# **Engineering a Takeover: The Case of an Investment Company**

The XYZ Company had been privatized through variant II of the MPP and the managers and the employees combined eventually accumulated close to 85% of the shares of the company. On behalf of an investor, Troika Dialog, a Moscow-based Investment Company needed to obtain more than 75% the XYZ Company before an investor would be willing to invest in the reconstruction and modernization of XYZ's facilities. Renting out a room in the factory in which .o organize the purchase operation, a team of Troika Dialog experts trained to execute on-site share purchasing mandates, organized and executed the purchase of shares from the workers during the work day.

## _Manager and Worker Opposition_

When talks between the investor and XYZ commenced, workers' representatives expressed strong opposition to "outside" intervention in the company's activities. Employees' most commonly expressed fear, naturally, was that of being summarily laid off by the new owners. In addition, many workers understandably lacked basic knowledge of what corporate equity represents. This naivetd generated rumors that the offered bid was too low or sellers would miss out on colossal future dividends. Many workers even believed that they could not be fired while holding equity in XYZ. The challenge was to respond effectively to workers' concerns. Educating workers on the acquisition proceedings often quelled fears, but not always, as employees were accustomed to a stark difference between promises and reality. Even on the management level, good intentions were sometimes misunderstood. For example, the investor decided to take some of XYZ's top management to visit a similar plant in Europe. The motivation was to provide the factory managers and opportunities to witness first-hand the Investor's corporate operations, culture and philosophy. Instead of being impressed by the efficiency of the operation, however, XYZ managers noted that the factory in Europe employed only 300 workers (well under XYZ's number), and immediately feared their work force would be downsized, thus re-igniting opposition. In the end, the investor gained acceptance only through a pledge not to significantly reduce employment levels for two years.

## _The Regional Government_

Regional governments posses a significant influence over the business of privatized enterprises: they control access to inputs, transportation and enjoy tremendous discretion in granting licenses and permits. The strategy of the investor for approaching an acquisition in Russia was to initiate discussions first with target-factory directors, to determine potential interest. This tactic was based on their previous experience of an attempted joint venture, which, after having been cleared at the federal and then local levels, was rejected by plant directors. After initial contacts with senior management, the investor approached local officials with their plans. Upon leaming that they had not been courted first, the administration, both on the city and regional level, felt snubbed. Prior experience with investors had left a bitter aftertaste, and, as such, the administrations were determined to retain control of the process. Troika Dialog and the investor made numerous conciliatory visits before the administrative apparatus warmed to their intentions.

## Source: Troika Dialogue

Foreign consultancies and investment banks have had, in many cases, limited success in sustaining enterprise restructuring in the former Soviet Republics. Therefore, under this proposal, other options should be explored: e.g., strengthening local consulting companies; establishing new consulting/advisory companies; forming restructuring teams workout units of local banks, developing restructuring/workout teams in investment 16