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The Aker Kvaerner Group
The fight against bankruptcy
Executive summery
During 16, Kvaerner sought to strengthen its engineering base internationally through the acquisition of the UK-
Buy cheap Aker Kvaerner Group term paper
based conglomerate, Trafalgar House. The acquisition was completed in May 16. Kvaerner became an
international player in shipbuilding, oil and gas, pulp and paper and engineering and construction. It moved its
international headquarters to London in the spring of 16.
In the following years, increasing financial and operational difficulties followed strong growth financed through
debt. The acquisitions had resulted in a broad business portfolio, without a corresponding management capacity. The
consequences were weak integration of the acquired units and no realization of synergies between the different
business areas.
In 1 the company initiated a major sell-off, focusing on realizing capital through divestments. These efforts did
not solve the mounting financial and operational challenges, which eventually brought the company into an acute
liquidity crisis in August 001.
In July 000, Aker Maritime ASA, a Norway-based offshore products, technology and services provider, had bought
6 per cent of the shares in Kvaerner ASA. The investment was made with the aim of creating a focused, profitable
and forward-looking group based in Norway, with substantial international operations.
It took 18 months to achieve the goal of integrating these businesses. In late November 001 an agreement was
reached between Aker Maritime ASA and Kvaerner ASA. Aker Maritime injected NOK .8 bn in net assets, raised
another NOK .5 bn through two direct issues and renegotiated NOK 8.6 bn of Kvaerners debt.
The result was a financially stronger Kvaerner, with four focused business areas Oil & Gas, Engineering &
Construction, Pulp & Paper and Shipbuilding. The group decided to adopt the Aker Kvaerner brand for the entire
group. But in 00 Aker Kvaerner still had a huge liquidity problem, so the company kept selling asset to earn
revenues. But in the end of 00 came the message Aker Kvaerner had again a liquidity cries.
To day Aker Kvaerner dont know how their are going to pay their workers salary the coming month, and their
struggling every day to avoid bankruptcy.
Introduction
The Aker Kvaerner Group
Aker Kvaerner is a world-class international oil services and products, engineering and
construction, and shipbuilding Group with the capability and resources to undertake the
worlds most challenging projects.
Todays Aker Kvaerner is an industrial technology provider. It meets the needs of its
customers by adding value to their business - through the provision of innovative, cost-
effective solutions - for challenges in the hydrocarbons, process, and maritime industries.
The Groups activities are organised in four core business areas
• Oil & Gas
• E&C
• Pulp & Paper
• Shipbuilding
The Group has annual revenues in excess of US$6 billion, with some 4,000 permanent
staff located in more than 0 countries throughout Europe, Africa, Asia and the
Americas.
This assignment is consentrated around the last years, but to explaine how they got their huges
debt, that was the main reasen for their crises, I start the assignment with telling the storry back
from 16. Then I explain about Kvaerners way thru crises after crises and until to days almost
bankruptcy. The assignment try to analyze what went wrong and way it went wrong.
Expanding and growth by loan financing
In 16 Kvaerner was the biggest engineering company in Norway. Kvaerner wanted as most
corporations to increase the value of the company and grow even bigger. To do this its a normal
process to expand their business to foreign countries. Kvaerner already had a lot of operations
around the world, but to grow bigger Kvaerners CEO, Erik Tønseth, saw it as necessary to
increase their international attendance in shipbuilding, oil and gas, pulp and paper and
engineering and construction.
During 16, Kvaerners CEO, strengthen its engineering base internationally through the
acquisition of the UK-based conglomerate, Trafalgar House.
To move the headquarter to London was a big change and an operation with high acquisition
cost.
At this time Kvaerner already had a lot of debt and to finance the new changes they borrowed
more cash from the banks.
The changes resulted in a broader business portfolio and this required greater and more exigent
management than Kvaerner had.
The management capacity didnt correspond to this requests.
The consequences were weak integration of the acquired units and no realization of synergies
between the different business areas.
In the following years, increasing financial and operational difficulties followed strong growth
financed through debt.
No dividends and increase in share outstanding
After 17 the company had to stop to give dividends to save money, but they kept invest money
to expand their business and to try to increase the revenues. But they didnt earn the money they
hoped, and the company started to increase shares outstanding to earn money. In 18 they kept
selling shares, and the value per share just kept falling.
After two years following this strategy the company hadnt seen anything ells than red numbers,
and in 1 the CEO Erik Tønseth got fired.
Restructuring and downsizing
The new CEO, Kjell Almskog, changed the strategy and initiated a major sell-off, focusing on
realizing capital through divestments. Now it was the agenda for change that again was in focus.
This involves a series of fundamental structural changes in order to create a company with a
clear focus on two core business areas Oil & Gas and Engineering & Construction.
An intense focus will be maintained on the debt reduction program to meet the earlier announced
objective for the Group to have zero net debt by the end of year 000.
Kvaerner planned to build shareholder value by creating a profitable Norwegian player with the
strength to compete internationally in selected regions and market areas. They planned to do this
by
• strengthening profitability through improved operation and better co-ordination between the
Engineering & Construction (E&C) and Oil & Gas (O&G) business areas.
• strengthening profitability through improved operation and better co-ordination between the
Engineering & Construction (E&C) and Oil & Gas (O&G) business areas.
• taking greater advantage of E&Cs strong global position and exploiting its extensive existing
expertise in pipelines, refining and other land-based process plants for the oil and gas industry.
• strengthening the technological platform through the acquisition of small technology-oriented
companies which complement the existing operations and product portfolio.
• strengthening the presence in selected regions such as the Gulf of Mexico, Brazil, western
Africa and the Caspian, with a particular focus on subsea production in deep water• assessing
alliances and partnerships with large companies.
During 000 and 001 the more than 0 businesses was sold or closed. Overhead costs was
reduced by more than NOK billion per year, net interest bearing debt was reduced by NOK 6
billion.
The CEO breach the disclosure requirement
But these efforts werent enough to solve the mounting financial and operational challenges, and
during the summer 001 the CEO Kjell Almskog knew that they were going to meet a liquidity
crisis in August, if they didnt borrow more money.
To the shareholders he told that the future prospect for the q was quite good.
Now the bard struggled for new loans, but the banks said no, and in August the company was in
an acute liquidity crisis.
Now the situation was so different from what the CEO had told the shareholders, so the Oslo
Stock Exchange (OSE) gave Kvaerner an penalty of a half million US $ for breach on the
disclosure requirement.
Kjell Almskog didnt tell about the financial difficulties of the Kvaerner Group, and now they
were suddenly fighting against bankruptcy in day to day operations.
Kvaerner merge with Aker Maritime
After two months with negotiation with banks and investors Kvaerner has agreed to merge with
its main shareholder and industry rival, Aker Maritime. Kvaerner is saved from chapter 8.
The news brought Kvaerners long-running battle against bankruptcy to an end, though the future
was still uncertain for Kvaerners 5,000 employees, 7,000 of them in the UK.
The rescue plan was made by the chairman of Aker Maritime, Kjell Inge Rokke, who have
previous attempt to merge his firm with Kvaerner, but have been strongly resisted by both
Kvaerners management and its board of directors. Mr. Rokke owns more than 50% of the shares
in Aker Maritime and is now the most powerful man in Kvaerner.
Kvaerner, which was suffering a serious cash crunch that would have brought it to its knees in
under a week, had repeatedly called on Mr Rokke to bail it out, but his refusal to step in without
being properly rewarded had been consistent.
But Kvaerner had to accept Mr. Rokkes deal that implied that Aker Maritime will own about
50% of Kvaerner. Aker Maritime injected NOK .8 bn in net assets, raised
another NOK .5 bn through two direct issues and renegotiated NOK 8.6 bn of Kvaerners debt.
The group decided to adopt the Aker Kvaerner brand for the entire group.
Internal problems in Aker Kvaerner
Kvaerner shares rose 40% by lunchtime in Oslo. The result was a financially stronger Kvaerner,
and most investors thought that this was the end of many bad years for Kvaerner.
But the internal problems started from the first day. From the beginning Kvaerner was negative
to Aker. They didnt really wanted to merge with Aker, they just did because there was no other
solution out of the crisis. Kvaerner wanted to have all the control and on the other side Mr.
Rokke wanted to have as much power as he could get. And with the Russian oil firm Yukos,
which owns just less than a quarter of Kvaerner, in the back Mr. Rokke became the new CEO of
the board.
In 00 Aker Kvaerner still had a huge liquidity problem, so the company kept selling asset to
earn revenues. The debt was a bigger problem than anyone had thought, and in the end of 00
came the message. Aker Kvaerner had again a liquidity cries.
All January have the board had meetings with the banks and investors. Yukos oil want a huge
downsizing of the company, but Mr. Rokke and the rest of the board want share capital
augmentation. The board has announced that it can be a problem to pay salary to the workers the
15th of February.
Aker Kvaerner is struggling every day to avoid bankruptcy.
What could Aker Kvaerner have done to avoid the liquidity crises?
During a period of 6 years Kvaerner went thru expanding strategy, cut of dividends, increase in
share outstanding, restructuring and downsizing, merge with Aker Maritime, internal problems
and the company had three differnt CEOs.
For the first I think that before a company thrie to erxpand its business, it should have full control over its existings
operations. With this I mean that Kvaerner should have got there already existing industries more
profitable, so when the wanted to expand they hadnt needed to borrow so much, and the risks
had been much lower if the investments went wrong.
At least a company which has to cut the dividends and increase shares outstanding at the same
time should never borrow money to invest in new industries. Of course its possible to earn a lot
of money, but its a risk that a huge company like Kvaerner never should have take. When you
are a CEO for 5000 workers and many thousands shareholders you have a responsibility, and
then I dont think its responsible to act like Kvaerner did.
Some companies dont pay dividends, but these companies usually do other things to increase
the per share value, like for example share buybacks. What Kvaerner did when they cut
dividends and on the same time increased share outstanding, was to decrease the per share value
with double effect. And by getting so much debt they will in the future decrease their instrinct
value. All this is important for way Kvaerner had an enormously decrease in shareholders value
from 16 to 001.
Her is some of Kvaerners key share figures that shows this effect very clearly.
Dividend
00100011817
Dividend per share (NOK)1)00007.00
Market capitalisation, number of shareholders and number of share adjusted for dilution effects
00100011817
Adjusted number of share at 1 December 1)106 6 16106 6 1668 1 6448 74 7848 74 78
Average number of shares1)106 6 168 75 5658 55 68648 74 7848 74 78
Number of shareholders 56018 8817 4018 811 5
Market capitalisation at 1 December (NOK millions)6 66510 1106 16 104
Movement in share price 1)
Amounts in NOK
00100011817
Price of A shares 1 December8.656.515.5114.687.
High6.414.150.41.065.
Low5.76.57.857.8.4
Price of B shares 1 DecemberN/AN/A1.5111.806.
HighN/A1.0140.41.16.4
LowN/A7.0.5.78.
1) Adjusted for dilution effects of subsequent share splits, options granted, bonus issues and stock dividend issues.
) Pay out ratio = (Dividend/Net profit)
) Preliminary
When they started the restructuring and downsizing in 1, I think they did the only reasonable
thing they could do. They tried to pay back debt and make their business profitable again, but it
seemed as this was to late.
When they in the end of 001 merged with Aker Maritime they had a new change to get on the
road again, but I think they were unlucky with the time. The year that followed after September
11th wasnt an easy period to improve the business.
To days idea of selling even more stocks is very short dated, and I really dont see how Aker
Kvaerner will be able to pay back the debt of more than a half billion US$.
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