Financial Performance

This section presents the organisation’s global revenue development before, during and after the M&A/integration, followed by its European revenue and profitability development during and after the M&A/integration using publically available data sources. Then it presents the organisation’s European financial KPIs and revenue development from the European Key Accounts during and after the M&A/integration using internally reported data.

1) Company-X Global: Revenue Development

In terms of reported revenue, the company had grown significantly between 1996 and 2005 with a CAGR (compound annual growth rate) of 24%, which was much higher than its rivals’ (Rival-A’s 5%, Rival-B’s 8% and Rival-C’s 10%). However, as clearly

shown in the figure below (Ch-3 Figure 13), almost 90% of its growth had come from the M&A activities, while its rivals (Rivals-B and C) had largely grown organically.

Ch-3 Figure 13: Company-X Global Revenue Development and Key Drivers

As indicated in Ch-3 Figure 14, the company’s global M&A activities were divided into three phases: 1) European domestic acquisitions without physical integration between 1996 and 2001, 2) large scale acquisitions and integration between 2001 and 2004, and 3) consolidation between 2004 and 2005. During the first phase, both reported and organic revenues grew almost at the same pace, whereas there was a large gap between reported and organic revenues during the second phase. Furthermore, during the official integration period of the Company-X group (2003-2005), the organisation even recorded a decline in its organic revenue.

Ch-3 Figure 14: Company-X Global Revenue Development 1996-2005

2) Company-X Europe: Benchmarking against Rival-A Europe

In order to make a sound assessment of Company-X’s financial performance in Europe during and after the integration, a benchmarking exercise was conducted against Rival-A Europe considering the following:

Both Company-X and Rival-A have a lot in common; for instance, they 1) have a similar history of corporate development, 2) have been competing in the same market segment since the late 90’s, and 3) focus on the European market (in 2005, Company-X generated 60% of its revenue in Europe, while Rival-A did 82%).

On the other hand, there is a fundamental difference. Rival-A completed most of its M&As by 1999 with minor players, whereas, Company-X went through heavy M&A activities until 2003 and then launched a full integration programme. Therefore, it is apparent that during the period being studied, i.e. between 2003 and 2005, when Company-X was integrating all the acquired companies in Europe, Rival-A was in a business as usual situation. This makes Rival-A a relevant benchmark to assess the

To make a fair comparison between the two companies, their year-on-year organic revenue growth rates from 20023 to 2007 were extracted, excluding the M&A effects — Rival-A data were taken straight from annual reports, while Company-X data were estimated based on reported revenue and information about Companies-X1, X2 and X3 as well as internal revenue data. As clearly indicated in the figure below (Ch-3 Figure

15), when Company-X was executing the large scale integration between 2003 and

2005, its organic business growth (year-on-year growth rate) was very limited compared to that of Rival-A in the same period. Especially in 2005, the planned final year of the integration, Company-X suffered most with flat growth. It was 2006, four years after the launch of the integration programme, when the company started to show signs of recovery.

Ch-3 Figure 15: Year-on-Year Organic Growth Comparison Company-X vs. Rival-A in Europe

In terms of a profitability benchmarking (return on sales or EBIT in %), due to data availability issues, the following data were used: Rival-A Global4 data (from its annual reports), Company-X Global data (from its annual reports) and Company-X European

3

Since the major target companies including Company-X1 and Company-X2 used to be privately owned, their revenue data in Europe before the integration (2001 and before) were not available in a consistent manner. Therefore, the benchmarking exercise can cover only during and after the integration period. 4

This is because Rival-A annual reports do not disclose its profitability by region. However, since Rival-A has been generating over 80% of its business in Europe, it would make sense to compare Company-X Europe against Rival-A (global).

data (from its internal source5). As shown in the figure below (Ch-3 Figure 16), it is obvious that Company-X Global suffered from its poor profitability due to its heavy loss- making business in the USA (after the controversial acquisition6 of Company-X4), compared to Rival-A Global which improved its profitability year after year up to a 9-10% level. However, it is also apparent that Company-X Europe improved its profitability year after year and finally caught up with Rival-A in 2007, five years after the launch of the integration programme. It is noticeable that there was a clear sign of margin improvement during the integration period, although its organic revenue did not grow.

Ch-3 Figure 16: EBIT Comparison: Company-X vs. Rival-A

3) Company-X Europe: Evidence from Internal Data

As stated earlier, the financial performance data of Company-X Europe used so far were a combination of official data and the author’s estimation from several sources. These would be reasonably accurate but obviously different from those recognised in the organisation. Therefore in order to understand Company-X employees’ perception during the integration, the key (financial) performance indicators (KPIs) were analysed using only internally reported numbers.

5

Due to management data visibility issues caused by the integration in Company-X Europe, its profitability data in 2003 were not available.

6

Highlights from the revenue development analysis from the internal data are:

 The company’s revenue consists of, among other things, two major service categories: premier services (formerly offered by Company-X1) and standard services (formerly offered by Company-X2),

 Revenue from the premier services was relatively stable during and after the integration, but that from the standard services declined in the same period,  The company launched a new international standard service in 2005, which

brought additional revenue (50% of this service category in the year).

The figure below (Ch-3 Figure 17) shows the evolution of financial KPI’s: year-on- year revenue growth rate (%), achievement (in %) versus original revenue target and actual profitability (EBIT in %). The organisation recorded relatively healthy revenue growth in both 2004 and 2005; however, it did not achieve revenue target, which means that its business did not grow as originally planned. It was 2006 when the organisation showed signs of turnaround internally by achieving its revenue target and improving its profitability.

Ch-3 Figure 17: Financial Performance, Company-X in Europe

4) Company-X Europe: Revenue from European Key Accounts

Company-X Europe formed a pan-European account management organisation in late 2003 to manage multinational customers in the region. There were several changes in its customer portfolio over time but 20 customers stayed on for five years (2003-2007).

Since they are the primary targets of the customer interviews in a later stage of this study, Company-X revenue development from the 20 European Key Accounts was analysed by generic service category: premier services and standard services.

As shown in the figures below (Ch-3 Figure 18 & Ch-3 Figure 19) the revenue from the 20 European Key Accounts grew consistently at a very high pace (15-25% except 2005). Here is a summary of generic findings:

 2004 was a good year for both standard and premier services, presumably due to the start-up phase of the new pan-European account management organisation,

 2005 was a bad year, especially for premier services (negative revenue growth vs. last year), presumably due to the integration issues,

 2006 was a very good year for premier services, presumably due to recovery from the integration issues, and a good year for standard services,

 2007 was another good year for both standard and premier services.

Eight out of 20 European Key Accounts were ‘down-traders’ in 2004, 12 in 2005, two in 2006 and four in 2007. As a rule of thumb, 10-20% of customers ‘down-trade’ anyway in a business as usual situation, but it is noteworthy that half of the European Key Accounts ‘down-traded’ in 2005.

Ch-3 Figure 19: Year-on-Year Revenue Growth Rate, EU Key Accounts

5) Summary: Implications from the Financial Performance Data

The following is a summary of implications from the organisation’s financial performance data during and after the integration:

 The global revenue data (Ch-3 Figure 13, Ch-3 Figure 14) show that the organisation recorded a decline in its organic revenue globally during the integration period (2003-2005). This implies that the large scale integration of acquired companies weakened the group’s normal business activities, and thus damaged its organic growth on a global scale.

 The benchmark against Rival-A (Ch-3 Figure 15, Ch-3 Figure 16) shows that: o The organisation recorded much lower organic revenue growth than Rival-

A did and it was 2006, four years after the launch of the integration programme, when the organisation started to show signs of recovery. This implies that it lost substantial business opportunities during the long integration period.

o The organisation in Europe improved its profitability year after year and finally caught up with Rival-A in 2007. This implies that it focused on cost control or indeed cost-cutting at the expense of revenue growth.

 The internal financial data (Ch-3 Figure 17) indicates that the organisation missed its revenue target for two consecutive years. This may imply that a

general sense of negativity was spreading through the organisation at least in 2004-2005.

 The revenue data of the European Key Accounts (Ch-3 Figure 18, Ch-3 Figure

19) show that the segment grew consistently except in 2005 when half of the

European Key Accounts ‘down-traded’. This implies that many customers perceived some kind of negative effects at least in 2005.