Industry Evolution In Russia And M

1
Industry Evolution In Russia And MA
Opportunities For Value Building Growth

• Report At The Conference Russian MA
  Peculiarities And Current Trends

April 18, 2006 Moscow
Anton Poriadine Senior Manager, Strategy
Organization Practice Leader, CIS
2
A.T. Kearney is a leading global top management
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into reality, creating value for the shareholders

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3
The A.T. Kearneys growth initiatives draw
conclusions from a data base covering 98 of the
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MarketCapitalization
4
The latest A.T. Kearney research on MA leads to
a number of striking conclusions
Strategic value of MA
Conventional wisdom
A.T. Kearney research

• Every industry follows its specific lifecycle

• Industries all over the world develop along the
  same pattern Russia is not an exception to the
  rule

• Profit alone is not enough value building growth
  is mostly driven by gaining scale

• Profitability focus is key in building
  shareholders value

• Not engaging in MA activity may turn a company
  into a prey for a more aggressive player whats
  the of no-mergers that fail?

• Engaging into MA activity may destroy
  shareholder value 50 of mergers fail

• Fast growing industries require significant MA
  activity

• Wrong targets and bad execution may be more
  detrimental than organic growth even in fast
  growing industries

5
Industries all over the world develop according
to the same pattern
Stages of industry evolution in the global market
CR31)
HHI2)
Opening
Growth
Focusing
Alliances
100
Defense and electronics

• Go for volume
• Set up business model
• Get scale effects
• Build merger competence

• Define the industry
• Set the standards
• Build entrance barriers
• Grasp ground

90
Agricultural machines
Max.
80
Distilleries
Iron ore
Aluminum producers
70
Shipyards
Footwear industry
60
Truck trailer manufacturers
Beveragesindustry
Clothing
Rubber and tire producers
50
Foodstuff producers
? 45

• Cultivate global acceptance
• Constantly keep performance and innovation
  pressure
• Reinvent the industry
• Set up new industries

Games
Hardware
40
Carmakers
Foodstuff retailers
Paper producers
Railroads
30

• Refine business model
• Execute final consolidation moves
• Optimize value chain
• Attack/sell niches
• Cultivate spin-offs

Restaurants Fast Food
Breweries
Energy providers
Pharmaceutical industry
Chemical industry
20
Automotive suppliers
Telecommunication
Airlines
Insurance
10
Steel Producers
Min.
Banks
Construction
0
-10
-5
0
5
10
15
20
25
Years since start of consolidation
MA Relevance
Low relevance
High relevance
1) CR3 Market share of the three largest
companies of the total market based on
Value-Building Growth database (25,000
companies) 2) HHI Hirschman-Herfindahl Index
corresponds to the sum of the squared market
shares of all companies, correlation of HHI and
CR3 is R² 0.9, HHI-axis logarithmically
plotted Source Value-Building Growth database
A.T. Kearney research
6
And Russia is not an exception to the rule
either it consolidates at a faster pace,
narrowing the window of opportunity
Industry examples
Stages of industry evolution in Russia
Opening
Growth
Focusing
Alliances
CR31)
HHI (2)
100
100
Part of global industry consolidation
-0,7
90
90
Mobile telecom
80
80
Max.
Fixed line telecom
70
70
Breweries
Automotive OEMs
Utilities
Tobacco
Entry of global players
60
60
Traditionally regulated industries with higher
concentration
Integrated Steel
50
50
? 45
Consolidation of niche players during the focus
phase
-0,1
40
40
Insurance
30
30
Banks (excl. Sberbank)
Faster pace due to equity markets pressure
20
20
Publishing Houses
-0,01
Min.
Retail trade
Pharma drugs
10
10
0
Years since start of consolidation
0
0
5
10
15
20
-5
25
Russia
World
1) CR3 Market share of the three largest
companies of the total market based on
Value-Building Growth database (25,000
companies) 2) HHI Hirschman-Herfindahl Index
corresponds to the sum of the squared market
shares of all companies, correlation of HHI and
CR3 is R² 0.9, HHI-axis logarithmically
plotted Source Value-Building Growth database
A.T. Kearney research
7
Industry position on S-curve also suggests a
preferred way of entry
Industry examples
Stages of industry evolution in Russia
Opening
Growth
Focusing
Alliances
CR31)
HHI (2)
100
100
-0,7
90
90
Mobile telecom
80
80
Max.
Fixed line telecom
70
70
Breweries
Automotive OEMs
Utilities
Tobacco
60
60
Integrated Steel
50
50
? 45
-0,1
40
40
Insurance
30
30
Banks (excl. Sberbank)
Scale driven MA. Excellent for private equity
low to medium barriers
Small number of large deals driven by shakeout -
high entry barriers
20
20
Publishing Houses
-0,01
Min.
Retail trade
Organic entry low barriers
Pharma drugs
10
10
0
Years since start of consolidation
0
0
5
10
15
20
-5
25
1) CR3 Market share of the three largest
companies of the total market based on
Value-Building Growth database (25,000
companies) 2) HHI Hirschman-Herfindahl Index
corresponds to the sum of the squared market
shares of all companies, correlation of HHI and
CR3 is R² 0.9, HHI-axis logarithmically
plotted Source Value-Building Growth database
A.T. Kearney research
8
In every industry sales growth and value growth
are closely correlated
Statistical analysis of value growth drivers
Sales growth
Only 22 of value growth can be explained using
static profitability indicators
22
EBIT
Value growth
78
78 of value growth can be explained by the
growth of sales
Growth and scale increase shareholders value
Value growth
Source A.T. Kearney Value Building Growth
database
9
If properly executed, growth can yield
outstanding results
A.T. Kearney Growth Matrix (1988-2003)
Sales growth
5,800 firms
14
20

Q3
Q1
Value Growers
Simple Growers
40 of growth is attributed to ??
Growth
Value
Growth
Value
9.9 ?
Q4
Q2
Profit Seekers
Underperformers
Growth
Value
Growth
Value
Value growth
19
47
7.0 ?
x
Firms distribution per quadrant
10
A firms position on the growth matrix suggests
the best type of MA activities it should engage
in
Global example Steel
Growth matrix (CAGR 2000-2004)
100
Sales Growth
OEMK
Value Growers
Simple Growers
Evraz
60
Baoshan 01 04
Salzgitter
Posco
40
Eregli Demir
Outokumpu
INI Steel
Mittal
Acerinox
Gerdau
CSN
Nucor
Severstal
Usinas
Voest-Alpine
World Average
20
Boehler-Uddeholm
Thyssenkrupp
Rautaruukki
Arcelor
Tata
Smorgon
SSAB
Harsco
Nisshin
Allegheny
Kennametal
Stelco
0
Carpenter
Grupo Mexico
JFE
Sumitomo Metal
Underperformers
Profit seekers
China Steel
Kobe
Dofasco
Nippon Steel
-20
100-150
1000
-35
-15
5
25
45
65
World Average 1)
Value Growth
Potential acquirer
Potential value creating moves
Baoshan 01 04, Severstal 01 04, Evraz 02 04,
Thyssenkrupp, Kobe, Outokumpu segment steel
Sales volume 2004
11
Combining two Simple Growers does not lead to the
emergence of a strong Value Grower
Growth matrix (2003-2005F)
Example Russian retail
Merger rationale
Value Growers
Simple Growers
Sales growth
100

• The merger of Pyaterochka and Perekrestok will
  not turn NewCo into a value grower
• The merger will unleash a limited synergy effect
  due to different business and operational models
• The deal to make sense should be viewed from the
  standpoint of a strategic investment by Alpha
  Group into an attractive retail format and not a
  merger

?
80
Magnit
Dixi
60
Perekrestok
40
7th Continent
EBITDA growth
29 ?
20
Pyaterochka
Kopeika
Ramstore
Metro
0
Underperformers
Profit seekers
-20
-20
0
20
40
60
80
100
120
140
160
180
68 ?
Would-be value creating moves
The size corresponds to the sales volumes in 2005
Actual moves
Sources Renaissance Capital, companies data,
A.T. Kearney analysis
12
In banking, the recent Raiffeisens acquisition
of Impex may be detrimental to value growth due
to integration and turnaround complexity
Growth matrix (2003-2005F)
Example Russian banking
80
Merger rationale
Asset growth ()
Value Growers
Simple Growers
MDM bank

• Most banks in Russia swirl around average, while
  only a few winners and laggards
• Raiffeisens rationale behind the acquisition was
  Impexs regional network
• Going after regional network at any cost
  Raiffeisen bought an underperforming bank
• Integration and turnaround Raiffeisen faces may
  well offset the time gain in speeding the
  expansion

60
UralSib
Gazprombank?
Sberbank
Raiffeisen bank
Ø 42.5
40
Impexbank
EBIT growth ()
VTB
Bank of Moscow
Rosbank
Industry and construction bank
20
Citibank
IMB
Alpha-bank
0
Mezhprombank
-20
Underperformers
Profit seekers
-40
Ø 32.2
-50
0
50
100
150
200
250
300
Would-be value creating moves
The size of the bubble corresponds to the banks
assets as of January 1st, 2006
Actual moves
Source Expert Top-200, banks data, A.T.
Kearney analysis
13
Therefore, an acquisition to be successful must
help gain scale by outpacing the leaders in the
peer group
Company and industry integration benefits
Post-merger value growth
Fair price
Transformation costs
Net integration benefit
Average same-period industry consolidation benefit
Captured synergy
Degree of overpaying
Company integration benefits
Industry integration benefits
Source A.T. Kearney
14
and must be properly executed in order to
achieve the desired results
Merger integration critical success factors ( of
companies surveyed)
49
47
35
20
14
10
4
"Sound Strategy From DayOne"
"ClarifyingExpectations (Finance/ Synergies)"
"Price Level Dependson Future Profits"
EnteringWhen PriceHas Become Lower"
"MotivatingEmployees"
"BreakingDownCulturalBarriers"
"MasteringIntegrationProcess"
Pre-merger activities
Merger Integration
Note (1) More than one answer
possible Sources Business International A.T.
Kearney Global PMI Study 2002/2003
15
For further information please contact our Moscow
office
A.T. Kearney Moscow office 52/4 Kosmodamianskaya
nab., 115054 Moscow, Russia Tel
7-495-258-5019 Fax [phone] www.atkearne
y.com www.atkearney.ru Ruslan Korzh, Managing
Director, CIS ruslan.korzh_at_atkearney.com Anton
Poriadine, Senior Manager, Strategy Practice
Leader CIS anton.poriadine_at_atkearney.com