Stability Through Foundations

Some company owners have found that the best way to ensure that their entities continue is to create a foundation that could take ownership of all, or part, of the business. Usually, foundations have a specified purpose which can bind future owner generations to the firm, preventing the business from falling into unwanted hands. The example of Max Felchlin AG, below, is probably the most particular of the documented companies but certainly not the only one. Founders at both Jura and Oetiker Group had placed some of their company stakes into foundations.

Max Felchlin started a honey trading business in 1908 that eventually grew into a bakery and confectionary supply business. He passed on the business to his son Max, Jr., in 1962 who ran it for 30 years. As Max, Jr., was getting on in age, he began to wonder what to do with his company. His two adoptive sons were not active in the business. The company was small but profitable, Max, Jr. wanted to find replacements for his many roles at the company and also a way to separate business control and ownership from the income stream generated. In 1990, he founded the ‘Association to Promote Business and Culture in Canton Schwyz,’ controlled and supported by Max Felchlin AG.

The structure eventually adopted in 1991 was rather unique. Ownership was divided equally among 1200 shares, each bearing one vote. The bulk of 1000 shares were placed with the ‘Association to Promote Business and Culture in Canton Schwyz’ who became de-facto owners of the company. The association, with a self-constituted board of five to six persons, was instructed to continue to own and run the company as long as feasible, and to only sell the company if there were no other options. Max, Jr.’s, two sons received 100 shares each. The distribution of the company profits and dividends were also regulated: one third would be reinvested into the business, one third would be for staff and employees, and the remaining one third was for dividend distribution, with 90 percent going to Max, Jr.’s, two sons, Max-Peter and Joe, and 10 percent to the Association for sponsoring local activities. This was the structure Max, Jr., chose to assure that the business would continue.Footnote 1

In the cases where foundations took over company ownership, the principal motivation of all the original owners was to preserve their businesses and ensure that the firms had long lives by removing ownership transfers that could endanger company stability.

Stability Through Private Investors

When the required financing was beyond the reach of a single new owner or investor, a group of private investors, acting in coordination, were sometimes able to assume ownership of a company. This was practiced by two of the documented firms, Sécheron and Pilatus, who were, at the same time, both in need of restructuring and turnaround management. The firm and long-term commitment of investors assured the company management sufficient time, as well as a longer-term horizon, in order to achieve the needed results and ensure the firms’ survival.

Sécheron, a company with a long history, had undergone a series of ownership changes and was suffering from declining results. Eventually, a group of private investors who also understood the business took control and assumed both ownership and management leadership.

Sécheron, founded in 1879 in Geneva, had a long history connected to the electrification of railways. The company went through several forms of ownership, from private owners to public company, and eventually became a subsidiary of a large international firm. When financially driven investors took over, and failed to turn the business around, the Geneva bank BCGE stepped in and took over control in 1995. Soon, BCGE was looking for new owners. There were several interested international companies in the field of railway or energy, but the Geneva bank management favored Swiss ownership.

A group of private Swiss investors then acquired Sécheron from the bank. The partners did not see themselves as a private equity group in the traditional sense, instead they were actively involved in the business and had no plans to sell. Some of these investors had worked on other transformation projects together, in particular under Ernst Thomke, and had gained valuable management experience turning industrial enterprises around. They possessed deep technical know-how in many areas relevant to Sécheron. By investing their own money, the new owners all had ‘skin in the game.’

The company remained privately owned and no IPO was planned.

The acquisition was heavily leveraged with financing provided through BEKB and BCGE with a minimum of investor capital required. The top 15 managers of the company were invited one year later to participate in the acquisition and all but one participated. As it turned out, the entire external financing was paid back within four years.Footnote 2

Pilatus experienced a similar transition from corporate ownership, as a unit of a large company, into private ownership, which had been passed on to the next generation, while engaging enlightened management to run the company.

Pilatus operated the first 60 years of its existence as a subsidiary of Oerlikon-Bührle, the large technology company assembled by Dieter Bührle (1890–1956), founder of Pilatus. This industrial group was inherited by the two children of Emil Bührle, the son of Dieter Bührle (1921–2012) and daughter Hortense Anda-Bührle (1926–2014). When the Bührle conglomerate ran into difficulty in the early 1990s, Hortense Anda-Bührle assumed increasing responsibilities, including a role in Pilatus. Around 1990, Pilatus had run into financial difficulty and was in need of restructuring, which was accomplished with a team led by Ernst Thomke, previously with Swatch.

At the end of 2000, and with its fortunes as a company resurrected, Pilatus was spun out of the Bührle group (renamed by that time UNAXIS). It was acquired by a group of Swiss private investors for a reported price of CHF 250 million. The new ownership group included Jörg Burkart, banker, the Anda-Bührle family and the retirement fund of Roche. The Unaxis company retained a small percentage of the shares. Although the company did not provide details on ownership, it was reported that the Anda and the Burkart families each held about 45 percent of the shares. The initial intent was to bring Pilatus on the stock exchange within four years, which never came to pass.Footnote 3

Employees Riding to the Rescue

The example of Selectron, although the only one among the companies researched, shows that, under the right circumstances, employees might even step in to provide stability for a company that is suffering from neglect from its corporate owners.

When Emmanuel Hannart took over Selectron, which had become part of Schneider Group, he continuously faced restrictions from the parent company’s staff on his efforts to develop the business into a pure-play for in-train electronic controls. When a sale to another large company failed, he pursued an employee buyout. Working with business contacts and private investors, he and his advisors put together a package for all employees, not just managers, to buy into the company. Schneider Group agreed to sell at the same price previously negotiated with a prospective buyer and to grant the necessary time to put the deal together. Banks, after first balking at the idea of a leveraged employee buyout, agreed to finance about 60 percent of the acquisition price. For the 40 percent equity required by the banks, 75 percent was contributed by a group of international investors recruited by Hannart. The remaining 25 percent came from employees, 80 percent of whom voluntarily decided to invest.

With newly found independence, Selectron continued to grow and new customers were acquired. Growth of 15 percent annually with sound profitability allowed Selectron to keep R&D at 20 percent of sales. The strong business results allowed the company to quickly pay off the bank loans from the leveraged buyout and to eventually refinance the deal at better terms.Footnote 4

The examples and experience of Burckhardt, Pilatus, and Sécheron demonstrate in an impressive way that private owners, particularly those also involved in the business, can outperform corporate owners and rescue companies that were in decline.

Stability as Public Company

Interviews with executives from many of the privately held companies uncovered an unwavering rejection of public ownership, expressing the sentiment that it is inconsistent with how an SME needs to be managed. Most owners and managers deliberately avoided being on the stock market because they feared a loss of strategic control of the firm and short-termism—the pursuit of short-term financial goals over long-term strategic objectives. This negative view, however, was not shared by publicly owned firms, although there were cases where the leadership of public firms referred to the share price as an issue that produced pressure.

Five public companies (LEM, Burckhardt Compression, Komax, C+M, u-blox), demonstrate that, under the right conditions, public ownership does not have to be a disadvantage.

C+M had a long experience as a semi-public company being listed on a secondary regional stock exchange. This listing provided the long-term owning families, in particular, with some liquidity while still preserving private ownership, similar to the strategies witnessed at Sefar or Plaston.

Founded as a partnership in 1885 and incorporated in 1924, C+M had always been a shareholding company with a small set of shareholders at its core. Stock market research indicated that the company ownership included seven larger and 260 small shareholders, with larger shareholders collectively accounting for a controlling interest. Some of the earlier founding families were reported to still be part of the core shareholding group. C+M shares were listed on the local Bern stock exchange trading as OTC shares. Using this type of listing allowed for some transactions among owners without leading to instability of ownership.Footnote 5

LEM had long been a fully listed public company; its initial listing dated back to 1986.

At LEM, the public listing was viewed as a positive force by management. The transparency required for a public company brought increased discipline and there was a certain “window effect” that made management work harder since results were clearly measured. Governance was of course driven by Swiss stock exchange requirements. What was important for LEM was its stable set of shareholders. Two core family shareholders accounted for slightly more than 50 percent of shares. This brought stability to the company.

Being a public company listed on the Swiss stock exchange, LEM had access to capital, if ever needed. With a steady cash flow of more than 10 percent of sales, the company was in a position to finance its capital needs from internal resources. The healthy profitability of 24 percent in total annual shareholder return during a recent period allowed for a targeted dividend payout ratio of in excess of 50 percent, appreciated by its shareholders.Footnote 6

At Komax, the fact that the company was listed on the Swiss stock exchange was also not viewed negatively. While accepting that, as a public company, there was more pressure for short-term performance, management still felt that the privately held companies had an advantage, as long as the ownership was pulling in the same direction.

Started as a single proprietorship by entrepreneur Max Koch in 1975, Komax became a limited company (AG) just three years later. In 1996, founder Max Koch, at the age of 47, sold 80 percent of his shares to management and a private equity company as part of an MBO. At that time, Komax had sales of about CHF 120 million and a workforce of 365. One year later, the company went public with a listing on the Swiss exchange. The company founder remained the largest single shareholder with a holding of about 5 percent. Shares were widely held, and the free float amounted to more than 90 percent. Shareholders were mostly Swiss investors.Footnote 7

Through its stock market listing, Komax had access to additional capital if needed. Over its history, the company could rely mostly on its self-generated cash flow and turned to external debt financing through banks for only a small part of its capital needs. Its financial performance allowed for a constant investment of about CHF 20 to 25 million and a targeted dividend payout ratio of 50 to 60 percent of earnings after tax.

Running a private company allows for more long-term thinking than a public one, but only if all owners are on the same page. As a public firm listed on the stock exchange, the required transparency and visibility leads to higher and more short-term pressure on performance (Kälin, CEO).Footnote 8

The issue of transparency and performance was mentioned by a number of company managements in this research. All of the public companies included appreciated the higher transparency, and performance comparisons, driven by the reporting required of a listed company. It has been noted, however, that at least two privately held companies—Geistlich and Sefar—management was using either International Financial Reporting Standards (IFRS), Geistlich, or Swiss Accounting and Reporting Recommendations (GAAP), Sefar, to report to ownership anyway. This supports the view that there were true benefits to the reporting mechanisms of a public firm and that they were also of great use to a privately held company.

That public ownership can be more stable than private equity (PE) was experienced by Burckhardt Compression. After a successful MBO and outstanding business performance, the PE investors wanted to exit. At that time, going public was judged to be the best way to replace the capital originally provided by the PE firm. In the eyes of company management, a shareholding contract and a reliable core of loyal investors provided the needed stability.

Four years into Burckhardt Compression’s MBO arrangement, the private equity firm Zurmont was itching for an exit. The acquisition of originally CHF 54 million had reached a valuation of CHF 280 million by their account. Under those circumstances, several options were evaluated: finding another private equity firm that would be able to take over Zurmont’s stake; approaching another larger compressor company as a strategic buyer; approaching a private investor and, finally, doing an IPO on the Swiss stock exchange.

The management team that had initiated the MBO from Sulzer Group decided on an IPO, because the financial situation of the company was sound, and the fact the private equity firm wanted to sell its entire stake of 78 percent, an amount that would have proven difficult for a single private investor to raise. The IPO was completed in 2006 and resulted in a market capitalization of CHF 280 million. A few years later, capitalization was to reach CHF 1 billion.

Stability in ownership was maintained through a binding contract among the five founding shareholders controlling about 18 percent of shares following the IPO. Valentin Vogt, Chairman of the Board, believed that a public company always required a set of core investors who were committed for the long-term: Particularly US investors like the clear and single-minded business purpose of a company such as Burckhardt Compression (Vogt, Chairman and CEO).Footnote 9

The short-term interest of private equity shareholders was also experienced at u-blox. Initially started with indispensable PE help, the company management eventually had to face the fact that there were limits to that type of financing. A successful initial public offering (IPO) on the Swiss Stock Exchange provided the needed capital for growth at the risk of dilution for the founders.

When u-blox was founded by a group of three student founders and their professor, financing came from a group of friends and family members. Soon, however, the private equity firm Partners Group (Zug) joined as a major investor. The investment was made as a result of the founders circulating an aggressive business plan in 1998 to entice investors. Following initial orders, the company was also able to attract the UK investment company 3i as investor.

The loss of a key customer and the resulting financial losses meant that the UK investor declined to further invest needed capital. At this time, new investors could not be found. Through capital write-downs and restructuring, the company could return to positive business results in 2004 which allowed the company to raise one last capital injection from Partners Group, and to IPO the company successfully on the Swiss Exchange in 2007. During this period the shareholding of Partners Group declined from a high of 45 percent prior to the IPO to a much smaller percentage afterwards. Both governance and management combined held less than 5 percent of all outstanding shares. Currently, leading shareholders were institutional investors, such as Blackrock, CS and UBS funds.Footnote 10

u-blox represents one of the classical start-up ventures availing itself of professional private investment funds. This rapid and substantial capital injection was beyond the means of the initial founders. Its aggressive growth could neither be funded through internal resources nor through private investors. However, its institutional investors did not represent the kind of stable shareholders enjoyed by other public companies in the sample, such as for LEM or Burckhardt Compression.

When Ownership Stability Fails

A lack of stability in ownership can have negative implications for the development of a company. This can be seen most dramatically for Sécheron, as well as for smaller firms such as Plumettaz and Selectron. Family members at Plumettaz wanted to exit and were looking for a PE entity that would assume a majority stake in the company. The arrangements with the first PE firm did not work out satisfactorily and the company needed to go through the process once again to find stability.

Up to 2008, for almost 80 years, Plumettaz had remained a family-owned company with more than 40 family-related shareholders. Most of the Plumettaz family members involved in the business had been engineers. However, only a few family members were active in the business. When Gérard Plumettaz retired at age 65 in 2008, a private equity firm took over 70 percent of the share capital. A holding company was created that held all assets and the PE firm appointed an outsider as CEO. However, the appointment did not work due to cultural differences with a CEO that came from a large company. Two years later, in 2010, the PE company invited the family under the leadership of Denis Plumettaz, cousin of Gérard, back into management. A different PE firm has since acquired the majority stake and a new CEO from the outside was recruited. Long-term stability in ownership has not yet returned to the company with financial return concerns remaining at the forefront.Footnote 11

The experience of Sécheron turned out to be more painful and the company underwent considerable ups and downs as a result of several ownership changes, passing from one set of owners to another. Even emerging from corporate ownership did not work out initially; it was only after a private group of owner-managers invested in the business that a turnaround was achieved, and growth resumed.

Sécheron became involved in the electrification of the Swiss Federal Railway network. During the post-WWII period, Sécheron experienced healthy growth, was profitable and by 1963 reached employment of 1700 and sales of CHF 55 million. Soon, however, new order take-in began to decline, because Sécheron could not accept new orders with very short delivery time. Difficulties prompted the company to engage in merger talks with several suitors, both Swiss and foreign. Brown Boveri & Cie (BBC) was the leading electrical equipment and power generation producer in Switzerland and itself a large international company. By that time, employment at Sécheron declined to about 1250. By all accounts, the integration of the two companies was fraught with difficulties but possibly saved Sécheron’s survival as an entity. Under BBC, Sécheron could profit from orders for Swiss locomotives. By 1979 sales reached CHF 120 million and employment was still at 1200.

The merger of Sécheron’s parent company, Brown Boveri, into Asea Brown Boveri (ABB), in 1988, brought substantial changes and a radical restructuring of Sécheron by separating the businesses into two companies. The now re-named ABB-Sécheron took the transformer business, the largest part, leaving Sécheron SA with the DC traction components and DC traction power substations.

ABB Group, the new owners, divested the activities and product lines of power supply substations and traction components. ABB sold 80 percent of the remaining business to a Geneva holding company, controlled by an owner with a financial but not an industrial or technological background relevant to the Sécheron business. At the time of the spin-off in 1989, Sécheron SA was down to just 180 people and sales of about CHF 25 million.Footnote 12

The experience of Sécheron demonstrates what can happen to a firm when it leads technically but allows neglect to set in; when owners do not bring anything to the table beyond their financial expertise and competitors begin to take market share away. The ownership changes, stemming from the mergers also added to the difficulties. It was only through the initiative of the investor group Transition Partners that the firm was resurrected and once again put on its growth path.

The history of Selectron has been touched on previously while describing the firm’s employee buyout. However, before the buyout, the company had become an unwanted business as the firm had passed through three sets of ownership. The sudden turns that can happen at larger corporations, often triggered by management change, put Selectron at risk, resulting in a steady downwards spiral of its business.

Selectron was founded in 1956 by a local entrepreneur from Lyss, capitalizing on the transition from mechanical machine and equipment controlling to electronic controls. By 1992, sales had grown to a high point of CHF 30 million. Employment had reached 175, with more than half dedicated to the manufacturing operation. With changes in technology and the arrival of international competitors, sales began to decline and by the end of the 1990s were only half of its peak volume. The owner, facing losses, decided to sell.

The company which acquired Selectron in 1998 was SIG, a larger Swiss industrial company. SIG had built up its packaging and bottling technology unit with the aim of building its own motion control and automation tools. In the same year, SIG acquired a German company, Berger and Lahr, in the field of motion control and assigned Selectron to report to that firm which had about Euro 100 million in sales. Difficulties soon arose when the two companies attempted to integrate their two control systems and software languages into a single system. Within two years, SIG changed its strategy and abandoned development of its own control system and instead to source controls from the open market. There was no use anymore for Selectron within the SIG group.

This change in SIG strategy put the German company on the block. In 2001, Schneider Electric, a global French firm and a major player in low and medium voltage circuit breakers, as well as in automation components, was interested in combining its product line with Berger Lahr. Given earlier experience with merging program languages from different producers, Schneider was not interested in the Selectron business. SIG, however, would only sell the German company if Selectron would be part of the deal. In the end, Selectron became an unwanted subsidiary of Schneider.

The new French owners had no interest in its technology, nor were there any synergies to its business. In the meantime, sales at Selectron had declined to a mere 11 million and losses continued to mount. Left without a suitor to buy the operation, Schneider decided to liquidate the company instead.Footnote 13

Selectron is an example of what happens to smaller units when they are made part of larger companies. Eventually, the company was saved by an entrepreneurial manager and his team who bought the business from the corporate owner and made it a major player in its field. Neglect, whether technological or otherwise, results in the rapid deterioration of a business. It is this fear of losing control over a company’s destiny that drives so many SME owners and founders to look for stable ownership under which their business can be developed with a long-term strategy perspective.

In 2015, a few years after the successful employee buyout, Selectron let itself be acquired by another larger company, the German Knorr Group. Knorr was interested in acquiring the Selectron train control system, or TCMS, because the company became convinced that this would become the central nervous system of new train generations. Adding this component to Knorr’s break business was considered a strategic advantage.

Because of the technological and strategic importance of TCMS, Knorr offered to make the Selectron unit its own future TCMS developing unit, making Selectron central to Knorr’s future strategy and allowing for operational autonomy to continue with its chosen direction. Hannart and his team were able to convince Knorr to make this acquisition not a merger, but to put it on the basis of “concordance,” or mutual agreement of governing issues and with operating autonomy.Footnote 14 Hannart convinced his investors and employees that this was a unique opportunity and that Knorr would be a better owner than Schneider, or ABB could have been, and less of a competitive threat to Selectron’s existing customer base compared to selling out to a major train builder.Footnote 15

Independence Versus Autonomy

What emerges here is that control or independence are just two elements of a larger puzzle. Yes, SMEs perform better when their management is in charge of their company’s own destiny. Ownership independence appears one way to assure this. But there is also something to be said for autonomy. If a company, when part of a larger group, can be assured operational autonomy, the results may be the same as those with independent ownership. Experience says, however, that larger companies are consistently unwilling, or unable, to grant such autonomy, thus smothering the smaller businesses and eventually driving them into underperformance. The early histories of Sécheron, Selectron, and Pilatus all attest to this reality.