International Business: RUSSIA
THE CONGLOMERATE IS ALIVE AND WELL IN RUSSIA
When defense budgets started shrinking during the late 1980s, managers of Moscow's elite Khrunichev missile factory saw the writing on the wall: diversify or perish. Their first move was to import computers and stereos for resale to goods-starved Russian shoppers. That import business has since evolved into privately owned Microdin, a conglomerate that today controls an impressive 150 companies, including such biggies as jet engine maker Perm Motors and auto and truck producer Zil.
Now, taking another giant step, Microdin will merge next month with a bank-controlled holding company called Interros (table). The combination will create an industrial-financial conglomerate with all the cross-holdings and potential clout of a South Korean chaebol. The Yeltsin government has been pushing for just such groups for nearly two years. The idea is that industries with common interests would be linked to banks that could pick up the financing slack from the state.
A REMAKE. A behind-the-scenes fight is already brewing over the role of the 23 new financial-industrial groups already formed. The more conservative elements want them to serve as a haven for change-resistant managers left over from the Soviet era. Indeed, critics say the groups that have been formed so far are weak and ineffective, created by Kremlin decree and owning mostly decrepit, nearly bankrupt factories. In contrast, the Interros-Microdin combination could herald a bold new way to marshal Russian capital to remake essential industries. "This looks very good," says Andrei Volgin, head of the Moscow Committee for Shareholders and usually opposed to such unions. "They combine their financial strength with good industrial assets."
The Microdin merger involves some of the best-known Russian companies and banks. By plowing profits into new businesses instead of parking them in offshore accounts, the former missile men have built up a stable of companies ranging from retail stores and real estate to banks and insurance companies. For its part, Interros is a year-old holding company with stakes in 23 companies, primarily in metals and transportation, including such blue-chip outfits as Norilsk Nickel.
Interros has rich parents. They are Oneximbank and an affiliated unit, Moscow-based International Financial Co. (IFC). Formed by Russian petroleum and metals exporters frustrated by the dearth of trade financing in 1993, Oneximbank has shot to banking stardom. Its assets have ballooned to $3.7 billion, making it the third-largest Russian bank; IFC is worth $1.9 billion. The Microdin wedding has even caught the eye of foreign analysts. "Probably two of the three smartest Russian companies are Oneximbank and Microdin," says Charles Ryan, an analyst with Moscow's United Financial Group.
The new holding company will be formed next month. It will be capitalized at $44 million and initially have assets of about $450 million. Vladimir Potanin, president of Oneximbank, will serve as chairman, with Microdin President Alexander Efanov as his deputy. "These guys really believe in Mother Russia," says one Western analyst in Moscow. "They want to show that they can remake companies without foreign help, that they can do it on their own."
Neither man is inclined to sit on assets. Instead, their strategy is to identify potential national champions, snap up shares, pump in money, fire old-thinking bosses, and stick in modern ones. "The goal of the new holding company," Efanov says, "is to increase competitiveness, spur investments, and upgrade management to European standards."
HARD HIT. At this, Microdin has already established a track record. In 1993, Microdin and its related companies acquired a 28% interest in Perm Motors, which was also hard hit by defense spending cuts and by Soviet-style management. Microdin slashed the workforce from 41,000 to 25,000 and placed in charge one of its own lieutenants, 32-year-old Mikhail A. Makarov, an aviation engineer. Executives at Pratt & Whitney, the U.S. aircraft engine company, say privately that Microdin pretty much saved their $125 million joint venture to make commercial jet engines with Perm Motors.
Microdin is trying to concoct a similar tonic for giant Moscow auto maker Zil, where it holds a 26% share. Long an icon for failed Soviet gargantuanism, Zil is in deep trouble, with obsolete equipment, a stale product line, and a bloated workforce. So troubled is it, in fact, that Efanov himself was named Zil chairman this spring to work up a rescue plan.
In other ventures, Microdin plans to expand into office construction and to add to its popular retail store chain, which has 25 outlets in Moscow and 25 more throughout the country. Microdin wants to become Russia's deluxe department store. At a richly wood-paneled Microdin outlet on Berezhkovskaya Embankment in Moscow, for example, shoppers pick over European shoes for $237 a pair, Panasonic televisions, and Lego toys. If customers need to change money or apply for a credit card, they go to Microdin-owned Rato Bank inside the store. The all-services approach has worked: Sales in Microdin's retail trade totaled $150 million last year.
In the process, Microdin has established a distinctive corporate style that combines youth with brains, energy, and nationalism. The average age of its top leadership is just 35. Some of them are, literally, rocket scientists--graduates of five or so prestigious Moscow physics and mathematics institutes who served some time at the Khrunichev missile plant. Efanov is 38 and is trained as a physicist.
In its hunt for acquisitions, the new holding company will mix Microdin's managerial skill with Oneximbank's deep pockets. Prime targets will be companies that have export potential and are involved in metals and high-tech production. However, they won't be looking at oil and gas companies. "One reason," says an Oneximbank official "is that the energy field is already divided up."
TAKEOVER BAIT. Instead, the list includes aluminum and steel plants in central Siberia, an aircraft plant in Irkutsk, and northern Russia nickel producer Norilsk Nickel--one of 29 companies whose state-owned shares are slated to be auctioned off by yearend. One top takeover candidate is Lomo, the former Leningrad Optical Factory. Russia's largest optical equipment plant, the factory churns out everything from medical microscopes to night-vision devices for the military. An Oneximbank official says the new holding company may plow in money to modernize the St. Petersburg plant. Lomo spokesman Vlasic Zalmanov says his company has close financial relations with Oneximbank but hasn't yet been formally approached for takeover.
Given the grand plans, critics worry that the new group may not be able to manage its disparate units. And shareholder activist Volgin says the union was spurred in part because Microdin's assets were overextended and took a beating in Russia's recent bank liquidity crisis. Microdin officials deny that.
Whatever the immediate problems, the new holding company's example is likely to be repeated as Russia's nascent securities sector grows more sophisticated and privatization plows ahead. Securities analysts in Moscow believe that 1996 will be a year for mergers and acquisitions. Look for Potanin and Efanov to lead the pack.
THE PARTNERS IN A KEY MERGER
In a $44 million deal, Microdin, a fast-growing private company, is creating a financial-industrial conglomerate by merging with Interros, a holding company controlled by Oneximbank, the country's third-largest bank with assets of $3.7 billion
INTERROS Owns stakes in 23 companies in metals, food, chemicals, railroads, and banking.
MICRODIN Controls 150 companies in retailing, real estate, banking, construction, jet engines, autos, and trucks.
DATA: BUSINESS WEEKBy Peter Galuszka in Moscow