Table 7-7. Metalac payout ratio,

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1 306 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.

2 What Lessons Serbia Can Learn from Failures 307 privatization law enacted in Before introduction of the strategic partner into the ownership in 2002, insiders controlled majority stock of shares (51.5%). Despite economic sanctions that the international community had imposed on Serbia in 1992, the management team of Sintelon set an objective of substantial improvement of company s position in the international market. Key decision was to partially outsource production and trade capacity in the Russian Federation where the company had already been well positioned. It also discovered that increased sales volume had largely been driven by the replacement of old product portfolio with a new one based on cutting edge technology. The vision was to become a low delivered cost-high perceived value supplier. Employee stock ownership as a model of privatization enables employee initiatives in business process redesign overcoming the paradoxes in balancing creativity and control like participation vs. partisanship and time-tested approaches vs. timeliness. The implementation of ERP software to solve previous dilemma was the mainstream management concept 8. ERP software allows data sharing without redundancy in multiple locations, providing various views, and eliminating manual manipulation with data. Following the principle redesign first, automate next, the company provided business processes redesign. Namely, organizational design considerations should be in place before automation is finalized. The new organization was actually implementation of the organizational design in line with strategic management requirements for complex and decentralized company oriented towards the value maximization. Organization consists of strategic business units (s), strategic functional units (s), and a corporate center. Concretely, Sintelon was designed as a compound interest or a two-tiered company. The mother company consists of five s, including finance and accounting, R&D, marketing, legal and administration, and quality control. Periphery of compound interest consists of five s with high degree of autonomy in different business lines like yarn and cloth, PVC flooring, textile flooring, carpets, and services (logistics, security, etc.). As usual, is defined as investment center or the smallest organizational part capable of strategy formulation and implementation. Being an investment center means that is responsible for return on investment. It also means, in accounting/reporting terms, responsibility for statutory financial reports. 8 Sintelon started with SAP implementation in 1997

3 308 In the new organization, the information system made possible for hundreds of decision makers from s and s to have a better understanding of the links between the business plan and strategy components and their financial consequences. All of this enabled entering in strategic partnership with Tarkett at the end of 2002, not only as a privatized company with great potential for growth and investment, but also as a well organized company with clear strategic focus and with strong ERP support. In the new context, several alternatives in business model formation had emerged, from new technology and automation to scale of operation and activity sharing in the value chain. These factors, coupled with management team agility, led to the conclusion that the company should find a strategic partner instead of continuing with organic growth. Such strategy was realized by introduction of Tarkett in the equity of strategic business unit PVC flooring. Namely, Sintelon entered in strategic partnership with Tarkett s.a. in Cutting edge technology that Tarkett s.a. possesses as well as its financial power were distinctive features supporting that orientation. In the period , strategic partnership functioned extremely successfully. Compound average growth rate in this period was 22%. Cumulative profit for the period approached 0.5 billion. Cumulative investment in the period was 450 million. Strategic partnership was rather a merger than an acquisition. Namely, Sintelon sold 50% of equity of strategic business unit PVC flooring to Tarkett for 70 million. Actually, Sintelon sold business line PVC flooring, including daughter companies from production and trade in the Russian Federation and Ukraine. No casting vote partnership meant that a high level of complementarity and trust existed between the equity partners. After handling with great success strategic partnership with Sintelon s strategic business unit PVC Flooring, Tarkett decided to buy 100% of equity of Sintelon mother company. The purchase was realized via stock market. The total price of acquired shares was 360 million. Figure 7-6 portrays a two-stage acquisition of Sintelon by Tarkett. The new company made huge investment in technology, revamping the whole product portfolio, and entered in new business line (parquet). Due to new investment, the product portfolio was extended, delivery and support services were upgraded and presale efforts were refocused. As a consequence, market

4 What Lessons Serbia Can Learn from Failures 309 Figure 7-6. Two-stage acquisition of Sintelon by Tarkett Sintelon Joint-stock company 2-nd stage 360 mill for 100% of the equity Quality committee Board of directors 1-st stage 70 mill for 50% of the equity Yarn & cloth Textile flooring Carpets Services PVC flooring Research & development Coloring unit Weaving Sale Purchase Tafting Needlepunch Sale Purchase Production Sale Purchase Transport & ins. CV products Prod. of collections PVC - 4m Prod. preparation PVC - 2m Social consumption Sale Grand club Purchase Marke ting Accounting & finance Quality control Legal & general dep. position was improved and the purchased company was going to be a cash cow in the structural portfolio of Tarkett s.a. In 2007, investment fund KKR bought 50% of equity of Tarkett s.a. and immediately orchestrated initial public offering. The company is listed on the Paris Stock Exchange. Successor of Sintelon 9 consists of the parent company (Tarkett d.o.o. with the head office in Serbia) and a daughter company (Tarkett Eastern Europe including production and trade companies from the Russian Federation and Ukraine). Actually, it is a mixed holding company in which the mother company has its own business. Table 7-8 portrays profit and loss account (P&L) of the mother company Tarkett d.o.o. for the period Consolidation occurs in Serbia, thus increasing its GNP and tax contribution to the budget. No doubt, consolidated results fully portray the financial health and potential for growth of the Tarkett d.o.o. as a business system.

5 310 Table 7-8. Tarkett d.o.o. P&L in millions, Operating revenues Operating expenses Operating profit (loss) (1.3) (0.5) Financial revenues Financial expenses Net financial revenues (expenses) Net other gains and expenses (4.5) (3.4) (1.5) Profit (loss) before taxes Taxes (0.2) (0.1) (0.0) (0.0) (0.8) (0.1) Net profit (loss) Table 7-9. Tarkett Eastern Europe P&L consolidated in millions, Operating revenues Operating expenses Operating profit (loss) Financial revenues Financial expenses Net financial revenues (expenses) (7.2) (5.8) 0.6 (6.5) (12.1) (11.4) (4.9) Net other gains and expenses 2.1 (4.1) 5.2 (3.7) 2.3 Profit (loss) before taxes Taxes Net profit (loss) Profit attributable to non-controlling interests Profit attributable to controlling interests Note: For the period data are presented according to the new Law on Accounting of the Republic of Serbia (noncontrolling interests included) Table 7-9 portrays P&L for the daughter company Tarkett Eastern Europe in the period Maximum level of net profit of million was earned in the year Basic performance indicators for the mother company Tarkett d.o.o. in the period are presented in Table Basic performance indicators for the daughter company Tarkett Eastern Europe in the period are presented in Table 7-11.

6 What Lessons Serbia Can Learn from Failures 311 Table Tarkett d.o.o. basic performance indicators, period Average St.dev. Liquidity: Current ratio Quick ratio Financial structure: Total liabilities / total assets Long-term liabilities / total assets Short-term liabilities/ total assets Debt/total assets Debt/equity Profitability: ROE 24% 18% 35% 39% 71% 61% 60% 40% 10% 40% 20% ROA 24% 18% 32% 38% 66% 54% 53% 40% 11% 37% 17% Operating income margin 22% 23% 24% 17% 17% 17% 10% -2% -1% 14% 9% Profit margin 23% 25% 36% 36% 64% 55% 58% 52% 12% 40% 17% Bankruptcy risk: EM-score Growth: Sales growth rate -26% 39% 12% 16% 1% -15% -33% -9% -2% 22% Total assets growth rate 50% -33% 11% 16% -6% -9% -12% -5% 2% 23% If we compare the data from the previous two tables with the data presented in the table that comprises the basic performance indicators for the whole economy, we can see dramatic differences in favor of Tarkett. Non-official ad hoc rating based on the previously explained EMS model placed both the mother company Tarkett d.o.o. and the daughter company Tarkett Eastern Europe at AAA credit rating rank. Both companies continually run sound financial results. Despite the Global Recession and local transitional recession, in each year of the analyzed period companies earned positive and significantly positive financial results. Profit margins were extremely high (see Figure 7-7). In the analyzed period, Tarkett Eastern Europe paid to shareholders million in dividends. This is higher than acquisition costs. From the perspective of the acquirer, this was also a shoe box deal, because the acquirer got the value of the company for free.

7 312 Table Tarket Eastern Europe basic performance indicatords, 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 20% 16% 24% 17% 29% 39% 21% 5% 21% 21% 9% ROA 19% 16% 24% 16% 23% 31% 18% 6% 12% 18% 7% Operating income margin 15% 17% 15% 13% 14% 17% 14% 6% 9% 13% 4% Profit margin 14% 15% 13% 9% 12% 13% 8% 2% 7% 10% 4% Bankruptcy risk: EM-score Credit rating AAA AAA AAA AAA AAA AAA AA B BBB AAA Growth: Growth of sales revenues -24% 78% 21% 24% 2% -12% -26% -6% 7% 32% Growth of total assets -5% 25% 6% 9% -5% -10% -15% 0% 1% 12% Figure 7-7. Profit margin benchmark: Serbia s economy vs. Tarkett, Profit margins 70% 60% 50% 40% 30% 20% 10% 0% -10% Tarkett doo Tarkett Eastern Europe Economy