Sunday, June 16, 2013

The biggest acquisition in the region

Big news broke out in the business world of the region. Two days ago biggest company in Croatia, Agrokor, signed the deal to buy majority stake in his main regional competitor, Slovenian Mercator. The new company will have more than 60.000 employees and around 7 billion euros of revenues which will bring them in the group of 10 biggest companies in the Eastern Europe. Technically, the deal is not finished since there are still some conditions to be met but it is hard to believe that something will now stop the owner of the Agrokor group - Mr. Todorić, from finally realizing his dream. As it is often the case, operational restructuring and merging of the two companies will take some time, but analyst believe that the joint company will be better positioned to fight against global competitors that are growing their presence in the region, and that the owners of the Agrokor manage to take advantage of the new synergies and benefits coming from the much bigger volume of trade.

But this deal is not only interesting from the business perspective, but also from the political perspective. As said, Agrokor is the biggest company in Croatia, and Mercator is the second biggest in Slovenia, and as usual such inter-country deals brings some politics on the scene additionally fueled by the media coverage that is not always following business logic. Agrokor has tried for several years to buy Mercator, and he would probably succeed in it if the Slovenian politicians didn't stop the takeover. But this time, they couldn't prolong the sales of their problematic company which is for several years in crisis.

It is a good start to look at the ownership structure, to better understand the background. So, who is the owner of Agrokor? The answer is simple, Ivica Todorić and his family through Agrokor have more than 50% share in all of the subsidiary companies. Ivica Todorić is the richest person in Croatian and region, and is frequently marked as a Tycoon by the local media. Word tycoon is here being used for someone who has amassed enormous wealth during the transition from Communism to market economy.

And who is the owner of Mercator? The answer is not that simple, since the ownership structure till this takeover was complex. Mercator is, like Agrokor, a joint-stock company, but stocks of the company are held by the banks, other Slovenian companies, investor funds and individuals, with no one being the major holder. Nevertheless, the Slovenian Government had influential role in the ownership through its controlled companies which had stocks of Mercator or had stocks of companies that had stocks in Mercator. Such position allowed Government to prolong the sales of the one of the most important national companies for some time.

The reason for such different ownership structure in two countries could be found more than twenty years ago. With the fall of communism, new democratic government in Eastern Europe took different paths towards transition to market economy. The path of Croatian government was to sell a majority of the formerly state-owned companies to private hands, usually to individuals and families with good connections to the ruling party. Basically, the old communist directors of the state enterprises were removed from their positions, bringing the new owners onto their positions. This has resulted in some famous fiascos, because some of the new owners haven't been capable of managing the large enterprises. But, some were more successful, one of them being Mr. Todorić who already had experience in the private business, and who has without doubt showed big talent at managing his large business.

In Slovenia the transformation was different. Instead of giving socialist enterprises to the few families, the government privatized companies by redistributing shares of the companies to the former workers and managers. This move kept majority of the former directors in their positions, but also increased the influence of the politics in the economy, since the companies and management boards were interconnected with one another, with many important national companies, like banks, insurance, telecom operator, Oil Company, etc. still held by the government. Nevertheless, such system worked very well till, with Slovenia being praised as one of the most successful transition economies and as the country that should play the role of the bridge between Western and South-Eastern Europe.

But, the current financial crisis also hit Slovenia. The construction companies were first to go down, with almost all the Slovenian construction sector going bankrupt. Secondly, with poor handling of the crisis by the Slovenian Government, a lot of formerly successful companies went into the problems, one of them being Mercator. Recently the government had made a decision to sell its biggest companies to the foreign investors. Several years ago takeover of the Slovenian company by its south neighbors would be surprising news, but Mercator's takeover was just the last in the series of similar events. On top of that, in Croatia the crisis in no less severe, with the standard of living going down and unemployment going up, but it seems that some of the companies have found the way to strengthen its position in the anticipation of the coming accession to the EU market.

So, this takeover underlines the crisis in which the Slovenian economy (and society) is now. From the Croatian perspective, it is questionable how this takeover will benefit average citizen since the biggest Croatian retailer will now have dominant position on the market. From the business side, it remains to be seen how this acquisition will turn out. I personally have some reserves, knowing the difference in business culture, relationship to suppliers, business model and management style between two companies.

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