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Des/JAN 2008-2009 1. tbl. 2. árgangur



ÁRNIODDUR Dagleg, vikuleg eða mánaðarleg uppgjör – Þú velur það sem hentar þínum rekstri! ÁRAMÓT / VIÐSKIPTABLAÐIÐ DESEMBER 2008 > JANÚAR 2009 Fyrirtækjalausnir VALITOR • Laugavegi 77 • Sími: 525 2080 • •

Iclandic Business Award


2008 Business Award

Text: Sigridur Mogensen Photos: Big Translation: Páll Hermansson




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Eyrir Invest’s CEO, Arni Oddur Thordarson, has received the 2008 Business Award. In an in-depth interview with Icelandic Financial News Magazine, he relates the phenomenal development of Marel and Ossur as well as interesting takeovers. He also offers his views on EU accession, the Icelandic banking collapse and the economic outlook.

Arni Oddur Thordarson founded Eyrir Invest in 2000 together with his father, Thordur Magnusson – an influential figure in Icelandic business for the past three decades, including a 20-year stint as CFO of Eimskip. The father-and-son team currently hold a 38% stake in the company, which generated a profit for the first ten months of 2008, including “Black October”. In addition to his father, Thordarson’s closest colleagues are Margret Jonsdottir, CFO of Eyrir Invest, and Hordur Arnarson, CEO of Marel. Arnarson and Thordarson are in nearly daily contact and have over the past few years worked closely together on implementing Marel’s strategy, with Thordarson as chairman of that company. Eyrir Invest employs a staff of seven in addition to Thordarson and his father. As well as managing its core holdings, the firm conducts extensive research both of macro-economic trends and of individual companies. Thordarson previously headed the brokerage, treasury, corporate finance and research divisions of the bank Bunadarbanki Islands, having been recruited by the bank aged 27 to build up its investment banking arm. In less than four years, the number of staff under his command jumped from five to over a hundred. In mid-2000, Thordarson and his father decided to establish Eyrir Invest. In 2002, Thordarson enrolled on an MBA programme at one of Europe’s most prestigious business schools, the International Institute for Management Development (IMD) in Switzerland. “The purpose of embarking on the MBA at that point was to transform myself from a banker to a business man, a goal in which I think I succeeded reasonably well. In fact, many things happened in Switzerland – I was reprogrammed, so to speak, and more long-term thinking took over,” says ÁRAMÓT / VIÐSKIPTABLAÐIÐ DESEMBER 2008 > JANÚAR 2009

Thordarson. “I also made many good friends in Switzerland, with whom I’m in regular contact. In my year, there were 60 students from 35 countries, which added a lot of breadth. We’ve met every year since graduating, and this summer 30 people from my class visited Iceland and enjoyed themselves thoroughly here.” At the graduation ceremony, the IMD President, Professor Peter Lorange, who is Norwegian, said to Thordarson: “Arni, you must promise me one thing: don’t get trapped in a narrow world view. I live in a small country, but you live in an even smaller one. Promise me not to get trapped.” “These words of farewell at my graduation have since resurfaced in my mind again and again when we’ve been looking at investment options,” says Thordarson. SHAPING MAREL AND OSSUR IS EXHILARATING What is Eyrir Invest’s background story? “It began in June 2000 when we founded the investment company Gilding in partnership with pension funds and other financially solid investors. Eyrir Invest was the holding company established by my father and me for our stake in Gilding, in which Eyrir was the largest shareholder. Gilding had five excellent assets, of which the largest were Actavis and the Kaupthing investment bank. Our error was to not secure their financing for a long enough period of time – a mistake of the kind that many are grappling with now. We lacked the credibility to manage these assets effectively enough, in that their price formation in the market was affected by doubts about our strength. “We started to seek ways in which to manage these strong assets as effectively as possible and subsequently structured a deal with Bunadarbanki on its acquisition of our assets in exchange for a stake in the bank. The bank’s share price had taken a beating in the

“Most industries are consolidating because there are two ways to make a profit: through economy of scale or highly specialised services. When you take the middle-of-theroad approach, you are neither here nor there. Hence, we concluded that it was important for Marel to grow at a robust pace and win a bigger market share.”

PROFILE > Arni Oddur Thordarson and his partner of ten years, Eyrun Lind Magnusdottir, have two children, Elin Maria, four, and Thordur Magnus, two. > His parents are Thordur Magnusson and Marta Maria Oddsdottir. He has two brothers, Magnus Geir Thordarson, artistic director of Reykjavík City Theatre, and Jon Gunnar Thordarson, theatre director. > Thordarson was an active participant in student activities during his years at the University of Iceland, where he chaired the society of business students and served on the student council.

market although its underlying operations were in fact strengthening. Gilding’s shareholders thereby acquired shares in Bunadarbanki in exchange for their shares in Gilding. Bunadarbanki reaped great benefits from this deal, which we shared with the bank’s other shareholders. “So Eyrir Invest in its present form launched its operations in 2002, although we measure all our performance since Gilding was founded in mid-2000. Soon after market conditions then staged a turnaround, we stepped up efforts to increase our stake in Bunadarbanki. Eyrir Invest together with several former Gilding shareholders subsequently acquired an aggregate stake of 25% in the bank. We then started pushing for a merger with Kaupthing. We remained a

Kaupthing Bank shareholder until year-end 2005 when Eyrir Invest sold its stake at a handsome profit. “In actual point of fact, the reason for divesting our stake in Kaupthing was not that we had made so much capital gain, but rather that our role as a strategic investor had come to an end. We had held a large stake and exerted our influence on the merger between Kaupthing and Bunadarbanki. The bank subsequently acquired the Danish bank FIH Erhvervsbank and pressed forward in many areas, and its shares were on a steep upward trajectory. Following that expansive phase, Eyrir Invest retained an approximately 3% stake in the bank. The investment had generated a healthy return. However, we weren’t in it

“You could compare it to overhauling a ship in mid-ocean – we couldn’t stop the ship and simply take it to the dockyard, because it needed to keep catching fish and steam ahead, whilst at the same time we needed to repair it.”


40 2008 Business Award

“It’s worth noting that Marel staged three takeovers in two years with two of the target companies not up for sale at all – a scenario that can undeniably hold up the entire process. So clearly these were neither haphazard nor opportunistic acquisitions.”

simply to profit, but to have the influence and power to change something. That relatively small stake in Kaupthing was then worth very substantial money, which enabled us to make inroads into Marel and Ossur, companies in which we had always been very interested. “In 2003 we took part in numerous other projects during a transformative period for the Icelandic economy. The projects included the transport and logistics company Eimskip and Straumur-Burdaras Investment Bank. While the investments were conceived on a long-term basis, changes were happening rapidly and we found share prices to be rising so steeply that further investment wouldn’t meet our return-on-equity target. So we decided to stop there and seek out new projects. We completely reformulated Eyrir Invest’s strategy in 2004 and 2005, shifting our focus to longer-term investment in companies with the potential to become true global leaders in their sectors. Marel and Ossur fitted the bill perfectly. “We bought stakes in Marel and Ossur in 2004. The following year I took over as chairman of Marel and Thordur Magnusson


took a seat on the Ossur board. We are now the lead shareholder in Marel, with 40% of the total shares, and the second largest shareholder in Ossur, with a 20% stake. Formulating strategy and shaping Marel and Ossur’s development is exhilarating work. However, it’s important that investors don’t put too heavy a foot on the brakes and stifle their investee companies’ dynamism and ideas. While the companies need to be guided towards the right course of action and their financing must be handled prudently, we must never underestimate the knowledge that they have built over many decades. For instance, Marel was born out of a research project at the University of Iceland’s engineering faculty in 1977. Ossur too was founded in the 1970s, by the eponymous entrepreneur Ossur Kristinsson. “In 2006, we alongside the two companies’ executive teams and other shareholders set ambitious targets for both of them – particularly Marel, in which we are the lead shareholder. The target-setting and strategic decisions that followed included a plan on how Marel could achieve a leading market position. We found it obvious that market consolidation was on the cards because

most of our competitors were family businesses ripe for a generation changeover, or companies owned by investment firms aiming to divest them in the next three to five years. “At the time, disclosing and presenting business strategies publicly was unusual and many found our going public with our plans odd and that we should let actions speak louder than words. But in our view we had to present the strategy for the staff to be in sync with one another and, as importantly, to raise capital for the projects ahead. Keeping silent about the story and the dream will not get you the funding. You then need to implement that vision, thereby gaining trust and support for further projects. But in such a situation you must move fast because your competitors know what’s up. “So Marel completed a five-year external growth strategy in two years. At that point in time, Marel held an approximately 4% global market share in its sector; the largest market players had double that share, at about 8%. The upcoming scenario we predicted was that two or three companies would gain a 15-20% market share each or that one company would win a 30-40% share”, says Thordarson. “Most industries are consolidating because there are two ways to make a profit: through economy of scale or highly specialised services. When you take the middleof-the-road approach, you are neither here nor there. Hence, we concluded that it was important for Marel to grow at a robust pace and win a bigger market share. Its sector was also undergoing hefty growth – it grew by an average of 6% per year over the past decade, nearly double the global GDP growth rate. When we presented Marel’s strategy we were already in takeover talks with three companies. We completed all of these takeovers, one of which was Marel’s acquisition of Stork Food Systems. “The Stork acquisition was far the most intricate. Not in terms of the operating aspect, since Stork Food Systems was a long-standing partner, but rather in terms of bagging the deal – the company was not at all for sale. This acquisition took a two-year marathon battle. It took us eight months to contend with Scanvægt, Marel’s nemesis for several years. “While these were dissimilar takeovers in many ways, what’s worth noting is that Marel staged three takeovers in two years, with two of the target companies not up for sale at all – a scenario that can undeniably hold up the entire process. So clearly these were neither haphazard nor opportunistic acquisitions.” What was Stork’s takeover like? “We had to take a longer route than we originally mapped out. Eyrir Invest ended up acquiring the parent company, Stork NV, jointly with our contenders for the future of the Stork group and Stork Food Systems. What

resolved the deadlock turned out to be the financial crisis. Both we and our contender, the UK private equity group Candover, had to inject more equity into Stork than we initially envisaged, and more than our banks had said we needed to. The solution was to join forces with Candover to bid for the company. Eyrir Invest and Landsbanki jointly with Candover acquired the industrial conglomerate Stork on the condition that Marel would acquire Stork Food Systems. So today we are joint owners of the parent company and Marel owns Stork Food Systems. Eyrir Invest and Landsbanki bought the stake in the parent company. Marel didn’t take part in that acquisition because we didn’t find it natural for Marel to venture into unrelated business activities at the same time that it was raising capital in the market in an aim to become the leader in its sector, which is the poultry, meat and fish industry. “Now that the acquisition is complete, I sit on the Stork board and work with Candover on the company’s development. Stork operates on two main pillars: technical services to the energy industry and services to the aerospace industry. It has an annual turnover of about 1.7 billion euros and a workforce of over 16,000. The company is one of the Netherlands’ foremost industrial groups as well as the oldest. We’re on both sides of the table now, with common interests and mutual respect for each other. It’s very interesting to be part of the same team after such a drawn-out battle. It was often a fierce struggle, with the protagonists not infrequently going to great lengths to get what they wanted. The company’s value was clear to all involved. “Now that the dust has settled, people perhaps realise how important it was for Marel to get hold of Stork Food Systems. Firstly, we have achieved our target of becoming the market leader in high-tech equipment for poultry, meat and fish processing from harvesting to packaging. Our current market share is 16%, well ahead of the second largest player at 8%. If we hadn’t acquired Stork Food Systems – our close partner for 10 years in development and marketing – it would have merged with another company. Our partnership would have dissolved and some other company would have a 16% market share. We would have been left with 8% and had to merge with less developed companies, which wouldn’t have provided such a well-matched growth platform. We are now focused on solidifying our market position through organic growth and rising earnings, while our competitors have yet to consolidate.” Wasn’t that a real turning point for Marel? “Yes. For Marel there were two turning points in the past few years: the takeover of Scanvægt and then of Stork Food Systems. The key was for Scanvægt to be the first step. We had to digest that merger first and then build on that. Today we have a 16% market share in meat, poultry and fish, and a much larger share in certain ÁRAMÓT / VIÐSKIPTABLAÐIÐ DESEMBER 2008 > JANÚAR 2009

42 2008 Business Award

market segments, particularly poultry and fish. About half of Marel’s turnover is derived from the poultry industry, currently the fastest-growing market segment. “Foreign bankers have said that what we achieved with a listed company is impossible – that is, simultaneously restructuring it and increasing its revenues fivefold. During that chapter, we were constructing a plant in Nitra, Slovakia, and relocating production capacities from Denmark, the UK and partly Iceland to Slovakia, which meant maintaining double inventories with double complexity. You could compare this to overhauling a ship in mid-ocean – we couldn’t stop the ship and simply take it to the dockyard, because it needed to keep catching fish and steam ahead, whilst at the same time we had to repair it. “Investors in the market perhaps generally don’t have patience for that: a company increasing its working capital requirement, reducing profits temporarily, etc., and at the same time asking investors to have confidence in its future vision. You get quarter after quarter of no organic or profit growth, which disappoints the market. But such a phase doesn’t disappoint us because it’s in keeping with our long-term strategy.” TAKEOVER TALKS LAUNCHED IN AN ATLANTA PIZZA JOINT How about Marel’s takeover of Scanvægt? Wasn’t such a direct strike on the competitor seen as unusual? “Yes, very. What was never really made public is that Marel and Scanvægt had already held takeover talks in 2003, having been sworn rivals for a quarter-century. But the talks fell through then. After that, competition was rampant. The advantage of acquiring Scanvægt was not reduced competition but, rather, bringing balance to a market that had got completely out of hand. Clients were getting a 20-30% lastminute discount by going back and forth between the competitors, and it was all about market share and finishing off the competitor rather than looking forward and building future business connections. Talks then resumed by coincidence in January ÁRAMÓT / VIÐSKIPTABLAÐIÐ DESEMBER 2008 > JANÚAR 2009

“Eyrir Invest’s role was to approve the strategy, work with the companies and help make the strategy a reality.”

2006 and a deal was finalised in August that same year. “The funny thing was how the talks picked up again. We were at a poultry exposition in Atlanta, where everybody from the industry meets. Immediately on the first morning, Marel’s CEO Hordur Arnarson introduced me to Scanvægt’s chairman, Lars Grundtvig. Later that day I strolled over to a nearby pizza joint, which was filled to the doors. I sat at the end of some table and tucked into my pizza without further ado. When I looked up, I saw that the Scanvægt chairman, his sons and the company’s entire board were seated at the same table. I thought ‘Well, what do I do now’ and then proceeded to ask those present at the table whether we wouldn’t be stronger united than separate. So negotiations between the two sides resumed in that Atlanta pizza joint in early 2006. “The talks were informal at first and in the spring Marel’s executive board joined the discussions, which were then concluded with a deal in August. The Scanvægt family now controls an 11% stake in Marel, and Scanvægt’s former chairman sits on Marel’s board. Interestingly, although we had initiated the talks with a hard-hitting opposing team, after we reached a deal they wanted to be paid in shares rather in hard cash to a larger extent than we wanted. So they immediately showed themselves to share our view of how strong the companies were united.” But these were very different companies. What was the merger process like? “The merger was as difficult as mergers get and it’s just now that we’re reaping the full benefits. A delaying factor was that we were in the middle of the battle over Stork and so didn’t go into full throttle on delivering synergies between Marel and Scanvægt until the Stork takeover was secured. “The idea of the Marel-Scanvægt merger was to first combine their sales networks,

THE BATTLE OVER STORK > At the same time that Marel wanted to acquire the Stork Food Systems division from the Dutch conglomerate Stork NV, a dispute was raging about how best to secure the Dutch company’s future and who should make this decision – the management or the owners. It became a bitter, drawn-out battle over the destiny of one of the Netherlands’ oldest industrial companies, which occupied a special place in Dutch hearts. > In 2005 two hedge funds, Centaurus and Paulson, started to buy shares in Stork in an effort to break up the company and sell its units to unlock value. Stork – which had once been a 13-division industrial conglomerate – preferred to retain its three-pillar structure and vehemently opposed all break-up entreaties. In effect, Stork’s board wanted to retain control over the company, which obviously confers considerable power. > As an interesting aside, the Paulson hedge funds made huge gains from betting against subprime mortgage securities in the United States. > After Marel’s bid for Stork Food Systems was rebuffed, Eyrir Invest, Landsbanki Islands and Marel established the holding company LME, which began to accumulate shares in the parent company, Stork NV. The goal was to secure a place at the negotiating table when Stork’s future would be decided. > The hedge funds, which held an approximately one-third stake in Stork, wanted to sell the company in pieces, while the board wanted to keep it intact. The debate became so heated that in just over a year Stork held 32 board meetings and three shareholders’ meetings. The drama was closely watched by the foreign media. Thordarson led LME in the discussions in close collaboration with Bjarni Thordur Bjarnason, Head of Landsbanki Corporate Finance, Ivar Gudjonsson, Head of Proprietary Trading and Private Equity at Landsbanki, and Hordur Arnarson, Marel’s CEO. > One of Europe’s oldest private equity firms, Candover, had also been eyeing Stork. There was widespread Dutch aversion to hedge funds in general, Centaurus and Paulson being no exception, while Stork’s management enjoyed public support. Candover in collaboration with Stork’s management tabled a bid for all shares in the Dutch group. LME rejected the bid and raised its stake to 43% of all outstanding shares, thereby effectively preventing a takeover of Stork without an agreement with LME. The financial market squeeze can be said to have been the key to the deadlock’s resolution. Candover and LME were able to finance a takeover jointly but not separately. Eyrir Invest and Landsbanki in co-operation with Candover acquired Stork NV on the condition that Marel would acquire its longstanding partner, Stork Food Systems. ÁRAMÓT / VIÐSKIPTABLAÐIÐ DESEMBER 2008 > JANÚAR 2009

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which took a whole year. We decided not to touch the production or financial side until the sales departments had been integrated. That may sound strange but it’s very logical. If you do everything at once, the sales force is in contact with clients during the merger process, and the inevitable tug-of-war within the company is reflected directly onto the market towards the competitors and clients. Therefore, it’s better to take one step at a time and in the right order. The big steps we took to increase cost efficiency during the merger process weren’t made until the second quarter of 2008, when Scanvægt’s entire executive board was dismissed except for one member. We knew all along that a simple merger of competitors probably wasn’t possible and that one of the companies would have to take over the other. We didn’t take the full step until we had completed the acquisition of Stork and integrated Marel and Scanvægt’s sales networks. Consequently, the benefits of the merger with Scanvægt didn’t fully materialise until the third quarter of 2008, two years after the acquisition. The gain for

our sales activities was apparent earlier, but the cost-cutting wasn’t achieved until later.” In which markets has Marel grown most and what’s its present position? “We’ve placed substantial focus on growing in emerging markets. Three to four years ago there were many who said this was risky, but I think it’s obvious to everyone now that focusing exclusively on the old markets in Europe and North America entailed considerable risk. We’ve taken an unhurried approach to the Asian markets, however, placing primary emphasis on Central and Eastern Europe, particularly Russia, as well as the Middle East and South America. These are currently our fastest-growing markets. “To grow in these markets, economy of scale is of the essence. It enables us to serve our clients well, which creates opportunities to grow with them and thus expand into emerging markets. It’s not only about selling a product. Nothing must go wrong in the food production process, so aftersales services and spare part sales are just as important. And to be able to deliver highquality services profitably, economy of scale is key.

EYRIR INVEST > Eyrir Invest is an international investment company founded in 2000 by Arni Oddur Thordarson and his father, Thordur Magnusson. The father-and-son team currently hold a 38% stake, with other shareholders numbering 16. Since its inception, Eyrir Invest’s book value per share has risen by an average of 38% annually, strongly outperforming the -7% average annualised return of the MSCI World Index, both numbers measured in euros. > Eyrir Invest’s strategy is to be a long-term investor pursuing active ownership by acquiring companies and participating actively in their development without any pre-defined timeframe. Arni Oddur Thordarson: “Our strategy is to invest in businesses with the potential to become real global leaders. We want to invest in few companies at a time and to be the lead shareholder or forge close partnerships with other major shareholders. Formulating strategy and shaping Marel and Ossur’s development is exhilarating work.” > Eyrir Invest’s financial position is solid, with its equity at ISK 30.2 billion, the equity ratio at 40.3% and ISK 8.6 billion in cash and bank deposits at the end of October. Eyrir Invest’s core assets are Marel, Ossur and Stork.


“Iceland has the wherewithal to weather the storm and soon emerge as one of the strongest and most flexible economies in the Western world.” “In the third quarter of 2008, Marel achieved 16% organic growth. We’re generating increased profit by keeping down sales and management costs, for example cutting staff by nearly 300 in 2008. We will see costs continue to drop and are priming ourselves for somewhat lower revenues in the next few months than previously forecast. But as 2009 progresses, we expect sales growth to return to former levels when new funding for projects is obtained. For example, the EU subsidises food production by 250 million euros annually, of which we should receive a sizeable share. In fact, such subsidies are not unlikely to be increased due to the economic situation. Overall, Marel is excellently positioned to tackle an economic slump. A large proportion of the company’s revenues are generated by spare-part sales and services, in addition to which standard-product sales have risen briskly in recent years. Marel’s funding profile is solid, with an average debt maturity of five years. Its sector has shown itself to be less sensitive to economic downturns than most industries. Hence, our projection of robust organic growth over the next five years remains unchanged. “We’ve restructured Marel’s financing in the past few years, with strong support from the domestic financial market. We financed Stork’s takeover very differently from what has been customary in Iceland, through a syndicated loan facility from seven banks with a maturity of six to eight years. These were mostly banks in the Benelux region, which were later affected considerably by the crisis. Rabobank acted as lead arranger in partnership with Landsbanki, which was our backer throughout the process.” IMPRESSED BY OSSUR AND MAREL’S STRATEGIES AND MANAGEMENT TEAMS Ossur posted a record quarter in its history this year and Marel reported record earnings. “All of our companies delivered a record performance this year. They are all very dynamic and cost-conscious and are now adjusting for temporarily lower growth in 2009. “What investors noted about the third quarter of 2008 is that sales and management costs were down both at Ossur and Marel while R&D costs held steady. Investors tend to forget that when companies post improved results it’s often due to R&D cost-cutting, which will come back to hunt them later. “Ossur’s CEO, Jon Sigurdsson, has been vocal at making this point and drawing attention to what’s called ‘the quality of earnings’. Ossur performs very well on this indicator, investing a significant portion of its revenues in R&D in order to generate profits in the future. But

scant heed was paid to his counsel when the banks’ trading gains were sky-scraping, making comparisons difficult. “You could argue that investing in two Icelandic companies with a similar growth cycle and growth strategy is risky. But what is positive is that both companies are now focusing on organic and profit growth. Marel has three acquisitions under its belt and Ossur six, all completed a year and a half ago. Had we been nine months earlier in this process, we would now be pleading with the market to keep the faith in our strategy without having begun to demonstrate results – and our position would be totally different. But in fact we’re now well positioned to focus on boosting profits and organic growth, which we’re not doing as a result of the financial crisis. This is perfectly in line with our strategy as we presented it.” The companies’ focus is now on organic growth and increased earnings. Does this mean that no further acquisitions are in the pipeline for the immediate future? “Marel has all the tools and trappings it needs and has taken a leadership role in its industry. It’s the unparalleled leader in poultry and fish processing systems and needs to take certain steps to enhance its standing in the meat market. We invest 40 million euros in research annually. If we channel those funds systematically towards meat, we can take a decisive lead in that market as well. “Ossur is tackling similar challenges. It has become the unrivalled technological leader in prosthetics and is number two in terms of turnover on that front globally. In braces and supports, Ossur is at the international forefront but hasn’t yet gained a sufficiently strong position. Sooner or later, Ossur will need to make further acquisitions in that field, but until then the company will concentrate on its internal operations and shift its R&D focus increasingly on braces and supports. The company’s cash flow is very strong, so such acquisitions could be financed largely by cash from operating activities. “Marel and Ossur spend about 6% of their revenues on R&D. Both are knowledge-driven, high-tech companies. To maintain their market lead and edge over competitors, they will continue their focus on internal R&D and, if needed, add small, selective takeovers to acquire new technology. This is how we lay the foundation for our leadership. We find this essential to building and maintaining our competitive edge. “One of the good things about Marel and Ossur’s management team – who, in fact, joined their respective


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“The basic principles of macro-economic management are the same as those of running households and businesses – earn before you spend.” companies long before we did – is their wealth of experience despite still being young. Both Hordur Arnarson and Stork Food Systems’ CEO, Theo Hoen, have been with their companies for 25 years, Jon Sigurdsson has been with Ossur for 12 years, and you could say the same thing about most other senior staff. We joined these companies because we were impressed by their strategies and management teams. When we entered Marel, its management had put together a comprehensive picture of the industry, put extensive effort into defining the company’s competitive position and prepared a summary of 130 key competitors. The conclusion was that eight to ten of them were attractive acquisition targets based on Marel’s aim of becoming the market leader. Marel then proceeded to acquire the top three companies on the list. Eyrir Invest’s role was to approve the strategy, work with the companies and help make the strategy a reality. We didn’t so much play a transformative role as facilitate the vision’s implementation, get the management to focus on the key issues and finance the companies in a prudent way. Investors have the luxury of not having to deal with their investee companies’ day-to-day management, allowing them to focus on the longer-term, big picture.” EU ACCESSION ON THE AGENDA Iceland’s stock exchange, OMX ICE, has been virtually out of order for some months. The current situation must affect Marel and Ossur, doesn’t it? “Marel and Ossur are now gearing up for organic growth. This means that we don’t need to raise new capital in the market in the next two years. My view is that the Nordic stock exchanges will merge in three years. So why not wait a bit and see how the situation develops rather than abolishing the Icelandic stock exchange and joining the Swedish or Danish bourse, as some want to do? I think that’s giving up. Our ambition is to remain here because we’ve had strong support from the domestic market. “In my mind, the key is for our companies to focus on their internal operations. We’ve just been through a string of acquisitions and funding initiatives, including the raising of new share capital. Delisting, or delisting and then listing on another exchange, is just as much work as the growth phase was, while our key priority is to give the companies some breathing space. The fact that their share price temporarily translates downwards owing to the Icelandic krona’s depreciation is not that important in the long run. However, a situation where the share price is out of sync with the companies’ actual value creation cannot go on for too long, because then foreign companies will arrive on the scene and make takeover bids for our companies, both of which are ÁRAMÓT / VIÐSKIPTABLAÐIÐ DESEMBER 2008 > JANÚAR 2009

global frontrunners. That’s for certain. “The two companies suffered when the Icelandic economy was overheating. The Icelandic krona was far too strong, there was substantial wage drift, and recruiting talented, well-educated people was easier said than done. Now the situation has reversed. About 12% of Ossur’s costs are generated in Iceland, compared with 1% of revenues, and as a result of the krona’s depreciation, costs incurred domestically have fallen. The same basic scenario applies to Marel. More importantly – since gains from the krona’s fluctuations are transient – the labour market is becoming more balanced. In the spring of 2008, I pointed out the difficulties this created, citing the fact that, at the peak of the talent shortage, two-thirds of electrical engineering graduates were hired by the banks and one-third of them enrolled on a postgraduate programme – whilst their entire training is aimed at working in the high-tech industry.” How does the new foreign exchange legislation affect Marel and Ossur? “In the short term, it has very limited effect on them. The situation is this: the companies have obtained financing to some extent in Iceland. Obviously, like other exporters they need to transfer export revenues generated by the domestic operations to Iceland and pay for the capital. But eventually the restrictions will have an effect; having to go to the Icelandic Central Bank and ask for permission for currency transactions – for example to launch an acquisition, strengthen our capital position or divest a business unit – is counter-productive. But I don’t think this legislation will remain in effect for more than but a brief period. “The Icelandic krona is now untenably undervalued. On the other hand, the international banking crisis is much deeper than previously thought, so many investors holding krona-denominated Eurobonds are likely not to have the sheer resources to hang on to them despite sharing our view that the krona is in for strengthening. The rationale of those who enacted the law was that the situation needed to be unwound in an orderly fashion to prevent the krona’s depreciation from further overshooting its long-term equilibrium. “If we examine the Scandinavian banking and currency crisis of the early 1990s, the exchange rates of the Finnish Mark, the Danish krone and the Swedish krona were kept within fluctuation limits for several years during the run-up to the crisis. When the banking crisis hit, these currencies were 20% overvalued for exports to generate profits – export industries were being killed in these countries and the current account deficit kept piling up year after year. Then these currencies

plummeted by 40%, while they only needed to drop 20%. It took them two years to rebound halfway back and gain equilibrium. “In Iceland, there was nominally a floating exchange rate regime, but in actuality the exchange rate was fixed by progressively higher interest rates. All economic imbalances were markedly greater than in the Scandinavian crisis, including the current account deficit. “The krona nose-dived 60% until it was refloated under currency restrictions. If we look at Marel and Ossur, they can live with an approximately 30% higher ISK exchange rate than that; if the krona doesn’t rebound, their Icelandic activities will produce excessive profit, and in the long run there will never be consensus in Icelandic society

for exporters profiting substantially more than importers. There also needs to be consensus from abroad. Supply and demand forces eventually determine the exchange rate of a currency. “The Icelandic krona has already weakened far too much, so over the next two years it should make a halfway comeback. There is a risk after such a crisis that the real exchange rate will shift owing to the interaction between wages and price levels, but this risk is small now given the employment situation.” But what measures could ensure the krona’s rebound, in your view? “Applying for membership of the European Union in parallel with taking steps to satisfy ÁRAMÓT / VIÐSKIPTABLAÐIÐ DESEMBER 2008 > JANÚAR 2009

48 2008 Business Award

the criteria for euro adoption, including on inflation and government debt. Although I predict that the krona will strengthen, the costs of having this micro-currency are too high in the long run. EU membership means three tings: first, we will be a full-fledged member of a community of nations and will have a say over how Europe develops; second, the euro; and third, our banking system will have the backing of the European Central Bank. So the costs of keeping the krona far outweigh the benefits. Furthermore, there are indications that in five to ten years the world will have only five to ten currencies. I would be surprised if among them were the Icelandic krona, the Swedish krona or the Danish krone – or even the British pound. It’s likely to be the euro, the US dollar, the Japanese yen, the Chinese yuan, etc. “Claims that EU accession isn’t on the cards because Iceland wouldn’t gain entry until in four to five years’ time are mistaken. It’s true that we cannot adopt the euro until we meet the Maastricht criteria, which takes five to seven years in my estimate. But what’s of even greater importance is the credibility we would gain upon applying for membership. As our credibility grows, the financial markets will start to adjust the exchange rate between krona and the euro. So many of the benefits of euro adoption would be felt straight away, with pricing of the economy’s strengths and weaknesses, which is how it should be. My father made these points very clearly in an in-depth interview in Morgunbladid in 1998, a year before the euro was launched. Adopting a new currency in the middle of the crisis is not ideal because the krona’s depreciation brings the current account into surplus. A unilateral adoption of the euro would cause many to abandon ship because we haven’t brought inflation and the trade balance under control and have no support from the Central Bank. We must allow that adjustment to run its course so that the krona can rebound in the next three years. “But EU accession will ensure the krona’s strengthening and that the whole process takes place in a smoother and faster way. We’re already a member of the European Economic Area and the only way forward is to make the full step – I trust we’re not going back to cutting ourselves off through ÁRAMÓT / VIÐSKIPTABLAÐIÐ DESEMBER 2008 > JANÚAR 2009

“Interestingly, although we had initiated the talks with a hard-hitting opposing team, after we reached the deal they wanted to be paid in shares rather in hard cash to a larger extent than we wanted. So they immediately showed themselves to share our view of how strong the companies were united.”

economic restrictions. The only tenable rationale for the current restrictions is that we need them to bridge the interim period until we’ve applied for EU membership and, meanwhile, restored some calm to the market. This cannot be a permanent arrangement. “Iceland should join the EU because companies like Marel and Ossur have no other choice but that route – which they can, however, also take by registering abroad. But it’s more desirable that the whole economy takes this step in unison, which optimises our bargaining position. I also think that the entire Icelandic equity market should join the Nordic market all at once, which would enable us to enter it as a united force rather than separate, single companies. “My view is that our bargaining position with Europe is pretty strong. There’s considerable interest in having Iceland and Norway onboard. Of course, we should stand firmly on our rights regarding our future fisheries arrangements and the distribution of wealth produced from our marine resources. We should simply weigh all interests against each

other. I have a strong feeling that this will demonstrate that Iceland is better off as a full member of the society of European nations.” WE TOOK HEED OF THE GATHERING CLOUDS What effect did the banking crash have on Eyrir Invest? Did you have any interests at stake in the banks, such as equity holdings or claims that you lost? “All told, the banking collapse has no short-term effect on us. The Icelandic krona’s fall actually caused Marel and Ossur’s value to slide in foreign currencies at the same time that their operating conditions improved. We’ve been strengthening Eyrir Invest’s equity and the other day we reached an agreement with Landsbanki on our acquisition of its stake in Stork in exchange for a holding in Eyrir. Our equity position is strong and we are confident that Marel and Ossur’s share price will pick up once the synergies from the past few years’ acquisitions start to materialise. “We sold our stake in Kaupthing Bank in 2005 in order to invest in Marel and Ossur. At the time, we had a positive view of the Icelandic banks’ plans and found that they were mostly very well managed in those years. However, we felt that their share prices were getting excessively high, although they were yet to double after we shed our stake. We had no shares in the banks when they collapsed and apparently we will lose no receivables or shares in Iceland as a consequence of the banking crisis. “But there were clouds gathering on the horizon in the past few years, which we took serious heed of. I don’t know if we would have behaved fully in that way if we hadn’t been such a major investor in Marel and Ossur. We decided to limit our risks at the potential cost of lower returns.” What is Eyrir Invest’s equity ratio? “It’s just over 40%, which is in accordance with our 4050% equity ratio target. Effectively, it’s even stronger than that because we have a good cash position. In our 2008 six-month interim accounts, our largest asset was Marel, followed by cash and then Ossur and Stork. Eyrir Invest is in a very strong position, primarily because our companies are in a good position and we have placed key emphasis on the long-term financing of both Eyrir and our investee companies.” Your investment strategy doesn’t follow a preconceived timeframe. Why is that? “Our strategy is to invest in businesses with the potential to become real global leaders. We want to invest in few companies at a time and to be the lead shareholder or forge close partnerships with other major shareholders.

But we don’t follow a pre-defined timeframe, which is of key importance now. “It used to be conventional for top executives to be at the helm for 12-15 years and for investors to stay with the company for an even longer period. In fact, the executives were the passengers. But when this is reversed and the owners, which are now investing for three to five years, have in effect become the passengers, you could say that the balance of power shifts. The owners lose control of the companies, which is very serious because the owners along with the board should be responsible for the strategy and long-term interests while the management concentrates on day-to-day operations. But when the owners have a short-term strategy and the chief executive and other senior managers have a longerterm horizon, it’s a reverse situation. “If we look at Marel and Ossur again, it would make no sense to enter such companies, grow them at a phenomenal rate through an acquisitive spree and then sell them. What that accomplishes is only increased costs without even beginning to reap the benefits. We’ve been with those companies for four years now. From the very outset we stated our view that the share price benefit would not materialise until we entered the organic growth phase, so our time frame is much closer to ten years than three. “When market prices keep on marching upward year after year, it’s easy to buy businesses and later divest them at a profit. Making short-term gains in the stock market obviously involves a completely different way of thinking from that of long-term value creation. Having said that, short-term investors are also necessary for the market, and we’ve done such transactions as well. But we left that strategy step by step from mid-2006, partly because we had concerns about the market but also because we needed capital to support Marel and Ossur’s growth plans and later to invest in Stork. That decision is benefiting us hugely now.” What were the key causes of the Icelandic financial system’s collapse? “In broad terns, the Icelandic financial sector had much to commend it, but the causes of its downfall were twofold: If we look at the banks and their major owners, their investments were too narrowly focused. The majority of overseas investment was in the banking and retail sectors, which are now facing tremendous challenges worldwide. In addition, most of the investments were funded for too short a time. These were the private sector’s errors. “Unfortunately, too much blame has been laid at the door of Icelandic expansion into overseas markets. But foreign expansion does not equal haphazard


50 2008 Business Award

or opportunistic acquisitions. Natural and sensible expansion into foreign markets is part of economic globalisation. It must be based on a well thought-out strategy that charts a path to real competitive advantage, prudent financing and long-term objectives. Such overseas growth is necessary for the Icelandic economy to maintain high living standards. “As for the government authorities, it must be said that quite often the left hand didn’t know what the right hand was doing. At the same time that the Central Bank was driving up the krona by hiking policy interest rates to ever-higher levels, the Housing Financing Fund raised its mortgage ceiling and maximum loan-to-value ratio. The local authorities funded their rising budget deficits with foreign borrowing, thereby failing to heed to Central Bank’s call to slow down. “The Central Bank then lowered reserve requirements instead of putting the brakes on the Icelandic banking system’s much too rapid growth. High interest rates attracted a strong inflow of short-term capital and curbed long-term investor interest. “Lastly, Iceland’s foreign-exchange reserves were far too low. But this is now water under the bridge – we must now make the best of the situation. We at Eyrir Invest have something of a motto: ‘Don’t get mired in ���whatifs” – the past is there to learn from and help us shape a better future.’ “So we must admit our mistakes: the investments were too narrowly focused and the government authorities failed to keep up with developments. Another problem has been the Icelandic economy’s small size. If one corporate group collapses and we’re basically trapped within a small economy with a micro-currency, it’s like throwing a boulder into a bathtub – the splash and waves hit everything in sight. On the other hand, if we were part of a bigger whole and currency system, one business mogul’s headaches would have a far smaller effect on others in Iceland. In itself, the idea of the EU is a somewhat socialistic construct, but on the other hand it confers great freedoms within a large system. Instead of being a big fish in a small pond, where the next person or company can wield great power, it’s better to have great freedom in a big pond.” How does the idea of foreign creditors acquiring stakes in the Icelandic banks strike you? “I think it’s a good idea as long as they don’t acquire the banks in their entirety. The risk is that the foreign creditors will focus mainly on maximising their profit over a three-to-five year period and less on long-term profits or the national interest. I’m also very much in favour of the public acquiring shares in the banks


again, in one way or another. It’s of utmost importance that the general public has a stake in the well-being of businesses and the banks rather than being at odds with the financial system. I would prefer that the banks be owned initially by the state, creditors and the general public. When the state sells them again, we must ensure that there can be no suspicion of ‘crony privatisation’. The shares must be sold in smaller lots and the market must have solid anchoring.” Lastly, is Iceland in for an extended economic slump or will we pull through relatively quickly? “Iceland has the wherewithal to weather the storm and soon emerge as one of the strongest and most flexible economies in the Western world. Perhaps it’s a cliché to highlight our resources in the fishing grounds, our renewable energy sources, the natural beauty of our country and our young and well-educated workforce. Nonetheless, these resources are of immense value. Also of huge importance is the country’s strong infrastructure. And let’s not forget our solid pension fund system, notwithstanding the pressures it’s now going through. In the current discussion about rising public debt, people tend to forget that most of the countries with which we compare ourselves have much weaker pension systems and their pension commitments will add to their public debt. “What’s most important now is for exports to grow and continue to outpace import growth. The basic principles of macro-economic management are the same as those of running households and businesses – earn before you spend. We must foster value creation, research and development. Research and development is conducted by well-educated people on relatively high incomes, and will deliver export revenues in a few years. It is of key importance to create opportunities for all those well-educated people who are now available for work after the banks’ collapse. We must rebuild trust in Iceland’s capacity to meet its obligations. I think we are making the right steps in this direction – applying for EU membership would be another big step. Therefore, I’m optimistic that we will navigate our way though the economic storm safely and successfully, but the next two to three years will not be easy.”

Icelandic Business Award 2008