February 1 2000 by Peter Buxbaum
“Why in the world would I take this job?” A reasonable question, coming from a man who took the helm in late 1998 of a company mired in a quicksand of deficit and debt, its share price having plummeted to a fraction of what it had been the year before.
Kjell Almskog, CEO of The Kvaerner Group, answers his own question. “For the challenge of it,” he says, “and just because I thought I could do it. I knew from the outset that there were formidable problems with the company.”
One predicament was the $2 billion in debt that Kvaerner had accumulated during a process of acquisition and diversification. The Anglo-Norwegian, London-based company, known as a world leader in construction, engineering, and oil-and-gas exploration, had, since 1996, made significant investments in shipbuilding, housebuilding, and manufacturing.
“That kind of debt requires substantial interest payments and the businesses weren’t making money,” says Almskog. “High debt and low earnings are a lethal combination. So much energy was being focused on bad businesses that the good businesses started to deteriorate as well.”
Almskog’s first order of business was to renegotiate the company’s loans. “We have relationships with 54 banks,” he says. “Getting 54 banks to agree on anything, even the time of day, is itself a major undertaking.”
Next, Almskog began a program of peeling off non-core divisions, a process that will leave the company leaner by one-third. “That is stage one of the turnaround,” he says. “Stage two will be to grow and improve our core businesses.”
How does Almskog decide what stays and what goes? “We want to look at a few select industries where we can become number one, two, or three worldwide,” he says.
The oil and gas business is one sector that fits that bill. “It has been key since the beginning of Kvaerner’s history,” says Almskog. “We have more than 50 percent of that market but in ten years we have had zero earnings. These are expensive and risky projects and if they go sour it really hurts.”
In an effort to squeeze some profits out of its $3 billion in oil-and-gas revenues, Almskog has instituted a process of bid reviews. “In the past, the company has been too risk prone,” he says. “Now, all project proposals go through an internal audit. The riskier the project, the higher up it must go for approval.”
Shipbuilding, on the other hand, despite the ongoing boom in international trade, has been identified as a sector that Almskog wants to ditch. “Shipbuilding is not a single business and it is not a global business,” he says. “Some yards build cruise ships, others container ships, others fast ferries. It is a capital-intensive business and if there is one thing we lack at this moment, it is cash. There is little synergy between shipbuilding and our other activities. These are localized businesses in relatively isolated areas of the world.”
The divestiture of Kvaerner’s shipbuilding enterprises is going slower than originally expected and the investment community is hanging on the progress of those transactions. “The restructuring appears to be well ahead of schedule with the exception of shipbuilding,” says Ole Slorer, vice president for European equity research at Morgan Stanley Dean Witter in London. “As a result, the company will have difficulty delivering its end-of-year targets.”
Still, Almskog’s efforts have received good reviews, as Kvaerner’s shares, which are traded principally on the Oslo Stock Exchange, finished up 60 percent for 1999. (They are still at only one-third the level they were two years ago, however.) “If he can deliver the shipbuilding divestiture, which will be the final large bit to leave the group, he will get to where he wants to be,” says Slorer. “Their third quarter results were on track and the momentum is good.” Ironically, as Kvaerner’s revenues continue to retreat, its share price will likely continue to recover. From $11 billion in 1998, the group is expected to show turnover of about $8 billion in 1999. “It will shrink further to about $7 billion before it is in a position to grow again,” says Slorer.
“It will probably take three or four years before we become a first-class company,” concludes Almskog. “But before then we should see significant progress.”
“SO MUCH ENERGY WAS BEING FOCUSED ON BAD BUSINESSES THAT THE GOOD BUSINESSES STARTED TO DETERIORATE AS WELL.”
Family: Married, three children.
Education: MBA, University of Kansas, 1964; also attended Harvard University.
Lessons Learned: “It’s impossible to be all things to all people. We must concentrate on where we can be a world player and not a me-too player. Differentiation and specialization are two buzzwords that I keep talking about.”
Decentralized. “There are ground rules set throughout the group but there are a lot of people with p&l responsibility. They own their balance sheets and they are responsible for their businesses.”