At the same time, it is observed thatgroups having their bases in extracting industries expand to, first,technologically linked sectors, and, second, to profitable industrial sectorsand, since recently, to the agrarian and industrial complex (AIC). The mostillustrative examples of this process are the takeovers metallurgy companiescarried out with regard to mechanical engineering, aircraft construction, andmotor vehicle enterprises, the expansion of oil and natural gas holdings to thesector of chemistry products, the growing interest of a number of largestgroups (Lukoil, Interros) to the agrarian sector and (Yukos, MDM, BIN) toretail trade.
An apparent advantage of the verticalintegration in Russia is also related to the process of propertyredistribution. In case the control over a supplier or a consumer isintercepted, it means the stop of the whole vertically integrated chain (if thetask is to exert pressure). The examples of “raw material” pressure oncompetitors or a shareholder who refuses to surrender control are numerous andwell known. The “coal war” between largest metallurgy companies in ferrous andnon-ferrous metallurgy in 2000 through 2001 was directly related to theirstriving to regulate the volumes of output, supply, and prices, as well as toexert effective pressure on electric power companies.
The horizontal consolidation (integration)is the market expansion of a group, first of all, at the expense of taking oversimilar regional enterprises (“Krasny Oktyabr,” and “Babayevski” holdings,“Sladko” group in the food industry, “Baltika” brewery, etc.). Among theadvantages arising due to amalgamation are the reduction of production andsales costs, and reduced tax payments.
Within the framework of large groups, therecontinues the construction of vertically and horizontally integrated“sub-holdings.” For instance, MDM group, which has only comparatively recentlystarted its active expansion in the industry, by 2002 owned three large branchsub-holdings –Mineralno-Khimicheskaya (Mineral and Chemical) company, UgolnayaEnergeticheskaya (Coal and Energy) company, Trubnaya Metallurgicheskaya (PipeMetallurgical) company. The process of formation of holding structures inmechanical engineering underway in 2000 through 2001 was both initiated bylargest multi-branch groups (from “outside”), and on the base of independentlarge mechanical engineering structures (TVEL, Benukidze group, “SilovyeMashiny (Power Machines)”, “Novye Programmy i Kontseptsii (New Programs andConcepts),” “Sibirski Aluminum,” etc.
However, the giant conglomerates andmulti-tier holdings with parity management of the business based on multipleeconomic and personal interests and political connections will hardly become areal perspective in the framework of the institutional and structuraltransformation of Russia’s industry.
It is well known that in 2000 and 2001 theexperts paid considerable attention to the large-scale process of formation ofthe conglomerate linked to R. Abramovich, I. Makhmudov, M. Cherny, O.Deripaska, “Evrazholding,” “MDM Group,” etc. Its structure was vague, seeminglydue to the continuing expansion and its managerial principles. Sub-holdingsmanaged by partners, trusted managers, or previous managers who kept theirshares in chartered capitals and became “junior” partners controlledconsiderable segments of copper, ferrous, coal, aluminum, and motor vehicleindustries. Although there are no (and can not be) convincing data basing onchanges in property and financial interests of partners, the collapse of thisconglomerate in 2001 may be considered as a logical development.
Apart from the break of politicalconnections and the new wave of compromising materials being distributed in thecountry and abroad, the collapse of such an externally amorphous structure maybe related to more serious contradictions caused by the very “system ofpartnership.” The system of partnership presupposes the focus on current shortterm revenues, and, accordingly, there arise problems of coordination andimplementation of long term investment strategy.
In 2001, there were registered numerousexamples of aggressive strategies some groups implemented to take overcompanies. These strategies were based on the discrediting of previousmanagement and the use of “administrative resource.”8
For instance, the logic behind FIG “Sibal”taking over motor vehicle industry is described as follows: 1) a massive PRcampaign aimed to discredit the enterprise and its managers in order todiminish the price of the future deal; 2) negotiations with local authoritiesabout “strategic cooperation and investment,” which involved top federalofficials; in the course of negotiations “Sibal” promised to settle local debtproblems, support election campaign, etc.; 3) purchase of the controllinginterest with subsequent replacement of managers and changes in the compositionof the Board of Directors; 4) “cleaning up” of debts and withdrawal of liquidassets to a new company in the framework of the holding structure.
MDM group also used Russia-specificstandard methods in the course of taking over JSC “Nevinomyssky Azot”(Stavropol krai) 9. The general plan of thetakeover envisaged: 1) purchase of about 30 per cent of shares at the secondarymarket; 2) replacement of the general manager; 3) purchase of 21.8 per cent ofshares still owned by the state at a tender. The implementation of this designincluded additional measures: discrediting of the general manager10 and hisarrest by the tax police, an extraordinary meeting of shareholders taken placeon the group’s“territory” in the Murmansk oblast, militia was used to prevent “outside”shareholders (both individual shareholders and state representatives) fromparticipation on the grounds of “violation of passport control regulations.”
An illustrative example is the conflictbetween “Alpha Group” and the Taganrog Metallurgical Works in the Rostovoblast. Although the factory’s management and affiliated structures owned the controllinginterest (51 per cent of shares), “Alpha Eco” employed well-tested takeovermethods, which included the purchase of a minor block of shares (to begradually increased) and the use of infamous “administrative resource” at thefederal level (initiation of court procedures using any pretext, inspectionscarried out by the prosecutor office, the Accounting Chamber, the InteriorMinistry, the Federal Security Service, the Federal Commission for Securities,tax and anti-monopoly agencies). The regional authorities preferred not tointerfere on the verge of the local election campaign. As a result, theenterprise had to put two representatives of “Alpha Eco” on the Board ofDirectors (it shall be taken into account that any Board’s decision is consideredlegitimate only if 10 out of total 11 members approve it) and to transfer alarger share of profits to dividends11.
In spite of the positive shifts inlegislation (see the section on corporate governance), law enforcement(settlement of corporate conflicts, including those related to takeovers and“shared control” situations) often involves the use of armed units (privatesecurity structures, bailiffs, etc.). Usually, the final decision (in case aconflict is of local character) is taken in favor of the party, which managedto obtain the support of the regional administration and mobilize theemployees. In 2000, the most publicized examples were Moscow-based JSC“Kristall” and SUP “Moskhimfarmpreparaty,” “Babayevsky” (a confectioneryproducer), Kachkanarski Iron Ore Dressing Works (Russ. abbr. GOK), JSC “Uralkhmmash,”Kamyshlovski construction materials factory (Sverdlovsk oblast), etc. Among theexamples registered in 2001 there were Saldinski Metallurgical Works (themonopolist of rail production, Sverdlovsk oblast), Ust Ilim LPK (1/3 ofRussia’s pulpproduction, Irkutsk oblast), Stupinski Metallurgical Works (non-ferrous metalsand heat resistant steel production, Moscow oblast)12, “Alstom– SverdlovskiElectromechanical Factory (energy equipment, Sverdlovsk oblast), Pskovski HeavyElectric Arc Welding Equipment Plant, JSC “Karabashski Copper SmeltingIntegrated Works –JSC “Karabashmed” (blister copper, Chelyabinsk oblast), etc.
At the same time, certain stabilizationobserved in the area of property interests (in a certain sense it is thepost-crisis fixation of the spheres of property interests) createsprerequisites for a new stage of hostiletakeovers. Both the deficit of “free” objects fortakeovers, and the gradual depletion of idle financial resources allows toassume that the “administrative” methods of takeovers involving debt schemes,court decisions ruling earlier transactions to be null and void, etc., willprevail at that stage.
In this connection, the example ofZavolzhski Motor Plant (Russ. abbr. ZMZ) is of certain interest. ZMZ is the major supplier ofautomobile motors for GAZ (Gorkovski Automobile Factory). According to someestimates, 65 per cent of ZMZ shares belong to affiliated structures of“Severstal.” GAZ, a member of “Sibal” group has a chance to purchase about 9.4per cent of shares. Both “Sibal” and “Severstal” (the latter, it seems, alreadyis the real owner) were given MAP (Anti-Monopoly Ministry) permission topurchase the controlling interest in the enterprise. “Sibal,” which is in theprocess of establishing of an automobile holding, is apparently interested toget rid of the necessity to coordinate prices of motors with competitors. Atthe same time, “Severstal” has certain interests in the automobile industry(the Ulianovski automobile factory) and does not intend to sell its assets.There is no sufficient number of shares on the market, and the only legal wayof consolidation for GAZ is to claim a number of previous transactions null andvoid13.
The only automobile factory still not takenover by largest holdings is JSC “AvtoVAZ.” After the problem of debts to thefederal budget was settled in year 2001, the block of shares, which was givenas collateral to the state, must be either nullified, or sold. Over 2001, thevalue of ordinary shares in “AvtoVAZ” increased tenfold, while the valueof preferred shares increased fifteen times, what is an evidence ofactive buying up in anticipation of the takeover.
Consolidation andreorganization of assets to a considerable degreewill remain the dominant institutional processes over next few years.
Consolidation of property in the frameworkof groups is related to the striving of real owners to build a maximallycontrolled corporate structure (in terms of corporate governance) free ofunpredictable influence of “outside” shareholders, including corporateblackmail. At the same time, reorganization is merely a consequence ofexpansion and consolidation of groups and the formation of multi-tiered holdingstructures. The spontaneous process of expansion of groups’ spheres of influence and theachievement of practically absolute corporate control in affiliated companies(sub-holdings) requires, at a certain moment, the legalization of the wholestructure acceptable for concrete beneficiaries and the term is used belowexactly in this context.
At present, there are at least four majortypes of legalization of existing groups:
- formally transparent ownership structurewithin holdings (Lukoil and other oil holdings after transition to the singleshare, “TNK-International”);
- the central structure of a holding is themanaging company established by nominal owners of the parent holding company(or of a group’sassets, which real owners transferred to various offshore companies) and havinga warrant of attorney to manage the assets (“group of shareholders” of“Sibneft” after the 2001 reorganization, confectionery holding “Sladko”);
- “shell” holding, in fact operating as asingle structure with real management authority, where neither the controllingshareholder in the central company, nor the central company itself ownsubsidiaries. The latter are transferred to other, not legally related to theholding, structures (oil and chemistry holding “Sibur”);
- a group where participants are involvedin different degrees. For instance, in the framework of “Sladko” confectionerygroup there is a not-for-profit partnership “Sladko” embracing a number ofenterprises. At the same time, there is established a single company JSC “KOSladko,” to which, upon taking a respective decision, affiliate otherenterprises (their shareholders).
Additional aspects are related to theregistration of the head company as an open or closed JSC, or its registrationabroad. In spite of such clear differences in the transparency of the wholestructure of a holding (group), the general feature of practically all groups(even those structurally transparent and those who got an approval of theirstructures from the Anti-Monopoly Ministry) is the beneficiary ownership, orjuridical identification of actual poles of control (in Russia’s conditions these terms arepractically synonyms).
In terms of the problems of corporategovernance, the importance of this issue depends on the degree to which theactivities of actual controlling owners (and their managers) negatively affectother groups of shareholders (dividends, transfer price formation, too lowexport prices, withdrawal of assets, etc. It is apparent that 100 per centconsolidation of group’s assets by the controlling owner settles the issue as concernsprivate minor shareholders and the management of shares owned by the state;however, the range of problems concerning the relations between the group andthe state remains (taxes, export of capital, etc.).
As in the case of expansion, processes ofconsolidation and reorganization more often take place in extractingindustries. An illustrative example is the consolidation of 100 per cent ofshares in extracting enterprises of TNK completed by January of 2002. Beforethe process of consolidation has started the holding owned 51 to 71 of votingshares in the subsidiaries. Originally, there was envisaged the>
At the same time, there was completed thejuridical reorganization of the holding (according to the available informationit was approved by the RF Anti-Monopoly Ministry). “TNK International,” whichwas established (in London) on parity basis by partners / owners of “AlfaGroup” and “Renova” at end-2001, owns 97 per cent of TNK shares14.