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LiquidNations

This year has seen a wide range of liquidity events across the family business spectrum. Ben Bland, Michael Fischer and David Craik analyse a selection of them from a geographical perspective ...

Asia
When Ranbaxy chief executive Malvinder Singh agreed to sell the pharmaceutical company founded by his grandfather to Japan's Daiichi Sankyo in the biggest ever takeover of an Indian family business, he described it as an "emotional decision".

But ironically, it was his ambition, pragmatism and a distinct lack of emotion that allowed him to do something that many in India viewed until recently as the unthinkable.

Daiichi Sankyo's $4.6 billion acquisition of a controlling stake certainly stirred up a mixed reaction in India, where Singh is one of the next generation of young family entrepreneurs seizing on the opportunities presented by the booming economy, as well as the erosion of traditional values, to transform the business empires created by their parents and grandparents.

"Some of the values that held these family businesses together have been diluted," explained Anuj Chande, head of the South Asian group at Grant Thornton, the international accountancy and advisory firm.

"The grandfather who founded Ranbaxy would never have thought of selling out because of pride. And, in the old days, whatever the father said, the son would do. But this patriarchal approach is on the way out and now sons are challenging their fathers more," he added.

Even Singh admitted that his grandfather, Bhai Mohan Singh, who founded the business in 1961, would probably not have been willing to part with the family's 34.8% stake.

But the 35-year-old, who has built Ranbaxy into a generic drug powerhouse, is not afraid to break with history when necessary. "Indian businesses are growing up and realising that if they want to play on the international stage, then they've got to follow Western approaches to governance and management," Chande said.

The sale of the family business represents the start of a new and exciting era for Singh, who wants to work with Ranbaxy's new owners to create a global pharmaceutical giant. However, elsewhere in Asia, where many ageing entrepreneurs are finding their children less eager to take over the reins, the sale of the business can be the only real option for family companies that have effectively run out of steam.

That is precisely what is happening in Hong Kong, where one of the city's five remaining family-owned banks, Wing Lung Bank, has already been sold. The others (Bank of East Asia, Chong Hing Bank, Dah Sing Bank and Wing Hang Bank) are widely expected to meet the same fate over the next few years. "The sons and daughters are usually not as motivated or as talented as the parents who founded these businesses," explained Dr Wayne Yu, associate professor in the school of accounting and finance at Hong Kong Polytechnic University.

"This is a huge problem for family businesses in general and a bigger problem in Hong Kong because Chinese families find it harder to let go even though they're facing declining prospects due to a lack of professional management."

Wing Lung Bank, which was founded by the Wu family in 1933 with $5,700 of initial capital, is being taken over by China Merchants Bank, which agreed to acquire the Wus' 53.1% stake for $2.5 billion in June.

Like other banks across the globe, it has been hit by the credit crunch and slipped into a loss in the first quarter because of write-downs linked to the US sub-prime mortgage crisis.

So, just as China's mainland banks are keen to break into the Hong Kong market, Hong Kong's independent banking families are much more willing to consider selling because of the current market conditions.

"The trend for these takeovers will continue," Dr Yu said. "The local banks are feeling the pressure and they need to either take on another partner or will be forced to sell out. Meanwhile, banks in China are looking for international partners and the easiest way of finding them is through Hong Kong."

The contrast between the towering ambitions of Singh, who will stay on as chief executive of Ranbaxy for at least another five years, and the fin de siècle feeling surrounding the Hong Kong family banks could hardly be much greater.

However, the strategic attractions of the Hong Kong banks both to Chinese institutions and their international competitors means that these families should still be able to exit their businesses for a decent premium.

London-listed Standard Chartered, Australia's ANZ and the Industrial & Commercial Bank of China all worked on possible bids for Wing Lung Bank before being pipped to the post by China Merchants Bank. And the share prices of the remaining family-owned banks have risen sharply in the following months in expectation of further deals.

So while their succession planning may not have produced a business leader as savvy as Singh, market conditions appear to have saved the day.

US
Family business owners sell their companies for a wide variety of reasons. Ed and Ann Zinke, who started a trail mix business on their kitchen table in Maryland in 1973 and grew it into a global leader in the snack foods sector, wanted to turn their attention to other interests, including philanthropy. In July, they sold a majority interest in their company, Ann's House of Nuts, to private equity firm Olympus Partners.

Over the years, Ed was approached by many buyers and when the time was right, he decided to get external help. He hired Lincoln International, an investment bank that works with companies in the consumer packaged goods sector, and realising that his company was not prepared in all aspects to be sold for the highest price, retained ForteCEO, a senior executive consulting firm.

In using ForteCEO's services, Ed avoided a critical misstep families often discover only when they're in the thick of due diligence with a potential buyer, says Mark Rittmanic, the head of the consultancy, who described the sales process. He says that the way a family runs its business may work well enough for the owner, but may be seen as a major deficiency and scare off potential buyers.

Rittmanic says a sophisticated buyer's due diligence will focus on several things: Does the company have financial systems that produce the level of detail the buyer requires? Does it have a management team that is going to go with the business? Does it have internal processes with a level of clarity that will be apparent to an external buyer, or are the practices in the heads of individuals who may or may not go with the business?

ForteCEO's role with Ann's was to help eliminate risk for interested buyers. "Risk for the buyer goes down dramatically when there's clarity around people and processes and how money is made, how they've established relationships with their customers – all the things a buyer looks for that will give them comfort around their ability to have a future stream of earnings."

Rittmanic says that a ForteCEO team worked in the company for a year and a half, doing everything from operations to finance to strengthening the management team. It also provided personnel, who went to the new buyer. These included George Lampros, a lead consultant, who ended his tenure with ForteCEO to become the chief executive of Ann's.

Meanwhile, the sale of Alberta-based Voice Construction Co Ltd to Genstar Capital came at a critical time for the second-generation owners and their employees, who were on track to buy 25% of the company.

Voice, which is involved mainly in oil field preparation work, had a problem confronting many businesses in the booming Alberta economy. Founded in 1933 by Arthur Voice and passed on to his wife after his death and then to his three daughters after her death, the company was having trouble holding on to key employees, including construction superintendents, general managers and people who could look after large projects. 

To address this, Voice created a new class of shares in 2006 and gave employees an option to acquire 5% of the value of the company over each of the next five years. According to Don Zinyk, enterprise partner at KPMG who was involved in the share restructuring, the first transaction was a gift to the employees, as they did not pay anywhere near 5% of the value. "Effectively their share of the profits after they got the first 5% gave them the money to buy 5% in 2007-8."

However, events overtook this process. "The business was growing so much that for us to do justice to the business, it was going to require a large injection of capital," says Lynn Adams, one of the co-owners of the company, which had been under professional management since the founder's death.

However, Adams could not come to an agreement with her siblings. "We were also going into the third generation. So, when the opportunity to sell arose, we all got together and decided that in the best interest not only of ourselves but the business as well, it was an appropriate time to let it go."

Zinyk says Genstar was one of 10 suitors that expressed interest in Voice. The 2006 employee agreement was grandfathered into the final sale, and "some employees walked away with seven-digit cheques."

Europe
Six months after selling his family's bookmaker firm to Ladbrokes, Barney Eastwood sometimes asks himself whether he made the right decision. "I miss the business. I put a lot of years into building it up," says Eastwood, referring to Eastwood Bookmakers – the 54 strong betting shop outlet in Northern Ireland he established 54 years ago.

"Even though my sons were running the firm at the end, I still went in there once a week and helped out. I now ask myself 'Did I do the right thing? Should I have held out?'"
But the €145 million that Ladbrokes paid for the shops and the company's telephone betting business in Belfast in February was too good an offer to turn down.

Eastwood, perhaps best remembered in the UK for being the promoter of boxing champion Barry McGuigan in the 1980s, says: "The changes to Capital Gains Tax rules were on their way, which would affect the tax paid on selling a business. The price being offered by Ladbrokes was a very good one and the downturn in the global economy was beginning to bite at that point. I felt it was not a bad time to go liquid."

Eastwood had not planned the sale, describing it as a "spur of the moment thing". He explains that a Ladbrokes representative visited him personally in Northern Ireland to talk about a possible deal.

"We had a chat and he pointed out some of the reasons why I should sell and I pointed out some of the reasons why I shouldn't," Eastwood says.

The clinching argument for Eastwood, apart from his concerns over tax changes and the economic downturn, was a guarantee from Ladbrokes that they would retain the firm's 210 full-time staff and 91 part-time staff.

The complete transaction, including goodwill and a leaseback of the freehold properties at a "very good rate", meant the deal was worth approximately €166 million to the Eastwood family. "Six months on Ladbrokes have rebranded the business and are doing very well with it," he says. "Myself and my sons are now concentrating on our property development company."

So what is the answer to his deliberations about whether he did the right thing in selling to Ladbrokes?
"I felt at the time that if I was ever going to sell then it was the right time to do it. At the end of the day you make a decision. You should never look back and always move forward," he states.

Economic considerations given the downturn in consumer confidence were a factor in Eastwood's decision but the ramifications of the credit-crunch have played a greater part elsewhere.

The decision of the Schuppli family to sell its Duesseldorfer Hypothekenbank to the BdB (Association of German Banks) in April was a result of the knock-on effects of the collapse of the US subprime market. It has hit Germany hard and Duesseldorfer Hypo became the fifth mortgage lender to find itself in need of emergency
assistance.

A spokesman for the BdB said the sale "will help overcome the difficulties that the institute has run into in the current tense market environment". It said it is now looking for a new owner for Duesseldorfer Hypo.

Last year the bank had writedowns of €8.5 million which led to the Schuppli family putting in €150 million to help the bank increase its mortgage lending.

Management board member Friedrich Munsberg said the bank would continue to run as usual and he asserted that the bank does not have a liquidity problem.

Despite the harshening economic climate one corporate finance advisor said that deals involving large multi-generation family firms have been scarce so far this year.

Indeed multigeneration firms in Europe have been making more headlines in the opposite direction; look no further than engineering firm Schaeffler who gained control of tyre company Continental.

But there could be more sales of multigeneration firms in the near future. In May US investor Warren Buffett said his €148 billion Berkshire Hathaway investment vehicle was looking at persuading family-owned businesses in Europe to look in his direction if they were considering selling up. The appeal of Europe was stronger than that of India and China he declared because of the rules in the developing nations relating to the size of stake an investor can build up.

It could be an interesting period ahead with a number of key decisions for multigeneration family firms to make.

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