Fgure 7-5. Profitability benchmark: Serbia s economy vs. family silver, ROE

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1 What Lessons Serbia Can Learn from Failures 301 Fgure 7-5. Profitability benchmark: Serbia s economy vs. family silver, gs ROE ROA Equity/Total assets Operating margin Profit margin Tarket Metalac Apatinska pivara Economy of the process. Apatinska pivara, after privatization from inside, was successfully reprivatized three times followed by significant capital gains after each acquisition. Without any doubt, analyzed companies have succeeded in carrying out privatization. By doing this, these companies have capitalized on changes in the legal and regulatory settings and quickly responded to systemic initiatives for property-based management introduction. Benefits from privatization and other forms of restructuring surpassed transaction costs. Logical question is where does the family silver stand in the post-privatization period? In the following section, we intend to explain that post-privatization performances are truly fascinating 6. Metalac Gornji Milanovac: Privatization from inside The company was established in 1959 with the idea to produce cookware products. The founder s equity was around 0.5 million of deutschmarks (DEM). More than sixty years later, production capacity, number of employees, income and value of the company increased manifold. 6 The following analysis is based on databases formed in reference [4].

2 302 part seven Until the disintegration of SFR Yugoslavia, aside from Metalac, there were three major competitors in the industry: EMO (Slovenia), Gorica (Croatia), and Boris Kidric (Macedonia). Among domestic competitors, Metalac was a pioneer in many areas. Decision to go ahead toward technology revamping and production (and trade) automation has been rewarded by gain in market share. Metalac won leadership position on the Yugoslav market in 1986 and recorded moderate growth in market share, keeping this position until the disintegration of Yugoslavia. In 1990, absolute market share was 36% and relative one 1.4 (merchandise trade of Metalac vis-à-vis the main competitor was 1.4 times higher). Interestingly enough, competitors from ex-yugoslavia were less successful with restructuring during transition. The competitor from Slovenia was privatized after radical downsizing following its bankruptcy. The competitor from Croatia was partially privatized through debt-equity swap following dramatic reduction of equity. The competitor from Macedonia disappeared from the marketplace. The business core activity is cookware. The cookware is a sunset industry with moderate profitability and product innovations enabling frequent recycles. Some of the newcomers had arisen from other industries that had grown on the basis of new technologies. The main competitors have four production lines: enameled, stainless steel, teflonized, and with ceramic coating. Critical success factors in all lines are costs of production based on economies of scale as well as high perceived value based on high level of customer satisfaction. To match these requirements, customer relationship management along with automatization of operations, digitalization of the whole supply chain and cooperation with creative industries are crucial. Similar to other industries, hyper-competition is the main characteristic of cookware. The market is fairly saturated. Also, demand is cyclical. In a boom stage of the business cycle, consumption in developed economies ranges from 4-5 kg per capita. As the demand on internal market has been between 0.5 and 0.6 kg per capita, export is a way to achieve a break-even point. Fairly saturated market makes demand dependent on the producer s capability to differentiate themselves through quality, design, and product image (for example, healthy cooking). The leader s price umbrella due to technological innovation closes quickly under the pressure of imitators. Social dumping is important taking into consideration that competitors in low-end segments come from economies where labor is cheap (China, for example).

3 What Lessons Serbia Can Learn from Failures 303 In production processes there were no radical breakthroughs, while principal changes centered around technology-driven improvements in standard processes and digitalization. Thanks to ERP software, differentiation of product design enhanced, construction automated, production cycle shortened and inventories decreased. The sustainable competitive advantage is achieved when a competitor has advantage based on core competence in key activities from the value chain. For example, competitive advantage in cutting edge technologies enables uniqueness of product combined with cost leadership. After privatization, the company has used the opportunity to diversify both downstream, towards the components production, and upstream, towards the channels of distribution. Also, the company used the opportunity to diversify horizontally by entering in water heating boilers, sinks, and spare parts for auto industry. As far as privatization is concerned, it began a few months following the adoption of the privatization law. More precisely, on December 9, 1990, the workers council passed two decisions opening the doors to privatization: the decision on legal transformation of the self-managed enterprise into a jointstock company, and the decision on issuing internal shares for raising additional capital. Book value of the company at the start of the transition was DEM 4.1 million. Internal valuation has corrected this value to the level of DEM 9.6 million. Because capital increase option of the law was used as a model of privatization, the level of capital being privatized increased up to the level of DEM 19.2 million. Average discount for buyout of internal shares was 45% and, consequently, social capital was reduced by the amount of this discount. Based on previous propositions, the company had issued shares with nominal value of DEM 1,420 per share. The shares referred to as internal were transferable by full endorsement recorded by the company statute and with preemptive right by employees. The company announced the offering on December 12, 1990 for 10,498 shares. Before the effective date (January 17, 1991), the closing of the deals had been completed for 10,298 shares. The predominant buyers of shares were employees. In the second offering (January 25, 1991 to February 25, 1991) an additional stock of shares including 2,793 shares were subscribed. In the new emission of shares, it was the outsiders that mainly participated in the buyout.

4 304 part seven After two offerings, the following results were achieved. First, out of offered stock of shares, about 99.4% were subscribed. Second, out of the 1,254 employees, 1,047 (or 83%) became involved in employee share ownership. The largest employee holding was 108 shares or 0.8% of stock of shares. During privatization, the company established corporate governance bodies like shareholders assembly, board of executive directors and board of managing directors. In addition, an independent auditor was engaged. The board of managing directors was composed of ten members, five of whom were independent nonexecutive members. Among outsiders sitting on the board of managing directors, there were two university professors with experience in management consulting as well as three highly ranked executives with respectable expertise in the field of banking and international trade. The statute of the company prescribed that the management board could not pass a decision unless at least two thirds of independent board members took part in the decision-making process. Today Metalac engages more than 2,100 employees. In contrast with the privatization by using buyout to outsiders, insiders buyout in Metalac increased the number of employees in parallel with the output and productivity increase. It is proactively managed joint-stock company with concentrically diversified structural portfolio and resilient organizational structure. The company is listed on the Belgrade Stock Exchange (listing A) and insiders are majority shareholders. The company continually runs sound financial results. In 2016, net sales billed was more than 73 million. Profit margin in the business core is moderate, but stable. In cookware industry, the competition is too strong to enable the introduction of market skimming strategy. On the other side, unpleasant feedback is typical in the case of launching new products. Consequently, there are a lot of tasks on the market side, particularly in the line of change from product marketing to channel marketing. These facts inspired company diversification toward the trading. Also, business diversification was a way to find new areas for profitable investments. Table 7-5 portrays trend in profit based on profit and loss account (P&L) for the period Despite the Global Recession, in each year of the period the company made positive financial results. Basic performance indicators for the period are presented in Table 7-6. If we compare the data from this table with the data presented in Table 7-3 that contains basic performance indicators for the whole economy, we can see dramatic differences in favor of Metalac. Non-official ad hoc rating based on Altman s EMS

5 What Lessons Serbia Can Learn from Failures 305 Table 7-5. Metalac consolidated P&L, in millions, Operating revenues Operating expenses Operating profit (loss) Financial revenues Financial expenses Net financial revenues (expenses) (1.5) (1.0) (0.3) Net other gains and expenses (1.3) (1.2) (1.0) (0.7) (1.5) (0.5) (0.2) (0.6) (0.8) Profit (loss) before taxes Taxes Net profit (loss) Profit attributable to non-controlling interests Profit attributable to controlling interests Table 7-6. Metalac basic performance indicators, Average St.dev. Liquidity: Current ratio Quick ratio Financial structure: Total liabilities / total assets Short-term liabilities / total assets Long-term liabilities/ total assets Debt/total assets Debt/equity Profitability: ROE 10% 10% 14% 14% 15% 10% 6% 8% 13% 11% 3% ROA 13% 10% 12% 12% 13% 8% 8% 8% 9% 10% 2% Operating income margin 13% 13% 14% 12% 12% 8% 6% 6% 7% 10% 3% Profit margin 7% 8% 10% 10% 10% 7% 4% 5% 7% 7% 2% Bankruptcy risk: EM-score Credit rating AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA - Growth: Sales growth rate -14% 14% 12% 22% 2% 2% 12% 20% 9% 11% Total assets growth rate -1% 6% 5% 13% 2% 3% 5% 5% 5% 4%

6 306 part seven Table 7-7. Metalac payout ratio, Consolidated income Net profit (total) Net profit (cons.) Dividend Payout ratio, % Emerging Market Scoring Model [1] placed the company at AAA credit rating rank. Thanks to good financial results, the company continuously pays dividends. Table 7-7 shows payout ratio during the period This is very important for marketability of the company keeping in mind that the company is listed on the Belgrade Stock Exchange, and for motivation of employees, keeping in mind that majority of shareholders are insiders. Sintelon Backa Palanka: Ingenious introduction of a strategic partner in ownership Predecessor of the company was established in From its establishment until today, the production has never been suspended. These days, Sintelon is part of a multi-billion business of Tarkett s.a. 7 Namely, former Sintelon (today s Tarkett d.o.o.) is a division of the multinational company Tarkett s.a., one of the global leaders in the floor covering industry. Tarkett d.o.o. is a two-tiered company with the mother company (Tarkett d.o.o.) and a daughter company (Tarkett Eastern Europe) consisting of several production and trade companies operating in the Russian Federation and Ukraine. Privatization in Sintelon began at the end of 1990, a few months following the adoption of the privatization law. The company was successfully transformed into a joint-stock company and made a decision on issue of internal shares for raising additional capital. By using employee buyout, insiders privatized 82% of social capital. Revaluation in 1994 dramatically reduced the level of privatized capital. The company continued with privatization using the framework of the 7 Mother company Tarkett s.a. in 2016 earned 2.7 billion in four divisions, Western Europe, Eastern Europe, North America and Sports.