Moeller Group

 

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The dramatic turnaround of ailing global electronic components manufacturer Moeller is testament to Advent’s skills in re-focusing businesses on their core competencies.

Despite a 100-year history that had elevated it to major global status, German electronic components manufacturer Moeller was on the verge of insolvency when we invested in the company in 2003.

“It’s not true that Germany is a difficult market... It was obvious that the company [Moeller] was in trouble, so securing buy-in wasn’t hard.”

- Uwe Alwardt, ex Moeller Group Chairman and Advent Operating Partner

Crippled by over-diversification and a failure to respond to a changing competitive landscape, the business was unable to convince its existing backers to increase their financing. A two year search for a buyer had also proved fruitless.

But we regarded Moeller differently.  Its core components businesses were profitable and enjoyed an excellent market position. The products were good, the brand was highly regarded and the company attracted a high level of customer loyalty.

Our belief was that if we refocused the business on its core competency - component manufacturing – we could improve its profitability.  Led by two of our most established Operating Partners, the subsequent turnaround programme was highly successful, returning Moeller to profitability only 18 months after investment driven by above-average industry growth.

Over-diversification

“Moeller has always been known as an innovator; it’s a high-brand awareness company. Its only mistake was to expand into and acquire non-core businesses.” - Uwe Alwardt, ex Moeller Group Chairman and Advent Operating Partner

The chief challenge facing Moeller arose from a historic decision to launch a separate systems business. Like many successful companies with a strong product base, Moeller had taken the decision to vertically integrate, offering complete solutions. It was an ill-judged move. Not only did it find itself competing with customers, but the heavily loss-making subsidiary became an enormous organisational distraction, consuming excessive amounts of management time.

Cost-effective production was also an issue for the business. Moeller had been slow to respond to the global dynamic of low-cost manufacturing, making it overly reliant on its high-cost German and Austrian factories to supply components. At the time of acquisition, only seven of its 32 production facilities were in low-cost countries (Eastern Europe and China). Of the remainder, 15 were in Germany and 10 in other European countries.

Given the severity of its problems, the banks assumed operational control of the business and appointed a new management team with the brief of keeping the business ticking over until a new buyer could be found. Despite the management team coming up with a feasible turnaround plan, the banks were unwilling to commit the funds required for its execution. Potential purchasers were similarly discouraged. Of the 20 bidders who looked at the business over the following two years, only Advent was prepared to accept the challenge.

Refocusing on core competencies

Despite its problems, Moeller was an attractive proposition. Its core components businesses were profitable and enjoyed an excellent market position. The products were good, the brand was highly regarded and the company attracted a high level of customer loyalty.

The strategy for the turnaround was to re-focus the company on its core competency - component manufacturing - and improve its profitability. The approach was three-fold: the transfer of selected production activities to lower-cost counties in Eastern Europe and Asia, regain market share, and the on-going development of the product portfolio.

100-day plan
The seeds of Moeller’s successful turnaround were sown in the nine months due diligence that preceded our investment. Operational insight was critical to a successful execution, provided by two full-time operating partners brought in from ABB and GE - Uwe Alwardt and Dave McLemore - both of whom had the extensive industrial experience to help define and then execute the key strategy.

The resulting 100-day plan, which outlined exactly what would happen week-by-week during the first 100 days of ownership, was the springboard on which the turnaround was built. It had two core effects. Alwardt explains the first: “It made the workers realise that we only had one chance to turn this business around and focused everybody’s attention on what was needed.  With the business so close to insolvency, union leaders lent the changes strong support. “

Non-core assets
The 100-day plan also built the momentum on which the tough decisions,  such as the closure of the loss-making systems business, which was exited through a series of sell-offs to management and site closures, could be implemented. Dave McLemore was solely focused on the exit of the systems business. The closure enabled the rest of the management team to focus its attention on the core business, guided by Alwardt.

The effect was almost instantaneous as the change of ownership injected a much-needed shot of confidence into the arm of Moeller’s customer base. Not only sales, but also morale, rose as employees recognised they had an opportunity to contribute to a turnaround. “The company immediately had leadership, direction and a plan. It knew what it had to focus on. Sales turned round very quickly,” says Humphrey Battcock, a managing partner in Advent’s London office.

Manufacturing
It was critical that the shift to lower-cost manufacturing markets didn’t undermine the quality standards for which the business was famous. (It is remarkable that even in times of crisis, Moeller’s investment in product development didn’t waiver, with the minimum research and development budget never falling beneath €50 million.) The manufacture of the more sophisticated product components therefore remained in the more experienced Austrian and German factories, with the lower-skilled final assembly being moved to low-cost locations. New facilities were established in Romania, and the existing Chinese and Czech facilities extended. As well as generating financial efficiencies, this best-fit approach to production also introduced valuable operational flexibility.

One benefit of this shift has been increased local market sales growth. In Romania, in particular, there was a dramatic leap of 550% in a single year. So what began as a strategy to capitalise on cheaper labour markets has also helped to develop those local markets.

“It’s not true that Germany is a difficult market. Workers’ Councils just like to know what’s going on. It was obvious the company was in trouble, so securing buy-in wasn’t hard. There were clear rules to follow and then it was done. It’s about clear positioning, communication and execution.”

- Uwe Alwardt

Return to profitability

The outcome of the turnaround plan was impressive. In the 18 months during which the restructuring was executed, Moeller reduced its production facilities from 25 to ten, and its legal operating entities from 110 to 60. Although the initial headcount of just under 12,000 was reduced by 3,500 to a total workforce of 8,000, the nature of the exit plan, which was primarily focused on trade sales or management buyouts, meant that only 300-400 people actually lost their jobs. In total, there were 25 sales initiatives, the majority of which were cash-generative, providing a welcome boost to working

Today Moeller has moved out of restructuring mode and into growth mode. Having been loss-making at the time of investment, the business was able to show EBITDA of €120 million on sales of €800 million by the time of its sale to Doughty Hanson in September 2005. Crucially, and testament to the strategic viability of the turnaround plan,  this is sustainable. Today, Moeller’s core business is generating an organic growth rate of 14%, compared with an industry average of 5%.

Alwardt perhaps sums the turnaround up best: “Moeller has always been known as an innovator; it’s a high-brand awareness company. Its only mistake was to expand into and acquire non-core businesses.”

“Moeller has always been known as an innovator; it’s a high-brand awareness company. Its only mistake was to expand into and acquire non-core businesses.” - Uwe Alwardt, ex Moeller Group Chairman and Advent Operating Partner

 

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Jan Janshen

General Manager, Advent International GmbH
T: +49 (0) 69 955 2700