ENTREPRENEURIAL RESTRUCTURING Crafting Tailor-Made Business Models for Sustainable Success

BEYOND MAINSTREAM

ENTREPRENEURIAL RESTRUCTURING Crafting tailor-made business models for sustainable success

OCTOBER 2014 THINK ACT ENTREPRENEURIAL RESTRUCTURING

THE BIG 3 1 en·tre·pre·neur·ial Getting entrepreneurs to restructure enterprises places business models on a firm, new foundation for long-term sustainability. p. 10 2 re·spon·si·ble As though the livelihood of their own company depended on it, the restructuring team becomes co-owner of the transformation challenges instead of merely working through project plans. p. 11 3 tai·lor-made Hand-crafted solutions for strategic realignment enable businesses to carve out, fine-tune and defend competitive advantages with their own inherent strength. p. 12

WachstumGrowth throughdurch restructuringRestruktu- rierungp. 18 S. 18

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A new take on restructuring. Greater complexity. Less continuity. Two reasons why an entrepreneurial approach to finding sustainable business models is more important than ever.

To do a good job of restructuring a company these For the past ten years, our work has also featured a days, you need to look at more than just costs and the significant strategic component. While the tools of the headcount. Successful restructuring means quickly trade we grew up with have lost none of their validity, coming up with a new business model that is convinc- our core competency today is placing entire business ing and sustainable. Roland Berger Strategy Consul- models on a new economic foundation. In doing so, we tants approaches the task from a strictly entrepreneur- take our clients a step further. Our job is to foster trust ial perspective. On behalf of our clients, we moderate between the stakeholders – primarily between the cli- what are often conflicting demands. We also manage ent and its financial backers. Restructuring is a special the transformation process as though we were han- situation for every company, one that demands proven dling our own business. Responsible, energetic and expertise. It also requires consultants to work with cli- rigorous decision-making is at the heart of this "entre- ents to first develop a concept and then effectively un- preneurial restructuring" approach. derwrite implementation. Mediation skills are equally We first established our reputation as a market lead- vital in this context, because a company in a state of er over 25 years ago. F And to this day, rankings re- restructuring must make due provision for a broad peatedly confirm our position as the undisputed leader spectrum of interests. in both restructuring and implementation expertise. A The majority of managers have long since under- Very early on, we set the standards for rescuing com- stood that adapting their organization is the rule, not panies by combining analytical skills with methodologi- the exception. It is a permanent, ongoing challenge. cal knowledge and proven experience across a variety of Of the 11,000 or so German companies that post an- industries. In the 1990s, restructuring then acquired an nual sales of more than EUR 50 million, some 2,000 operational aspect, which above all involved straighten- are in an acute crisis situation in terms of earnings, ing out the income statement. Financial restructuring liquidity or on a strategic level. And far more than this added a further string to our bow around the turn of the number are having to brace themselves for radical millennium as clients' balance sheets became the focus changes in their market environment. of attention, alongside their income statements. We Running and leading companies is becoming ever thus helped companies redesign their assets and loans, more challenging, because top managers today oper- restructure their debt and equity capital, and realign ate in what has been called a VUCA world: They are their equity investments. confronted by volatile markets and geopolitical risks.

ROLAND BERGER STRATEGY CONSULTANTS 3 THINK ACT ENTREPRENEURIAL RESTRUCTURING

A RANKING THE RESTRUCTURERS Having been recognized as a market leader for many years, Roland Berger tops the rankings not least for its implementation skills.

Top 5 restructuring consultants Turnaround and restruc- Implementation over time turing [2014/2015]1) skills2)

1. Roland Berger 401 Roland Berger 375

2. McKinsey 397 Accenture 352

3. KPMG 381 Oliver Wyman 348

4. BCG 367 McKinsey 339

5. PwC 361 A.T. Kearney 335

2007 2009 2011 2013 2014/2015

1) Index points: 100 = very poor skills; 500 = very strong skills 2) Roland Berger ranked top in implementation skills for six years running, starting in 2005 Source: Roland Berger; WGMB – Wissenschaftliche Gesellschaft für Management und Beratung, Prof. Dr. Dietmar Fink

They are also constantly having to make decisions nounced its withdrawal from nuclear energy. More or within uncertain conditions. Unlike mere risk and un- less overnight, the traditional power utilities' business predictability, uncertainty means that we neither know model was turned on its head. One particularly striking what might happen, nor how probable it is that any factor is the decline in margins on power generation, given set of events might happen. This creates com- which has lately experienced radical change: Since ca- plex problems, leading to trends that are inconsistent pacity to produce energy from renewable sources has and often ambiguous – trends that can no longer be been ramped up sharply, it now hardly pays to market understood on the basis of conventional quantitative energy from conventional sources. This situation in models alone. As a result, stable companies can find turn raises strategic questions about the future viabili- themselves in need of restructuring at any time. Whole ty of entire business lines. industries, indeed, can unexpectedly plunge into a cri- These days, restructuring has become more com- sis as the conditions within which they operate change plex not only because the issues addressed have a suddenly and significantly. stronger strategic focus. B At the same time, continu- Germany's energy market is a good example. In ity is disappearing from the boardroom as the duration 2011, the Fukushima disaster triggered a political of top managers' tenure decreases. E Additionally, as volte-face on energy policy when the government an- more and more demands are placed on companies,

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NEW DEMANDS PLACED ON RESTRUCTURING MORE STRATEGY, A COMPLEX STAKEHOLDER STRUCTURE, MULTILAYERED FINANCING, LESS MANAGEMENT CONTINUITY

B RISE OF STRATEGIC ISSUES What areas form the focus of the measures to be taken? [percentage of mentions] 80% growth/sales 76% initiatives cost-cutting/efficiency enhancement programs

65% strategy/business model 61% adjustment cost flexibility programs (to reduce fixed costs) 44% optimized risk 47% management optimized liquidity management 33% material acquisitions/ disposals of corporate entities Source: Roland Berger

ROLAND BERGER STRATEGY CONSULTANTS 5 THINK ACT ENTREPRENEURIAL RESTRUCTURING

C EXTENSION OF COORDINATION EFFORTS The number of stakeholders and external influences on companies is increasing

PAST/ TRADITIONAL Share- Restructuring MODEL holders consultants

Legal COMPANY advice

Loans Information Loans

Bank 1 Bank 2

TODAY LA FA LA FA

Private Legal Mezzanine equity Legacy advisors lenders shareholders shareholders (LA)

Insolvency administrator/ COMPANY Restructuring trustee consultants

Commercial Financial Banks Hedge credit Commercial advisors funds insurers banks (FA)

LA FA LA FA LA FA LA

Direct advice to the company Indirect advice to the company Source: Roland Berger

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D E COMPLEX CAPITAL STRUCTURES INCREASING TOP MANAGER CHURN The concept of a "main bank" is losing ground, Staff continuity is on the wane risks are being spread [tenure of CEOs in German-speaking countries]

PRIMARY OBJECTIVE Company Corporate turnaround

Private equity

Mezzanine

Risk Com- Bonds reduction pany

Main Hedge banks funds 2002 8.1 years Large Corporate 2013 number turnaround/ of banks secure credit 6.8 years lines

Past/ Today's traditional approach approach

Source: Roland Berger Source: Strategy&

ROLAND BERGER STRATEGY CONSULTANTS 7 THINK ACT ENTREPRENEURIAL RESTRUCTURING

F the complexity of stakeholder relationships naturally SKILLS, METHODS, EXPERIENCE increases too. C By no means least, the forms of fi- Roland Berger established its reputation nancing and capital structures are becoming more and as a market leader over 25 years ago more diverse. Whereas businesses used to simply bor- row money from their main bank, the latter now have to compete with other financing forms: mezzanine capital, private equity, hedge funds and corporate bonds. D Even the lines between debt and equity are becoming blurred, and foreign capital backers too are in- ENTREPRENEURIAL creasingly gaining a foothold. The latter expect certain Since RESTRUCTURING 2014 Big-picture view of a company's performance levels and regular reporting in compli- future role in the competition ance with international standards. In a restructuring scenario, excellent links to all these sources of finance can ultimately determine whether a turnaround suc- ceeds or fails. The government too has provided powerful stimu- lus for a new understanding of restructuring. The Ger- man Insolvency Code, for example, was reformed in FOCUS ON STRATEGIC March 2012, and its scope was widened by the Law on RESTRUCTURING Since the Further Simplification of Corporate Restructuring 2005 Entire business models placed on a new, firmer foundation (ESUG). G The core element of this code, broadly based on the provisions of US insolvency law ("Chapter 11"), is the new option of self-administered financial recovery which, in effect, allows firms to be restruc- tured under the protection of insolvency. Under the su- pervision of a trustee, the company's owners are given three months in which to take the fate of the business FOCUS ON FINANCIAL in their own hands and draw up an insolvency plan. The RESTRUCTURING In the aim of the ESUG law is to simplify corporate restructur- 2000s Assets, loans, equity investments – Balance sheets became more ing and help more companies to avoid being either and more important wound up or broken up. As companies seek viable alternatives to liquida- tion on the basis of the new Insolvency Code, there is growing demand for 360° consulting. A paradigm shift in favor of preserving the substance of the company has also breathed new life into the role of the Chief FOCUS ON OPERATIONAL Restructuring Officer (essentially, an experienced and In the RESTRUCTURING – above all – independent manager). All of which goes 1990s Straightening out the income statement – That's how it all to show that the time is ripe for a fresh approach to began restructuring.

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G UNDER PROTECTION MOSTLY POSITIVE EXPERIENCE OF THE GERMAN LAW TO FURTHER SIMPLIFY CORPORATE RESTRUCTURING (ESUG)

FIRST STEPS TOWARD A NEW INSOLVENCY CULTURE Roland Berger/Noerr survey of 2,100 legal experts, managers and investors with a wealth of practical experience

MORE INSOLVENCIES The number of insolvencies LEGAL REFORM in Germany is edging up. Companies are gaining experience The number of applications of the reformed Insolvency Code. for self-administration is Well over 80% of respondents have SELF-ADMINISTRATION increasing at a (slightly) faster applied ESUG, mostly in the role of Creditors are more critical than insolvency rate. creditors, but also as insolvency judges: Preliminary insolvency commit- administrators/trustees or CROs. tees reject 11% more applications for self-administration than judges (45% in APPLICATIONS total). Even so, the majority of applica- Stricter documentation obligations and tions for self-administration meet with insufficient legal certainty make the success. application process a complex task. PROCEEDINGS UNDER PROTECTION A third of self-administration proceedings take place NOT QUITE THERE YET under the protection of the new law. These cases 90% of respondents believe reach a successful conclusion more frequently and the government's aims have more quickly than other processes. The time spent largely been fulfilled – 6% more under protection is thus put to good use. than in 2012. However, it will take time for people's mindset INDEPENDENT MANAGEMENT to adjust to a new culture of The most important aspect of self-adminis- insolvency. tration is to engage experienced, independent management. This requirement gives a major new boost to the Chief Restructur- ing Officer.

ROLAND BERGER STRATEGY CONSULTANTS 9 THINK ACT ENTREPRENEURIAL RESTRUCTURING

The Roland Berger approach: Getting entrepreneurs to restructure enterprises. A new philosophy, top-flight capabili- ties and a comprehensive perspective.

Companies in crisis situations have widely varying meet the given requirements. This question can only needs. Small and medium-sized firms often make mis- be answered by adopting an entrepreneurial approach: takes when internationalizing, are short of adequate Not until agreement has been reached on the compa- management capacity or lack the necessary transpar- ny's strategic realignment does it make sense to think ency about key performance indicators. Clients such about appropriate measures. For us, there are two as these need a lot of help implementing new strate- sides to the entrepreneurial coin: gies. Larger companies tend to struggle more with ENTERPRISES. Restructuring that relies solely on complexity and/or diffuse strategies. They need more methodological approaches focuses on cutting costs. support in the form of "conceptual consulting". Every That can help improve the earnings situation and ward restructuring situation is, of course, unique, and this off the threat of insolvency in the short term. It is of no breakdown is very rough at best. Yet even for clients value in the medium to long term, however, because it themselves, it is often hard to judge which consultants is highly likely that precisely those skills and capabili- and what services might really help. ties that are vital to get the company back on its own The way we tackle restructuring assignments en- two feet will no longer be there. That is why, whenever ables us to find the right combination of conceptual we think about restructuring, we always begin by look- design and implementation. Drawing on our proven ing at the long-term perspective for the company and network and close contacts with legal advisors, banks, its business model. We examine its strengths and investors and other sources of support, we can provide weaknesses and explore the options for a new strate- one-stop shopping to meet every need. For this rea- gic model. That does not necessarily mean that re- son, we have improved on our tried and trusted ap- structuring an imbalanced enterprise as an entity fits proach, fine-tuning it and anchoring it even more deep- the bill. It might be inevitable that a healthy core has to ly in our own unique strengths: entrepreneurship, be separated from units that have no future. And it is empathy and excellence. H this strategic decision on which the restructuring concept must be based. 1 Entrepreneurial: ENTREPRENEURS. We systematically staff our A coin with two sides teams with experienced consultants who have run a business or held an executive position. This policy An entrepreneurial take on restructuring is the core of yields a number of advantages: First, it means we can our approach. The first step is to clarify why the market contribute greater knowledge and draw on our consul- needs the company, and whether management can tants' valuable practical experience. It also helps the

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H GUIDING PRINCIPLES OF THE ROLAND BERGER RESTRUCTURING APPROACH A successful blend of entrepreneurship, excellence and empathy

ENTRE- Focus on experience PRENEURIAL instead of toolboxes

Hand-crafted and Joining the team client-specific TAILOR- RESPONSIBLE instead of watching solutions instead of MADE from the sidelines window dressing

Source: Roland Berger

client, stakeholders and consultants to work together decision-making structures and the balance of power. as partners, as equals – which makes communication Yet successful implementation often depends on pre- and acceptance so much easier in difficult situations. cisely these issues. A modern approach therefore The outcome? Realistic expectations about what is gives the restructuring partner a wider role: If you want feasible and how quickly it can be implemented. to implement a concept and breathe life into it, you need to spend as much time as possible on the ground 2 Responsible: with the client, demonstrating empathy, establishing Co-ownership of transformation yourself as a partner and being accepted as such. It challenges takes experience and a sensitive touch to lay a foundation and foster a constructive mood in a company that In restructuring situations, it is crucial to find the right is under severe pressure. And that can only work if the way to roll the concept out throughout the company. restructuring partner "co-owns" the client's transfor- Implementation requires not just technical expertise mation challenges and shoulders responsibility for and an understanding of the methods, but also years finding and applying a solution. of hands-on experience – not to mention excellent so- We always have a listening ear for the needs of our cial skills. If all you do is tick off the milestones on a clients. We base all communication on the principle: project plan, you don't see the whole picture of the "Don't lecture – leverage!" progress that is happening. You can easily overlook the We don't tell you what is going wrong or what social dynamics that are at work, psychological issues, should be done better. We talk to you as partners and

ROLAND BERGER STRATEGY CONSULTANTS 11 THINK ACT ENTREPRENEURIAL RESTRUCTURING

trusted advisors, discussing how each client can make tional and financial restructuring. The consultant better use of their specific potential. We then work with must see the big picture and appropriately tackle all you to improve the situation together – just as a true three aspects if value is genuinely to be added for the entrepreneur would do. We become co-owners of your client. issues. Our primary focus is not on getting the project Based on a healthy balance sheet, the company done and the invoice out, but on delivering solid, sus- must stand on the solid foundation of a robust share- tainable solutions. Along the way, the team has to be holder and financing structure, and its income state- flexible enough to deviate from the charted course if ment must be back in the black. These are the tradi- this seems the best way to reach the client's goals. tional cornerstones of financial restructuring. However, Despite all the extra work it involves, it might, for ex- improving the financial situation alone does not deter- ample, be best to swap a preferred investor for an- mine how the project is to proceed. Top priority must other interested party. be given to identifying the healthy core that is worth preserving and for which a solid, positive outlook ex- 3 Tailor-made: ists. Exactly what constitutes the basis for this healthy Hand-crafted solutions core will depend on the company's potential in terms of its knowledge, people, markets and products. How At the end of a turnaround or restructuring project, this potential is mobilized, how resources are allocated the client company should walk away with a and how the organization is adjusted are all part of hand-crafted solution that lets it do business suc- operational restructuring. The sustainable success of cessfully again with little or no outside support. restructuring activities is rooted in this integrated per- "Hand-crafted" is indeed the operative term, reflect- spective: Successful strategic realignment – an im- ing the necessary mix of a solid mastery of the tools proved value-creation architecture and optimized mar- of one's trade with creative design skills. We identify ket and competitive positions – is imperative if three key quality criteria that such a solution needs operating performance is to be boosted and operating to satisfy: It must be accepted by the parties con- cashflow is to be positive in the long run. Working on cerned, be tailored to the needs of the company, and this basis, the financial restructuring that is usually deliver lasting success on the market. Window dress- necessary can be realized by striking the right balance ing helps no one: A sustainable solution is vital, and between debt and equity. I the easy road is seldom the best one. The scope of Essentially, this combination of an entrepreneur- change that is needed, the number of legacy busi- ial approach, co-ownership of transformation chal- ness units that are retained, whether a radical shift is lenges, hand-crafted, tailor-made solutions, compre- needed in the asset portfolio – or even in the compa- hensive methodological skills and hands-on support ny's governing bodies: All these questions are natu- through every stage of implementation is what our rally essential to any successful restructuring exer- restructuring philosophy is all about. cise. On their own, however, they are not enough. Restructuring can only be deemed successful if, at the end of the day, a verifiable transformation is clearly visible in the company's strategic positioning, its profitability and – by no means least – its culture. How do you achieve this kind of solution? Successful turnarounds are possible only if the teams called in to provide assistance fully master the standard aspects of restructuring: strategic, opera-

12 ROLAND BERGER STRATEGY CONSULTANTS THINK ACT ENTREPRENEURIAL RESTRUCTURING

I SEEING THE BIG PICTURE – COVERING ALL THE BASES ROLAND BERGER'S INTEGRATED RESTRUCTURING APPROACH INVOLVES COMPREHENSIVE SUPPORT FROM BUSINESS PLANNING THROUGH IMPLEMENTATION

> Market and competitive positioning > Value-creation architecture > Legal framework A (e.g. ESUG)

STRATEGIC RESTRUCTURING

> Business planning > Interim management > Central control/coordination (CRO) ENTREPRENEURIAL > Support during RESTRUCTURING implementation B C D OPERATIONAL FINANCIAL RESTRUCTURING RESTRUCTURING

> Alignment of balance sheet > Optimized purchasing structure with business needs > Production footprint > Debt/equity structure > Reduction in labor costs/ > Disposals, reduction in working overheads capital > Outsourcing/centralization > Short-term financing

Source: Roland Berger

ROLAND BERGER STRATEGY CONSULTANTS 13 THINK ACT ENTREPRENEURIAL RESTRUCTURING

Roland Berger teams are reliable partners. Time after time, they have proven themselves in turnaround and restructuring situations, consistently delivering solutions tailored to customers' specific problems. That is entrepreneurial restucturing.

We have always adopted a constructive attitude to ad- tives and staff alike is of critical importance. Yet change vising companies that find themselves in difficulties. Our can only come about if swift, comprehensive and honest work consistently focuses on the healthy core of each analysis is followed by focused change that quickly re- company. Not until we have identified this core do we turns the company to liquidity and profitability. move on to developing an entrepreneurial strategy for You need an experienced team that sees the big the future. And only then do we think about what the picture if you want to develop an integrated operation- business case might look like and where costs have to al and strategic concept. Once it's been clarified who be rolled back. Our set of tools and methods has grown is responsible for what in the project, mixed teams of more numerous, and more is now expected of the re- client staff and consultants can get together to plan sults we deliver. J We have observed how influences the next steps forward. Project work and deliverables on management – both inside and outside the company are monitored on an ongoing basis, helping the own- – have changed over the years. ers, the banks and the work force to regain confidence So, what is it that you need? Growth? Or lower in the company. To condense this whole approach into costs? What used to be an either-or decision has now three salient points: become more of a continuum, along which some com- > We don't say what others are doing wrong, but how panies move more in the one direction and others more we can do it right together. in the other. This understanding is confirmed by our re- > We restructure not just the income statement or the cent restructuring study. K Moderation is just as im- balance sheet, but the whole company. portant as flexibility and far-sighted vision. To accommo- > We are uncompromising on content issues, but sym- date the many and varied demands of this management pathetic in our dealings with people. challenge, we have entered a new phase of restructuring Our clients rightly expect us to deliver tailor-made busi- – a phase we explicitly refer to as "entrepreneurial re- ness models for a successful future. That is why, having structuring". This term emphasizes the sense of respon- taken the constraints out of the restructuring process, sibility that guides our thoughts and our actions. we are free to make a bold and confident promise: the It takes courage to change, which is why having a promise of entrepreneurial restructuring. strong CEO who can rely on the commitment of execu-

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J JOINING THE DOTS HOW WE FORGE STRATEGIC LINKS BETWEEN RESTRUCTURING CONCEPTS, PERFORMANCE IMPROVEMENT, IMPLEMENTATION SUPPORT AND M&A – A SELECTION OF PROJECTS

(Selected projects from January through September 2014)

KEY TOPICS ENTREPRENEURIAL RESTRUCTURING CORPORATE FINANCE

Integration Restructur- Performance Refinancing Distressed Investor Due project ma- ing concept improvement M&As support diligence SELECTED nagement/ PROJECTS implement.

Automotive supplier A Automotive supplier B Automotive supplier C

Chemicals company

Consumer goods manufacturer DIY market

Hospital

IT company

Project developer

Public transporta- tion company Retailer

Shipping company Solar companies (various) Telephone service operator

Source: Roland Berger

ROLAND BERGER STRATEGY CONSULTANTS 15 THINK ACT ENTREPRENEURIAL RESTRUCTURING

K DRIVING GROWTH INSTEAD OF MANAGING CRISES GERMAN COMPANIES ARE OPTIMISTIC – THE GOALS OF RESTRUCTURING ARE CHANGING

2014 RESTRUCTURING STUDY Is the financial crisis over? The most important answers at a glance

GROWTH DEBT CRISIS MARKET ENVIRONMENT German companies anticipate 85% of respondents expect Geopolitical dangers are keeping further economic growth and, in Germany to avoid a recession – the market environment volatile some cases, significant sales 85% believe that European growth in the next two years monetary union will continue – The public debt crisis is seen as the biggest global threat

VIGILANCE BUSINESS MODEL SUCCESS FACTORS Continuous improvement and Restructuring should focus on Management commitment foresighted restructuring are a growth initiatives – Efforts to adjust remains the critical success must: Crises and insolvencies the business model and cut costs factor – Big-picture restructuring are no rare occurrence are here to stay concepts are growing in importance

LIQUIDITY FINANCING PLANNING Most respondents are optimistic Internal resources are the main Scenario planning helps to about the liquidity position – source of funding – Working capital prevent market risks from Assessments of the financing should be optimized to add extra materializing environment remain positive leeway

Source: Roland Berger

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ABOUT US

Roland Berger Strategy Consultants

Roland Berger Strategy Consultants, founded in 1967, is the only leading global consultancy with German heritage and of European origin. With 2,400 employees working from 36 countries, we have successful operations in all major international markets. Our 50 offices are located in the key global business hubs. The consultancy is an independent partnership owned exclusively by 220 Partners. WWW.ROLANDBERGER.COM