovel when it has been a lot of snow. In reality the

Market for financial products must create a demand for the product.

1 A. Schertler, Venture capital in Europes common market: A quantitative description.

3


4/36

In these senses, the persons, who are working in the private equity sector, have a very

good education, a lot of them have been abroad, mostly in London or the US, and worked

for big companies, such as Morgan Stanley and Goldman Sachs, in the departments of

mergers and acquisitions. They have a lot of experience in looking into companies in a

bigger international perspective. They have more experience to compare how companies

are managed in an international perspective compared to a person who has never worked

abroad. However, this experience is very important for the society since they restructure

the companies in a more international way in a world with fast changes.

I will show that they are very important for the society and the economic environment as

some oil in the machinery.

Today the private equity (PE) business has grown to an enormous industry and in the

daily life we hear a lot about big private equity companies. Today, many companies and

specially public companies are afraid of the PE-company as a buyer. In the media2 we can

read that the CEO of Volvo (Leif Johansson) said in an interview that he is afraid of the

PE-companies who want to buy Volvo. In reality, what are the CEOs afraid of in the

public companies? Anyway, it is the stockholders who are the owners of Volvo and if

some international PE-players pay the right price, the stockholders will, for sure, sell their

shares. The question is if they can sell everything for the right price3.

I read an article from Affrsvrlden4 which is an article about the new industries. The

article is an interview with the owner and the CEO of Cevian Capital, a big PE company

in Sweden. They ask questions about what he thinks about the PE-companies and the

CEOs qualification about financial knowledge in the Swedish companies. He says that

on a scale from one to ten the knowledge about financial theories is very low. He only

gives the Swedish directors in the big Swedish public companies the grade two on the

scale. It is due to this lack of knowledge about financial structures that the private equity

industry has become a big industry5and they have began to buy companies, they buy

everything if we review the recent buyouts on the market. This is happening in the

2 DI 2006-05-123 M. Ahlstrm, Procuritas4 Interview C. Gardell 2006-02-285 Interview C. Gardell 2006-02-28

4


5/36

reality. One example of an investment a PE company made was when EQT acquired

Gambro for 40 billions SKr. When the management dont build values in the company

the consequence is often that the Swedish directors at the public company will become

unemployed after an acquisition by the PE-company. The PE-companies dont buy

companies that are efficient, value builders and has the right price; they restructure the

companies with different strategies so they increase the value and that they can be

efficient in the future.

In the last years, we have read about company restructurings. To analyze this you will

find that the restructurings are executed in the same manner as the private equity

company would have done.

In Sweden, we have a special fund for wealthy private person or institutions. The name of

the fund is Cevian Capital and the CEO and owner of the fund is Christer Gardell. In the

US there are a lot of these kinds of funds. However, Cevian Capital work only with

public companies and if they decide to buy a big post of stocks in a public company they

would be one of the biggest owners. When they have done this they try to change the

structure of the company: it can be in the financial structure or it can be in the

management or board of the company. After a couple of years they will sell the company

and hopefully make a good profit/exit. I will quote what the company said in their home

page Cevian Capital is a private investment firm that acquires significant minority

ownership positions in undervalued Nordic public companies where there are

opportunities to enhance value through active ownership. Cevian Capital invests capital

for a number of Nordic and international institutional investors and was founded in 2002

by Christer Gardell and Lars Frberg6.

We have seen how this fund has taken a big portion of stocks in the insurance company

Skandia and also in the retailer company Lindex.

In my discussion I will show that today it is a more global and faster climate than a

couple of years ago and companies which are sleeping on changes in the global

environment live a dangerous life to be acquired by a Private Equity Companies and

6 Cevian Caital, homepage

5


6/36

Investment Companies. It can be a small subsidiary in a big financial group. This

company has lived a comfortable life far from the big group. For the big group this

subsidiary is like peanut money and suddenly a private equity company or an investment

company acquire this company because they can work with it in a more efficient way.

However the most important is that almost all private equity firms are financial

intermediaries. In some countries they receive capital from banks, in others the main

capital comes from pension funds, while in other countries the main capital comes from

governments to help new technological starters7. Actually, the PE companies manage a

small capital of the pension funds money; I have heard a number of about 2-8%8. We

must remember that this is high risk capital and anywhere in this topic they are pushed to

perform well. One of the most important questions is, however, do they beat the return of

the stock market (the OMX-Index)? Is this the most important for the society or has the

private equity industry another objective for the welfare of the society?

The aim of this thesis is to control and try to see what different changes the PE-firm has

used in the case of different strategies and relate the theories to the work with look at

different strategies for the PE-companies.

To mention some of them, are incentives programs, management skills, leverage buy out(LBO), management buy out (MBO) and turn arounds.

To accomplish a fall study from different interviews which has been done by different

people who have a connection to the private equity companies (PE). Today, we can

analyze that the PE-companies in the financial sector have as high growth in Sweden as

in the global market9.

In the fall studies I must concentrate my efforts and ask what angel of incidences are the

most important and describe the Analyze. Another question which is very important to

ask is for whom you make the Analyze and how much access of material do you have?

7 A. Schertler, Venture capital in Europes common market: A quantitative description.8 Lecture T, Amond9 A. Schertler, Venture capital in Europes common market: A quantitative description.

6


7/36

Most of the people who are working in the economical field does not know so much

about what the PE-firm works with and actually nothing about what they do. In reality

this is very interesting as the PE-firm works with big institutions and it is of little interest

for private person to come close to. I would say that they live an own life far from private

persons. But it is very important to point out that they are financial intermediaries and

they have a very important role in the economical environment.

1,2 How do the PE companies work

It is very important with good connections with the institutions because when the PE-firm

will raise a fund the PE-Firm turn to the institutions and say that they are going to raise a

fund for about X-billions (Swedish kroner) and they want the institutions to invest the

money.

When the Private equity fund has got the money they close the fund and after half year to

one year they have bought all the targeted companies to the fund. When the PE-company

has bought all the companies they will act as an owner of the company as for ever.

This mean that they will be an owner over the companies on a long term basis, say 7-12

years10. If they want to get more money they open the fund again and try to get more

money from the institutions. Maybe they analyze that a company in the fund needs more

money for the growth. In reality, it is clearly obvious that the most important target for

the institutions is the return that the PE-firms can produce to the institutions. Most of the

PE-firms, which are on the market, are new so it is very hard to see the performed return

in a long term view.

Private Equity firms like venture capital funds, LBO funds, MBO funds, and buyout

funds provide an important financial intermediation service by "completing the market".

In a country without Venture Capital funds (VC) it is very likely that potential value

innovative start-ups will not be materialized. This would reduce the aggregate welfare of

10 Homepage EQT, Nordic capital with more.

7


8/36

the country in question, and would prevent some individuals from maximizing their value

due to the incompleteness of the market in the absence of VC funds. Therefore, it is

important to understand how Private Equity firms operate, and what is needed to attract

them to a market, (this is applicable/true in particular to small countries). People in the

capital market and elsewhere understand that. This is why the global market for Private

Equity is growing. It follows that for financial and other business executives and for

students of finance and economics it is important to become familiar with this segment of

the capital market11.

11T. Agmon

8


9/36

1,3 Problem discussion

What kind of changes are the Private equity industry doing in the companies and are

these changes good for the companies owners or stockholders and for the society?

When the thinking about the problem goes to management theories: what kind of leading

changing theories does the PE-company use and how have they used these in overall?

How does this strategy fit to the structure of the company? Obviously, the most important

issue in this master thesis is to explain and understand how the private equity companies

make their changes. However these topics can be discussion in a lot of ways.

What are they doing for wealth for the society? Are they doing some wealth at all for the

society? A lot of these companies have moved their production abroad to get lower

production costs and higher earnings12. In the short term this is not so good for the

society but in the long term it can be good for the society because they have restructed

the company to meet a higher competition in the future.

When I talk about strategies about a company I talk about changes in the company. It can

be small changes or big changes. PE investments are all about changes13. Mikael

Ahlstrm, Procuritas, said I believe without changes there is no future and the change

agents are the angel of tomorrow. Mikael is working as a change agent, restructuring

companies; changing them to meet the standards of their industry. These types of active

investors are necessary for the health of the business, the business that generates

employment and welfare to the society.

When I began with this work I was very interested to write about one company. Todaywhen I write about this subject it actually doesnt matter which company I write about.

That is not the main issue. The main issue is that I want to show how the PE-companies

work with changes. In this master thesis I have, however, chosen Lindex. I choose Lindex

12 DI Article, Duni owner EQT13 Mikael Ahlstrm, Procuritas, Seminarium CFF

9


10/36

as a company to analyse the changes that have been made since I have read about it and

heard about it in the media as I have heard a lot of Cevian Capital, which bought a corner

position in Lindex. I do this because I want to have something more to relate the theories

that the private equity companies work with.

I will call Cevian Capital for a private equity Company. Actually, this is not correct as the

purpose for Cevian Capital is to buy a corner position in the company and then change

the structure, take a place in the board and accumulate a higher value to the fund

investors. However, they work exactly like the PE-Company the differenties from the PE-

companies are that they only by public company at the Nordic stock market.

I am going to ask this question is it necessary to have the private equity company when

we have the stock market as the main question in my interview below to person who

works in the field. The most important management theory that the PE-companies work

with to perform changes are the following: LBO, MBO, Turnaround and Privatization. I

will compare the answers from the interviews with the theories as a fall study.

10


11/36

Transaction

Source of change Turnaround LBO MBO PrivatizationReframing of asset X

Incentives & cost adv X

Capital structure X

Ownership change X

Figure: Introducing Change14

The interviewed persons who have been very gentle to answer my questions work as a

director, an Investment manager and a controller. The controller works at a company that

a private equity company acquired about one year ago. This person, however, will not be

quoted in the thesis but I have been allowed to write down the answers even if they work

under strong secretes.

1A. is it necessary to have the private equity company when we have the stock market?

I will try to get the answers to this question as the main point in the work. Corporate

governance is one sector in the private equity industry which is very important for the

PE-firm and the most of them work with corporate governance questions because it is

about changes15. Why I have chosen to discuss corporate governance is because it is so

important for the changes in the company so I can not leave it out. I want to see what

changes the PE-company has done in Lindex. I will use the question for the work to look

at changes before and after the private equity company acquired Lindex. My purpose

with this is to understand more how the private equity company overall thinks when they

14 Tamir Amond, lecture note15 Tamir Amond, paper lecture

11


12/36

do changes and in this master thesis I will get an understanding of how they think when

they restructured the company. I want to see what they have changed and how they have

changed it. I will compare the result with the financial information.

When I have done this and checked the answer to my question to the person who are

working in the field to the financial statements and relate them to the different strategies

LBO, MBO, turnarounds, and privatization I have done the work and get the conclusion

from the work. After that, this master thesis purpose is finalized and I will get an answer

of how different management theories has changed PE-companies. In a small way I will

discuss how Cevian Capital has change Lindex. I have done this because it is more easy

for the reader to relate on some real company.

12


13/36

1.4 PURPOSE

The purpose of this master thesis is to understand what changes the private equity

company has done when they acquired the company. I want to get an answer of what

have they have changed in the company and how have they have changed it.

13


14/36

1,5 Limitation

I have only chosen one company that I am going to research and check against what

management theories they have worked after in form of control in the financial

statements. Hence, this will be as a ground limit for the question. I have tried to make the

question in that form that I can compare them with the purpose of the master thesis.

I shall also only explain the management strategies from the field of management buy out

(MBO), Leverage buy out (LBO), turnarounds and privatization.

The company that I will choose is Lindex. Cevian Capital bought a corner position from

the Stockholm stock exchange one year ago. Today Lindex is a company which has

Cevian Capital as the biggest owner for about 10%. Because it is a lot of secrets in the

industry and Nordic Capital has as a rule to never give comments about the different

companies so they will not tell me what they have done for changes in Finnveden. In this

case I have chose Lindex instead.

In Lindex I can see how Cevian Capital work with changes because I have the financial

statement before they have bought a corner position and after they have bought this

position. Anywhere I can control and compare what they have done. However this is not

the main thing the purpose is to understand how the private equity industries may

changes in the companies. And I want to see which changes they do. Of course these

changes are different in different sectors and many of the PE-Companies work with

different strategies. The smaller of the PE companies are anywhere specialized in onestrategy

14


15/36

Disposition

Chapter 1 - Introduction

Chapter 2-Method

I will explain which consequent method I have use in this master thesis. I will also

discuss the critical revues of references and at last I will present which theories I am

going to use.

Chapter 3-Theoretical framework

Explain how the theoretical framework concrete the changes that I have chosen to

describe. I have done this because it is easier for the reader to follow the work. However

the chapter will describe different changes in the private equity industry. I will describe

the different method management buy out, leverage buy out turn arounds and

privatization that the private equity uses for changes.

Chapter 4- Enterprise of the Company

I will present the history of Lindex, how Lindex looks today and in what areas it works

today. The chapter will also explain the history and strategy of Cevian Capital.

Chapter 5-Analyze

Analyze and concretizes the answers that I have got from the questions to different actors

and in the case of Lindex. Compare them with the financial statements to look at how the

financial structure has developed and I will also mention how corporate governance has

changed in a small portion when I studies the management buy out. Anywhere I will only

relate to Lindex in small portion as the main work are to studies which changes the PE-

companies do in the companies as they buy and how they do this changes.

15


16/36

Chapter 6- Conclusion

I will say something about what the private Equity Company in overall do. However I

have control which different strategies they work with and which changes they do. When

I have done this the purpose in the work are done and also the whole work.

2 Method

This chapter will explain which method I have used for the work of the thesis and I will

also discuss the practical way in how I will work with the theories. I will also explain

where I have got the information from.

One of the main points in the work with the master thesis at the University of Gothenburg

School of economics and commercial law is to explain how I shall solve the problem. I

think that this method section is very important for me to pass because in this section I

shall discuss how I think when I solve the problem. In the method section I will ask

myself and discuss how I will solve the problem and also what method I shall use for this.

In reality I think that this is one of the most important points in my education at the

school are learning to me. If I work as an analytic or investment manager or for a big

consult in transaction service sector I think that I get a fantastic use for this method in a

practical way.

2.1 Chosen method

In the hermeneutical side the purpose is to interpret and try to understand the nature in

reality. You always look at a problem and try to see the difference between fact and value

but it is not as hard as in the positivistic way.

The master thesis is not writing from the positivistic nature where objectivity and reality

are studied. The positivistic nature says that people must have an opportunity to differ

16


17/36

betweenfactandreality. The positivistic side is in principal about observation from

computed numbers. To find an observation for the whole population we can draw a

conclusion for the observation16. This master thesis is in a small portion, working with

the positivistic view, because I am controlling the answers against the financial

statements.

2,1,1 Inductive and deductive method

In the deductive method with the help of the theories you shall in the reality try to test

theories and try to introduce new ones. If we generalize the environment we can draw a

conclusion which leads to new theories. The opposite is the inductive theories which

come from the empiric way and try to describe this with observations 17. In this work, I

will mainly work from an inductive method.

This master thesis is however studying an existing company Lindex. All the interviews

will be given in a balanced and a friendly and objective way. This is a very important

factor to point out in this work and obvious clear that the private equity company has a

lot of important points for the society as I mention earlier. I will mention some of them.

The result from the interviews will be controlled in the relations to the financial statement

and compared against what has change in the financial structure.

A lot of private equity literature with theories will be used and literature from papers and

books from mostly Gunda 18 which is the server of the library at Gothenburg University.

2,1.2 Qualative method

This work will be done in a qualitative way because I am going to use interviews and ask

questions to the management how they have changed the company after the private

equity firm acquired the company. I want to get an answer of what they have changed

16 (Lundahl & Skrvad, 1999)17 (Eriksson & Weidersheim-Paul 2001)18 www.ub.gu.se

17


18/36

and how they have changed it. How management of the companies has change, will I

describe from the questions of the interview with different actors. In the financial

structure of the company I can compare the result from the interview with the financial

statement of Lindex. However in this form the method will also be quantitative because I

am going to compare some information with the financial statement. In this discussion I

will say that I use both a Qualitative and a Quantitative method.

2.2 The practical Method

In the first interview when I contacted a controller in a company I didnt think that they

had talked with the private equity company which owned them. However I got some

answers from him, which I can use in this master thesis. I have also booked a day for

interview with the finance director for a previous quoted company on the Stockholms

Stock Exchange. Suddenly the finance director could not give me the interview with the

company. I also talked to a man at the private equity firm which was in the board of the

company. He told me that I could send a mail to their investment relations person and I

did that. Anyway, she told me that this man can not give me the interview because of the

companys practice of secretes. But for the moment I managed to get three interviews.

When I phoned these people, I said that I called from the school of economics and

commercial law from the department at finance and that I work with a master thesis in

Finance actually in private equity. In reality I got the feeling that a lot of the big PE-

company is afraid of telling something to persons outside the company about what

strategies they are working after.

In the second interview I got an interview with one of the investment manager of one of

the biggest investment company in Gothenburg. I know this man very well as I have abackground in the financial markets as a broker at Kaupthing Bank and an asset manager

at Thenberg & Kinde Investment banking. This man works as a broker manager for

another company. However I think it was easier to get the interview with him as I knew

him. I did the interview in his office and we sat down to talk about different questions

which I am going to explain in the analyze. I wrote down the answers that he gave me

18


19/36

from my questions. After that I went to the finance lab to write down the answers that I

got from the interview and put it as a file on the hard disc in my documents. Then I went

home to think about the questions and the answer that I got from the represent ant of the

company. Next day I sent him a mail and thanked him for the interview.

The third interview was with an auditor. I get a lot of information about how the private

equity company works. This auditor works at one of the biggest Consulting and

transaction companies and has work a lot with Private Equity companies. The auditor has

a lot of experience in prospectus, transactions, mergers and acquisitions. Also the auditor

cant say any specific about companies due to the secretes.

3 References I will use a lot of difference references. First of all I will use the interviews

that I have done. Then I will use books, articles from a course from Private Equity19 her I

will use lectures note and call them Lectures note20. I will also use a lot of comments and

articles from media as Dagens Industri (DI)21Affrsvrlden (AFV)22 Veckans affrer

(VA) and more.

I will also use articles from the libraries e-server. In the reference list I will write them as

book first then as second articles from the library and as third article from the lectures

and at last as number fourth media articles.

19 Private Equity20 T. Amond, Lecture note21 DI22 AFV

19


20/36

3.1 Leverage buy out (LBO)

Buyout specialists are very different from the usual outside or public company directors

who usually represent the shareholder value23

. In the paper24

M, Jensen said that many are

afraid of this because threats about changes in the future are always controversial in the

daily work. He also says that these control transactions, i.e. transactions that make one

party to take the control of the company, are powerful instruments for the economy and

in the long term good for the society.

In the paper Mr. Jensen wrote that control transactions generate value for the

shareholders and that it comes from a higher productivity in production and the value will

not come from other parties such as creditors, labor, government, customers or suppliers.

If we look at the Stockholm stock exchange today we have seen a lot of LBOs. The last

one was yesterday25 when EQT bought Gambro. We have also seen how the PE-company

Nordic Capital did a leverage buy out of Finnveden.

When these PE-companies have done leverage buy out in a public company they bought

the company out from the stock market. In reality they do a lot of analysis of the

company and when they see that it will be a good acquisition for them in the future they

buy a lot of stocks and when they have got a portion of over 5% 26they must show this to

the other financial members and to the public of Stockholm market place. When they

have got a portion of stock they give a bid to the other stockholders usually about 15-20%

over the public stock price.

When they have acquired the company and the bid has been accepted they begin tochange the financial structure of the company. I will describe how they change the

financial structure. Something that is very interesting to look at, according to Jensen, is

23 M C, Jensen , Active investors, LBOS, and the privatization of bankruptcy24 M C, Jensen , Active investors, LBOS, and the privatization of bankruptcy25 DI, 2006-05-2726 Rulles Stockholm exchange

20


21/36

why it has been so much popular to talk about why high debt ratios and less solvency

are less costly now than in the past? Actually this question is very interesting and we can

see that the investment manager, in my interview, has little distance to the question.

21


22/36

3.2 Management buy out (MBO)

Studies about the effectiveness about management buy out have been made. In these

studies they can see that a MBO is a very effective process to change the company27

. In

this survey they also say that they see a better result in the sectors of retailing and

manufacturing than other sectors. This is very interesting when reviewing Lindex. It has

not been so good result in the sector of banks. The studies were done over a time period

of one to three years.

In another study they say that an MBO generate value for the stockholders28. In the study

they also talk about how an MBO generate operating efficiencies by altering managerial

incentives reducing agency cost and improving factors productivity.

I read in HQ+ (Hagstrmer & Qviberg ) monthly magazine May 2006 and see that they

have an interview with Christer Gardell, Cevian Capital. He talks about the differences

between his fund and usual funds. He says that they can change the companies indirectly;

they can change the Board of Directors, the CEO and the finance manager with a MBO.

When normal investors buy stocks they can not change these factors so in reality they are

more related to the normally performance of the companies.

The difference between how a usual fund react when they buy stocks to the fund that the

banks sell to their customers (mostly private person) and when the PE-companies buy

companies to their investment-fund. When the fund that the bank are selling to their

customers, they invest in stocks that they can not change or do not usually change the

management of the company. The funds are only value investors and they analyze a lot of

different stocks with different methods. Every fund has its own investment model whichthey use. I will now discuss about how two different funds react then they by the

companies and what they are doing.

27 Studies in MBO effectiveness, J, Kondrasuk (Academy of management review 1981)28 SC, mart, J, Waldfogel Measuring the effect of restructuring on corporate performance: the case of

management buyouts

22


23/36

When we are talking about a usual fund that the banks and investment banks are selling

out to the big public market i.e. private persons, they are only interesting in that the

companies are cheap when they buy and according to their investment model. The fund

company will not take a place in the companies board of the stocks company that they

are buyer and owner. They say that they are not interested in this, it is not their work and

they have not the time and the right working experience for this.

When we look at the PE-companies they take a place in the companies board and they

make different changes such as implementing incentives program for the management in

the companies. If we look at the company Lindex the Cevian Capital works inside this

company to change the management structure of the company. They have hired a new

CEO, who came from H&M where he performed very well. They have also gone inside

the company to look at how the management makes performance in the company. Cevian

has given a lot of person in the board the possibility to use their buying option if the

company will be successful, of course, the management will use their option since this is

the whole thinking process about the option programs, to perform better results. However

this is a very useful incentives for the owners of the companies to work after. Hence

different people in the management that the PE-companies have hired get, of course,

different sizes of the buying options.

23


24/36

3.3 Turnarounds

The definition is a process resulting in a substantial increase in a companys revenues,

profits and reputations29. In Sweden, we have, actually not, this special funds but in the

US they have a fund that buys companies under chapter 11. Anywhere the companies are

not far away from bankruptcy. The name of the fund is KPS30. This fund buys the

companies very cheap. Actually, they analyze methodical which companies they are

going to buy and then the try to do a turnaround. Of course, this is a high risk and the

companies that they are going to buy are nearly bankrupted. This can be a good method,

as the reader surely understands. They buy this company for nothing, very cheap, and if

they are lucky and creative in the reconstruction work of the company they can sell it

when it has been restructed with a good earning or it is mission impossible. This

explanation is the pure strategy of turnarounds.

A turn around situation is when the company has a problem with declining performance

and they try to change this by a turn around strategy. To do a good performance of a

turnaround strategy it is very important to analyze the firms core problem which could be

either operational (not efficient) or strategic ( weak strategic position in relation to

competitors). One group and researcher argue that unsuccessful turnarounds arise when

the firms management fails to do a successful diagnosis or respond inappropriately. The

management tries to increase the efficiency when the firms strategic weak position is the

cause of decline31.

The other group of researcher argue that it is the firm-threatening performance decline

(organizational crises) are an inevitable consequence of organizational stagnation over

29 Private equity Glossary, Tuck school of business at Dartmouth30 www.kps.com31 VL, Baker, IM, Duhaime, Strategic change in the turnaround process Strategic management Journal vol

18-38 (1977)

24


25/36

time as managers fail to maintain the alignment of the firms strategy, structure and

ideology with the demands of an evolving and changing environment who fails in the

organization the organization stagnation over time32

In reality the companies at the market that are working after this strategies can be very

successful and the PE-companies work with this strategy a lot. Why they do this is, of

course, because the companies are very cheap to buy for the PE-companies in both the

public and unpublicized market and if the PE-companies management has done their

work well they buy some of these companies. Maybe they see that it will be a better

potential in an other market for the company they buy and it is easy for the company to

go to this market. In Sweden we have actually no specialized fund for this, as far as I

know. But the big PE-companies as Nordic capital and EQT and Industri Kapital work

with turnarounds in their strategies. However they work with all strategies.

To give some examples and one PE-company that has down a turn around situation is

Nordic-Capital. They bought Kappahl from the cooperation company, KF, and then they

did an IPO of Kappahl. Another turn around situation was done when Cevian-Capital

bought a lot of stocks in Skandia. Cevian Capital voted for people in the Board of

Directors who had a good reputation and had done a good work earlier for them.

In theory it seems difficult to do turnarounds but in the reality the PE-companies always

try to do turnarounds. Of course, they dont buy companies that are nearly in bankruptcy,

they buy companies with mismanagement, some companies are at the public market and

others are in the unpublic market. They try to get a good price for the companies as the

companies have difficulties in earning money due to mismanagement. Then they

restructure these companies with their strong financial muscles. One example of a

company which was mismanagement inside was KappAhl that were owned by KF when

Nordic Capital acquired the company. Only after one year they sold it to the public

market with a good profit. However Nordic Capital is still a big owner of Kappahl and

they will continue to increase the value of the company.

32 VL, Baker, IM, Duhaime, Strategic change in the turnaround process Strategic management Journal vol

18-38 (1977)

25


26/36

3.4 Privatization

I will first write about the importance with the companies who have the Government as

an owner. For the thesis work and to understand little about the privatization process I

will argue little about the governments role as an owner of the companies and that they

are a different picture between governments as an owner in different country33. However

I think that this step is very necessary to understand for the PE-companies investment

managers who are working in a global scene.

A lot of countries have different legislations as how the government acts as an owner of

the companies. If we talk about the owner structure in Germany there is a lot of banks

who are very big owner in a lot of big industrial companies. There is a tension between

the economic and the institutional side. This is of course not so good because the banks

have a lot of information and so on in the company. However the big banks in Germany

are the owner or influencer to a lot of investment bankers. In the US the banks can not

own a too big control stake in the companies because of the legislation and they have a

more broadly picture between the banks and the investment bankers and other actors in

the institutional system .

I will argue about these two economies because they influence the privatization pictures

dependent to which legislation structure it is in the country. I think also that this is

important to know.

In the paper privatization under asymmetric information Dieter Bs argue that youalways get a higher efficiency of a firm under privatization, but it is only the management

who know the exact value of the relevant productivity increasing parameters34.

33 T. Pedersen, S. Thomsen, European patterns of corporate ownership: a twelve-country studie

34 D.Bs Privatization under asymmetric information. CESifo working paper No. 244 January 2000

26


27/36

The author writes on and says that privatization is high on the agenda for the government

but the trade unions dont like the privatization of the companies. If the company would

be private the trade unions would loose their members. However we can also understand

that there is a lot of politics in the process of privatization.

Trade unions have a great importance for the workers because they are interested in that

the companies create job even if this leads to more inefficiency in the production and less

profits for the companies.

I think that it is very necessary to understand the financial legal structure in the

privatization process. In the global scene there are a lot of different owner views in the

financial arena.

If we look how the system and the institutional owner ship are highly dependent on

regulations, even in a market economies. Companies legislation differs from country to

country. The structure picture that they have in Germany differs from the system they

have in the US. The structures of ownership between different countries are very

different.

I will argue what has happen in Sweden. I would say that the private equity companies

live a life far from the governments privatization companies company it can be harder to

get a pictures about the financial statements, a lot of politics with trade unions and the

governmentmore.

27


28/36

4 Enterprise of the Company

I will present the history of Lindex, how Lindex looks today and in what areas it works

today. The chapter will also explain the history and strategy of Cevian Capital.

4.1 Lindex

There is a best way to make steel and presumably there is a best way to organize large

steel firms35.

When I think about this meaning I think that Cevians Capital investment managers thinklike this in the case of Lindex when they was acquiring a big part of the company.

There is a best way to sell close and presumably there is a best way to organize retail

store.

I visited the head office of Lindex to get some financial reports. In the reception I talked

with the lady who was nice to give me the financial statement of Lindex. She told me that

today a risk company owns us. This is true with modification as Cevian Capital only own

about 20 % of the stocks but they have a big influence in the company.

The PE-companies have also change the marketing at the company. They have contact

the famous model Emma Sjberg who is doing marketing for them. In the financial

statement I can read that it is only fashion for women and children. The vision of Lindex

is to inspire women to fell Beautiful and look fantastic. The business Idea is to sell

clothes to women and serve them with a inspire price wealth fashion. They afford an

assortment that all women can buy. Anywhere they have make this good and the most

important to the CEO at Lindex is that they have sold more clothes at full price and

match the inventory side better, They have also closed some shops in Germany how dont

fell well out. Lindex has also sold the Twilit shop to concentrate them self to only market

35 T. Pedersen, S. Thomsen, European patterns of corporate ownership: a twelve-country studie

28


29/36

Lindex. The goal for Lindex in the future is to have a focus on the cost and earnings but

they try to plain for expansion.

4.2 Cevian Capitals

I have chosen this company because I think their business is very interesting.

They work as a PE-company but they dont own whole companies in reality they usually

take a big control post in the company they are buying. They try to buy companies which

have mismanagement or the financial structure is wrong according to Cevian Capitals

strategies. Hence they have an idea about how to try to change the companies to earn a

higher profit.

I am very interesting of this fund because they are radical and they competition with the

other funds at the market about high return. Cevian has got a return of 90% each year in

three years36. They can mobilize a lot of big international player and 40 billions at one

business. However they work as a private equity fund.

When they have bought the companies they go inside the companies to change and

restructure. However the better of two worlds is of course if they could buy the

companies without make changes and restructures to a small amount.

Anywhere this is an impossible equation and against Cevian Capitals investment

strategies because at the stock market this companies how a good management and a

good capital structure have and earn a good profit are not in mood for restructuring.

The strategies that they will work after are companies that are not effective companies

and they analyze that they can do something changes inside them. They can as an

example change the board and they can change the financial structure at the company.

36 AFV (Affrsvrlden)

29


30/36

The investment process to choose which companies they are going to chose to invest in

are like this37. They have a discussion at the Cevian Capital and the two owners say that

he want to hear everything about how they have think in the analyze of the different

companies that they have analyse.

He says in the interview that he pay them for that they propose the companies leather in

the discussion of the analyses. Pedersen, S. Thomsen, European patterns of corporate

ownership: a twelve-country study analyze the companies the must investment manager.

5. Analyze

In this analyze I will comment on what the private equity companies have done in the

companies and how they have done it and if they are important for the society. I will use

my interviews that I had with three persons (the auditor, the controller and the investment

manager) together with theory. I will explain how they use the capital structure to change

the companies which they have acquired and I will also explain if they are good for the

society. In this analyze however it can also be a lot of more thing that the Private equity

companies use to do changes in the companies but I hope that this thing that I have get

under the interview are the most important factors.

I talked with one teacher at the department at international and financial economics. The

only thing they do is to buy the company cheap and sell it expensive. He draws the

parallel to a car dealer, they do the same thing: Buy the car cheap and sell it expensive

and the best for the car dealer is to sell it a day when it is a lot of rain because you can not

see the if there are small spot in the lack.

However this are not the main thing for the thesis the main thing are to see what changes

they do and how they do these changes and also to answer the questions that are the most

important in the thesis is it necessary to have the private equity company when we have

the stock market. I have done this from the interviews to see what important view the

37 Intervju C. Gardell 2006-02-28

30


31/36

private equity companies have against the society. In my head I have had this question

when I do the interviews. In the interviews there have, of course, been a lot of questions

and all that I have get the interview from has work in the financial business for about 20-

years or more so in reality they have a good education about how the practical financial

sector work.

A lot of the PE-companies they try to change the capital structure in the companies and

the most important is that they change the leverage structure. Today, one of the most

important things for the companies to work with is that they have too high solidity and

they do not create enough growth.

The new thing with the PE-companies is that they take higher loans in the companies

because the tax shields defense them, so they get a lower WACC against the old

industries. However they look and analyze the expensive own capital and try to find the

best mixture of the loans and the own capital.

They will also if necessary try to save scarce resources to put the production abroad. This

will make that the cost in the income statement will be lower and they get a higher

margin.

In the short term this is however not good since a lot of people loose their work and

maybe they must move away from their homes. In the long run, however, the Swedish

companies will be more competitive against other companies and maybe some area in the

Swedish companies in Sweden need and can create new fields for works. But the most

important is that it must be a competitive company in relations to the other companies in

the market. If we look at a company like Lindex, Cevian Capital bought a small portion

(20%) of this company and they are the biggest owner. In Lindex, they have done a lot of

different changes: they changed the management with a management buy out (MBO)

mostly because the previous CEO did a mistake when he bought too much of trousers

31


32/36

actually more than 52 containers too much38. Anywhere Cevian Capitals fired the CEO at

Lindex after this mistake.

As we can see The Cevian Capital has done a management buy out. They have put in a

lot of people who has a good track record. They have also given the management

incentives in form of Wright call option to the leading management.

In the interview with the investment manager he say that this is a trend that every PE-

company look at the financial structure in the balance sheet which is very important

according to the investment manager and it shall not be overcapitalized. The investment

manager also told me that his personal point of view is that there are today too many PE-

companies and maybe it has been a trend in the market. However, the investment

managers company look more at the balance sheet since they are value investors and they

look at P/E-ratio Price/annual sales and Price/ book value. But of course they have also

an investment model that they use. However, he thinks that this factor is not as important

as the financial sector try to say. You must know that in the financial sector it is a lot

salesmen who try to do business at the market, but actually, it is not so many who are

really good investors. When I look at the financial sector it is like we can see when it will

be a trend for something. A lot of gold diggers go inside the sector and when the

market turns down these companies leave the market.

6. Conclusion

I have done this work to analyze which changes the PE-Companies do and how they done

the changes and I have also try to argue how they have work after different changes. I

have done these things from three interviews with different actors and all has a great

experience from the financial work with PE-companies. It has been very hard to get

people from the different PE-companies to make an interview. They tell me that they

have as policy to not do comments in there investment strategies how the private equity

companies work. The person how has been friendly to be interview will not be corporate

38 AFV, articles

32


33/36

with there name because they say that there work under secrets against there customers,

which I can understand after I have talk with different actors in the PE-companies.

However the PE-companies are very important for the society and for the market as a

financial actor. They have sharpened the competition between different strategies and

they put up a lively discussion about the capital structure in the companies. The PE-

companies take also a place in the board of directors. They want to get faster a more

control over the cost in the companies accounting system according to the interview.

They do incentive program with the management and in a lot of companies they act as a

board of directors. They put also inside own money in the fund. All this point makes that

the CEO gets a higher pressure to do the company better and earn a higher profit.

Anywhere in the long run for the society they have a very important role to make because

they challenge the old industries with their new management. According to this the PE-

companies pressure the Swedish companies and today they must maximize the

economical value for both the society and the owner. Obviously this is very important as

we can see a harder and faster competition in the international environment. We have a

capital market which works faster international today and as some oil in the machinery

we have hedge funds who works after a lot of investments methods. Today it is easier to

get help of these funds as some of them work with embedded value according to the

investment manager.

The conclusion of the work is that they use all the methods that I have explain without

(privatization). Today the PE-companies work mostly after two methods in the

investment strategies that are very important and the most useful. This are changes in the

capital structure and changes in the board there the PE-companies take a place or act likes

the board of director.

However it is impossible to say which changes they do exactly and we must study this in

each case. Every PE-company has there own structure and it is hard to copy this

structure. I think the most important is that they work under they own structure.

33


34/36

Anywhere the purpose of this work has been finish as I have explain which changes the

Private Equity companies done and where it done this changes according to the interview

that I have done with different people in the Finance sector. I have also explained why

the Private equity companies are important for the society.

34


35/36

7. List of references

Books

B. Elliot, J. Elliot, (2006) financial accounting and reporting

D. Johansson, (2006) Accounts in Corporate Governance

Copeland, Weston, Shastri, (2005) Financial Theory and corporate policyFreningen auktoriserade revisorer (FAR), (1998) FARs Engelska ordbok

D,H, Chew, S,L, Gillan, 2005 Corporate Governance at the Crossroads

R.Jay, (1994) How to write proposals and reports that get results

L, A, Bjrk, (1997)Academic writing for graduate studentsS, Strmqvist, (2003) Rd och regler fr utformning av examensarbeten och

vetenskapliga uppsatser

Papers

A, Messica, CAPM & APT models for security returnT, Agmon, A, Messica The business plan

G, Chemla, (2005) The determinants of investment in private equity and venture capital:

Evidence from American and Canadian pension Funds

T. Agmon, (2004) Enerco enterprises (LTD)F, Watnwright, A Groeninger (2004), Note on exit

O, Hart (2001) Financial contracting

J,D Coval, A,V, Thakor (2004), Financial intermediation as a beliefs-bridge betweenoptimist and pessimist

Tuck school of business (2003), Private equity glossary

T. Pedersen, S. Thomsen, European patterns of corporate ownership: a twelve-countrystudy

D.Bs Privatization under asymmetric information. CESifo working paper No. 244

January 2000VL, Baker, IM, Duhaime, Strategic change in the turnaround process Strategic

management Journal vol 18-38 (1977)

Studies in MBO effectiveness, J, Kondrasuk (Academy of management review 1981)

SC, mart, J, Waldfogel Measuring the effect of restructuring on corporate performance:the case of management buyout

M C, Jensen , Active investors, LBOS, and the privatization of bankruptcy

Newspaper

Di (DagensIndustri)

AFV (Affrsvrlden)VA (Veckans Affrer)

HQ magasin

Private equity Magazine

35


36/36

final thesis on private equatiy companies

Documents