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Strategic and Financial Analysis of Auriga Industries A/S
(Strategisk og finansiel analyse af Auriga Industries A/S)
MSc Economics and Business Administration
Master Thesis
Written by:
Michal Nielsen – MSc FIR Klaus Thøger Pedersen – MSc ASC
Number of pages: 117
Number of characters: 272,626
Supervisor: Kristian Sørensen
Hand-in date: 17.05.2016
Executive Summary
The general purpose of this thesis is to investigate foundation-owned companies’ ability to maximize shareholder value in highly innovative- and/or consolidation industries.
The paper adopts an inductive approach and narrows its focus on the agrochemical industry by applying Auriga Industries A/S as case company with the purpose of conducting an in-depth external- and internal analysis to uncover potential strategic dilemmas and implications influencing to the company’s ability to maximize shareholder value. Auriga divested their operations to FMC in 2014 for a price of DKK 325.00 per outstanding which will be the target to meet to optimize shareholder value.
The analysis identifies several strategic dilemmas that the Auriga Industries A/S needs to solve to be able to maximize their strengths and opportunities as well as minimize their threats and weaknesses. The paper sets up three different strategies, that the company can either adopt individually or as a combination.
Path #1 mitigates production inefficiencies and result in an expected increase in the share price of DKK 10.13 per outstanding share. Path #2 optimizes the company’s working capital processes which lead to an expected increase in the share price of DKK 30.24. Path #3 strengthens the company’s innovative
capabilities and secures a better chance of penetrating the North American market which off-sets in an expected increase in the share price of DKK 20.22 per outstanding share.
Because of the human, organizational and financial resources required, a simultaneously implementation of all three strategies are deemed unrealistic. Instead, the paper favors a joint initiation of path #2 and path #3 which would result in an expected increase in the share price of DKK 52.30 equaling a share price of DKK 294.06 per outstanding share.
As the expected value of implementing the two favored paths of DKK 294.06 per outstanding share does not exceed the price of DKK 325.00 per outstanding share offered by FMC, it can be concluded that the offered price from FMC optimizes shareholder value, and thus should be accepted.
General findings suggest that foundation charters potentially restrict consolidations, and as a possible result the authorities have seemingly adopted a liberal stance towards accepting changes in foundation charters, which have off-set a trend towards less restrictive charters – especially concerning divestments. The same trend is observed with Auriga Industries A/S.
Managerial distance between a foundation and its operational company are positively correlated with company performance. AURF and Auriga operate with high managerial distance, and should thus perform well. This has not been the case with Auriga Industries A/S which has not been able to capture their share of a growing market. A potential problem could be too much managerial distance, exemplified by the fact that AURF as majority owner have tried to sell Auriga Industries A/S for the last fifteen years – they did just not succeed until 2014. A possible effect of this unwanted marriage could be underinvestment causing
inefficiency and lack of responsiveness, resulting in low growth and thus affecting the ability to create shareholder value.
As the internal and external analysis reveals Auriga Industries A/S have developed into a company, being in a highly consolidating industry, where a divestment was the only right option to pursue in optimizing shareholder value.
1. Introduction ... 1
1.1. Problem Statement & Research Questions ... 2
1.1. Delimitations ... 2
1.2. Conceptual Framework ... 3
1.2.1. Data ... 4
1.2.2. Structure, Theories and Models – an Overview ... 6
2. Exposition ... 10
2.1.1. Industry Terminologies ...10
2.1.2. Auriga History ...11
2.1.3. Access to Documents Concerning the Sale Granted to Kurt Aabo ...12
2.1.4. Auriga in 2013 ...14
2.1.5. Stakeholders ...15
3. EXTERNAL ANALYSIS ... 16
3.2. Exogenous Factors ... 19
3.2.1. PESTEL ...19
3.2.1. Sub-conclusion – OT 1 ...29
3.3. External Factors ... 30
3.3.1. Generic Competitive Strategy ...30
3.3.2. Porters Five Forces ...32
3.4. Benchmark Analysis – Financial Data ... 36
3.4.1. Sub-conclusion – OT 2 ...39
4. COMPANY ANALYSIS – THE INTERNAL FACTORS ... 41
4.1. Value-Chain Analysis – Financial Data... 41
4.2. Financial Analysis ... 44
4.2.1. Accounting quality ...45
4.2.2. Re-classifying the Financial Statements ...46
4.2.3. Reclassification ...48
4.2.4. Tax ...50
4.3. Profitability analysis ... 51
4.3.1. ROE and the influence from Financing Activities and ROIC ...52
4.3.2. Effect from financing activities ...53
4.3.3. Effect from operating activities ...54
4.3.4. Trend Analysis and Common Size Analysis of Profit Statement ...56
4.3.5. Common Size and Days on Hand Analysis ...57
4.3.6. Weighted Average Cost of Capital - WACC ...59
4.4. Stakeholder and Corporate Governance Analysis ... 62
4.4.1. Corporate Governance setup at Auriga ...62
4.4.2. Corporate Governance and Stakeholder analysis ...66
4.5. Risk Management Analysis ... 73
4.5.1. Theoretical Terms and Aspects on Risk ...73
4.5.2. Risk in a Corporate Setting ...74
4.5.3. General Risks in Auriga ...77
4.5.4. Strategic Risks Management Analysis...79
4.5.5. Risk Management Effectiveness ...80
4.6. Sub-conclusion – Internal Factors (SW) ... 85
5. STRATEGIC ASSESSMENT ... 88
5.1. SWOT ... 88
5.1.1. Opportunities ...88
5.1.2. Threats ...89
5.1.1. Strengths ...89
5.1.2. Weaknesses ...90
6. STRATEGIC DILEMMAS ... 91
6.1. Setting Value Drivers ... 91
6.2. TOWS Matrix ... 93
7. FORECASTING & SCENARIO ANALYSIS ... 95
7.1. Setting Up the Strategic Paths ... 95
7.1.1. Free cash flow (FCFF/FCFE) ...95
7.1.2. DCF-model – Point of Origin Scenario ...96
7.1.3. The Paths - Basic Assumptions ...98
7.2. Paths to Optimize Auriga as an Autonomous Entity ... 98
7.2.1. Path #1 – Update Production Facilities to Improve Efficiency ...98
7.2.2. Path #2 – Initiate Projects to Optimize Working Capital Management ...101
7.2.3. Path #3 – Joint Venture/Collaboration with US Based Chemtura ...104
7.2.4. Path #4 - Combining the Paths ...108
7.3. Assessment of divestment relative to Auriga’s strategic opportunities ... 109
8. Discussion ... 112
9. Conclusion ... 116
10. List of Litterature: ... 118
10.1. Books, Articles and Scientific Research Papers ... 118
10.2. Annual Reports: ... 122
10.3. Homepages ... 123
11. List of Tables, Figures and Graphs ... 126
12. Appendix ... 128
1
Figure 1-1: Introductionary Triangle (Source: Own creation)
1. Introduction
Danish foundation owned companies employ 300,000 people worldwide and with large companies like Carlsberg A/S (beverages), Novo Nordisk A/S (healthcare) and A. P. Møller Maersk A/S (oil & shipping), the ownership-structure makes up the majority of the leading Danish share index, Nasdaq OMX C201 underpinning the important role of foundations – at least in a Danish context2.
Several research papers have been published concerning foundation- ownership concentrated on the ongoing discussion whether or not this type of ownership structure performs as well as other shareholder-owned companies (Thomsen & Rose, 2004; Thomsen, 1996, 1999; Rose, 2002;
Herrmann & Franke, 2002). Findings indicating that foundation
ownership seem to grow more slowly, amongst other things due to the fact that they are less active in mergers and acquisitions, have received less attention3.
In Northern Europe4 quite a few companies are owned by foundations
through a dual-share structure, where the foundation is obliged to hold a certain part of the company shares and/or votes. This take-over defense provides room for long-term planning, but could also be a potential constraint if the company itself wishes to actively participate in a consolidation trend.
To better grasp potential implications with foundation owned companies and their ability to create shareholder value in highly consolidating industries, the paper narrows its focus on the highly innovative chemical industry, which has experienced intense consolidation in the last decade with mergers and
acquisition transactions totaling more than 600 and 550 billion DKK in value in 2014. According to Deloitte Consulting this consolidation is expected to continue in the years to come.5
Part of the industry is the specialty chemical companies, which until recently had a Danish element. In August 2014 the Danish foundation owned agrochemical company, Auriga divested its sole operational company, Cheminova A/S (Cheminova) to the US based FMC Corporation (FMC) in a DKK 10.5 billion deal6. The acquisition is a text book example of a bigger company acquiring a smaller company in a horizontal acquisition to broaden access in key regions and expanding positions in existing product segments, and thus serves as a relevant case for further investigation of foundation-owned companies, consolidation and mergers and acquisitions.7
The purpose of the paper is to add to the literature, placing itself in a niche investigating the cross-field of consolidating industries, M&A and foundation-ownership.
1 The OMXC20 index portfolio consist of the 20 most traded shares of the 25 largest shares in terms of free floated market capitalization listed on Nasdaq Copenhagen. http://www.nasdaqomxnordic.com/indeks/OMXC20stillingen
2The Danish Ministry of Taxation, (2015), “Succession til erhvervsdrivende fonde”, Report 6’th of May 2015, http://www.skm.dk/media/1209173/succession-til-erhvervsdrivende-fonde_rapport.pdf
3 CBS Homepage: Center for corporate governance, Industrial foundations live forever:
http://www.cbs.dk/en/research/departments-and-centres/department-of-international-economics-and-management/center- corporate-governance/news/industrial-foundations-live-forever
4 Rose, Caspar,, ”Foundation Ownership and Financial Performance: Do Companies Need Owners?”, European Journal of Law and Economics, 18: 343-364 (2004), page 344.
5 Deloitte, “2015 Global chemical industry mergers and acquisition outlook. The momentum continues”. (January 2015), http://www2.deloitte.com/be/en/pages/manufacturing/articles/global-chemical-industry-m-and-a-outlook.html
6 The total price of 10.5 billion DKK resembles a cash price of 8.5 DKK adjusted for net debt
7 FMC Corporation homepage: http://www.prnewswire.com/news-releases/fmc-corporation-announces-agreement-to-acquire- cheminova-for-18-billion-274295241.html
Foundation ownership Consolidating
industries Chemical Industry
Auriga
2
1.1. Problem Statement & Research Questions
8With the stage set in the introduction the paper will investigate foundation-owned companies’ ability to maximize shareholder value in highly innovative- and/or consolidating industries.
To structure the investigation, the paper will answer the following research questions:
I. Based on exogenous, external and internal factors assess which strategic dilemmas are facing Auriga and thus alternative strategic options for the company?
II. Investigate if the divestment maximized shareholder value after the takeover?
III. Deduce possible structural changes and governance implications which can be learned from the horizontal acquisition of a foundation owned company?
1.1. Delimitations
This section will explain the boundaries of the paper.
The focal point of the paper will be on issues relating to the target less so deal with internal issues with the acquirer.
Because Auriga is a foundation owned company, touching upon governance issues is key, and this topic will therefore be an important part of the paper. Issues related to the legal acceptance of the change in the
foundational object of clause will not be addressed as this subject is more suitable for a paper focusing on legal issues rather than this paper focusing on economic, financial and governance issues.
Figure 1-2: Focus of the Paper (Source: Own creation)
The environmental and competitive environment analyses will only cover key points concerning the different markets and regions. Auriga operates in more than 25 countries divided into 4 regions and a detailed
description of each country/region is not possible, both due to information not publicly disclosed and the formal- and time constraints regarding the paper.
Production methods and products are not described in detail – both since information is not disclosed and because of the industry being rather complex which would involve specialized knowledge with both authors and readers.
Some of the material and references used is originally published in Danish. Texts and citations have been translated to the best of our ability, and if any details, contrary to expectations has been lost in translation process it is the Danish text which is applicable.
The time period for most analyses in this paper is 8 to 10 years, as it provides a reasonable period for analyzing trends. Expanding the ex-post period analyzed is not believed to provide further value to the ex- ante projections that will be conducted later in the paper.
8 Ankersborg, Vibeke & Watt, Merete, “Tænk selv! Videnskabsteori og undersøgelsesdesign i samfundsvidenskab” (2007), Forlaget Politiske Studier, page 9. Model used for developing the problem.
3 The last full-year Auriga owned Cheminova was 2013, why this is also the “cut-off year” of the paper. This means that the paper to a high degree uses historical information, and that information and events since then could potentially have influenced/motivated the description, analysis and conclusions of this paper.
It could be argued that the paper should be written in past-tense but it is written in present-time, as 2013 is the “cut-off year” in all instances.
1.2. Conceptual Framework
A global company is a complex entity and creating a holistic picture, incorporating the external business environment as well as the company’s internal state, framework and processes is a coherent process, bridging from market and industry understanding to
organizational setup and internal financial analysis. As a result, the paper is compelled to draw on and make use of a wide variety of models and theoretical approaches of structural, managerial and financial origin.
Together, the different elements create the focal point that enables the paper to answer the problem.
The paper will adopt an inductive and positivistic mindset as the aim of the paper is to use a case company for as a reference for
potential general implications with foundation-owned companies operating in highly innovative- and/or consolidating sectors. This is done mainly through observable and quantifiable findings.
The use of a case-company enables the paper to center the analysis in the framework where the value- creation takes place, and provides the opportunity to conduct a qualitative and quantitative in-depth study with the purpose of uncovering internal processes and implications that potentially could affect a company’s ability to create shareholder value.
The methodology will be dynamic and explorative, with a time-frame that mainly covers the ex-post period from 2003 – 2013, though later sections of the paper also conducts ex-ante projections beyond 2013.
The paper will take the overall perspective of all shareholders, and answer the research questions from the viewpoint of this particular group of stakeholders.
It is important to note, that the case company as a specific entity has unique features, but also that there could be other potential case companies, which just as well could have served the same purpose – both in regards to a specific industry as well as a specific company.
Auriga has been chosen as case-company because it exists in an industry which is both highly R&D focused and that experiences a high degree of consolidation. Both are elements that put pressure on cash flow and liquidity which can be contradictory with charters and capabilities of foundations.
Another reason for choosing Auriga as case-company is that the board of directors and the shareholders have deemed the divestment to FMC as the transaction that maximizes shareholder value and conversely that Auriga did not have the relevant potential to continue as an independent company.
Figure 1-3: Model and Theories Applied to Create Focal Point (Source: Own creation)
4 The external approach – hereunder the use of a large industry sample, will be used to develop a quantitative perspective on the agrochemical industry in which the case-company operates.
The paper applies both quantitative and qualitative measures and thus constructs a framework of a
combination perspective. Data and findings will continuously be visualized by the use of graphs, tables and figures, and presented for the reader in the sections where the information is most relevant.
Put together, the scope of the paper is to combine theories and methods that best fit the constraint of the paper and the information and data available. To avoid an endless discloser of models and theories applied at this point, each relevant theory and model is described in the chapter where it is applied.
The structure is visualized in figure 1.4.
To clarify the conceptual framework used in the problem statement a brief description the three main concepts is listed below.
Maximizing shareholder value: Creating the highest possible risk adjusted return in monetary value to individuals or organizations possessing part of the company. On a more operational level shareholder value can be defined as Market Value Added (MVA), Total Value ex Total Capital, Net Present Value or Present Value of Future EVA9. This paper will adopt a less restrictive definition and define shareholder value as the present value of free cash flows to the firm, deducted net interest bearing debt, equaling estimated value of outstanding shares or the value per share when deducting the number of outstanding shares.
Highly innovative industries: The conceptual framework of highly innovative industries can be measured in many different ways. The paper adopts the wide OECD definition on innovation: “An innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations”10.
The main criterion in this paper is that a large amount of resources in the form of monetary value is required to maintain or increase a company’s position in the industry. How this monetary value is specifically distributed or used is not addressed. When e.g. measuring innovative capabilities in the peer analysis, R&D spending is solely used as a reference point for the degree of resources allocated to the matter.
Highly consolidating industries: The main criterion when defining a consolidating industry is that the industry is characterized by an ongoing transition from many small companies to a few larger companies.
This change forces companies within the industry to either find a niche, be the acquirer or be targeted for acquisitions. In highly consolidating industries, economics of scale11 is of importance, and mergers and acquisitions are therefore a necessity for the long-term survival.
1.2.1. Data
The data used in the paper is primarily of quantitative character, and can be divided into two overall groups – detailed accounting data on Auriga, and more wide-spread financial data on the agrochemical industry as a whole. Each group of data will be commented on in the following – both in regards to gathering and processing the data as well as checking for validity and reliability.
9 Stuart III, G. Bennet, “EVA, Fact and Fantasy”, Stern Stewart & Co., BankAmerica – Journal of Applied Corporate Finance, page 72 and 74(Materialesamling efterår 2014 – Køb og salg af virksomheder, Cand. Merc. R80, Bind 1, Academic books page 130 and 132
10 OECD, “Guidelines for Collecting and Interpreting Innovation Data”, (2005) OECD Publishing, third edition - page 46.
http://www.oecd-
ilibrary.org/docserver/download/9205111e.pdf?expires=1462037616&id=id&accname=guest&checksum=20B46D37F9B2E326BA64F 4C45ACD178B
11 Brealey, Myers & Allen, “Principles of Corporate Finance”, Global Edition, McGraw Hill Irwin, ISBN:978-0-07-131417-6 – page.823.
5 1.2.1.1. Specific Auriga Data
The detailed accounting data on Auriga where extracted from Orbis International which is a database on 200 million companies across the globe powered by Bureau van Dijk12. Setting up the data for further analysis, the data was spot checked against annual reports downloaded from the Auriga company website. As the sample was short of several items, these items were found in the annual reports and added to the sample manually.
The data was subsequently processed in Excel by the use of financial analysis, trend analysis, common size analysis etc. to uncover the company’s financial and operational abilities.
It is acknowledged that e.g. annual reports come with a certain degree of subjectivity, and that companies to some degree uses “fabrication”13 in order to produce a certain picture of the company. But as the rules regulating financial statements from listed companies are rather fierce, it is believed that the data in general are of high quality, providing a “true and fair view” of the current state.
It is believed that the data is of as high quality as possible, and that the results produced from the data is reliable, and valid as another paper applying the same data would reach similar results.
1.2.1.2. Industry Data
The industry data sample was extracted from Reuters Datastream Professional14 for the purpose of establishing a picture of the characteristics and levels of the different financial ratios in the agrochemical industry
The initial sample consisted of a total of 54 companies within the agrochemical industry. To secure a high degree of consistency, companies where Datastream was not able to provide a complete set of data, both in regards to the time period and the different items, where excluded from the sample. A total of 27 companies where deducted as there were no financial data available at all – mostly because companies being either privately or state owned. Another 11 companies were deducted due to incomplete financial data, resulting in a net sample of a total of 16 companies. Of the 16 companies 6 are categorized as tier 1 companies, and 10 as tier 2 companies – the latter including Auriga.
The sample has been processed in Excel to calculate a wide variety of financial ratios covering both the individual year as well as median numbers for both Auriga, tier 1 companies, tier 2 companies and the industry as a whole. The Median has been applied to meet skewness and outliers in the data. When processing the data, cross-references have been performed to avoid mistakes in calculating the different ratios.
Assessing the size of the sample, it is believed to be large enough, to be able to show relevant industry trends relative to Auriga, and the scrupulous work processing the data secures a high validity measuring what the data is supposed to measure.
The sample is also subject to the calculation of both descriptive statistics and correlations. From a statistical point of view, the paper could have wished for a larger sample, as a sample of 11 data points on each company and a total of 176 data points for the entire industry, a degree of bias cannot be excluded.
12 Bureau Van Dijk homepage: http://www.bvdinfo.com/en-gb/home
13 Skærbæk, Peter, (2005) “Annual Reports as Interaction Devices: The Hidden Construction of Mediated Communication”, Financial Accountability & Management, 21 (4), November 2005, 0267-4424.
14 Thomson Reuters Datastream Professional is a powerful tool that integrates economic research and strategy with cross assets analysis to seamlessly bring together top down and bottom up in one single integrated application,
https://forms.thomsonreuters.com/datastream/
6 Other sources of information are written literature on different economic subjects - e.g. books and working papers published in well reputed financial journals. Also homepages will be applied, but it goes for both sources of data that a sound source of criticism will be applied, to secure reliable conclusions. The use of newspaper articles will be minimized, but cannot be completely avoided.
The next section will provide an overview of the further developments and structure of the paper.
1.2.2. Structure, Theories and Models – an Overview
The paper consists of nine chapters with one or more sub-sections plus chapter 10 to chapter 12 with formalia, and makes use of a top down approach where the environment analyzed continuously narrows in.
The left-side of the model explains the purpose of each chapter, the mid-section visualized the plan/structure of the chapter, and the right-side lists the tools used for solving the purpose of the specific chapter.
7
Figure 1-4: Structure of the Paper (Source: Own Creation)
The next section will deliver a short “what, why, how” on chapter 2 to chapter 9, and serve as an appetizer for further reading.
1.2.2.1. Exposition15
The introduction will be followed by an exposition that presents Auriga as the case company. The chapter contains three:
A section that will go through key terminologies in the Agrochemical industry to secure an understanding of how the paper perceives different industry definitions.
A description of the “history of Auriga” explain the company DNA as it is important to know and understand a company’s ex-post situation to be able to uncover potential strategic opportunities
15 “Writing or speech primarily intended to convey information or to explain; a detailed statement or explanation; explanatory treatise”. http://www.dictionary.com/browse/exposition
Expos i ti on Sta kehol der Ma tri x &
Inf l uencedi a g ra m
Purpose: Plan: Model:
Introducti on, Probl em & Method Probl em A rea , Probl em ,Survey
Ques ti ons , Li m i ta ti ons , Da ta
& Model s
Indus try Term i nol og i es a nd brei f Introduti on of A uri g a a nd Sta kehol ders
Probl em f orm ul a ti on Model
Concl us i on
V a l uedri vers ba cked by s ta ti s ti ca l da ta ( SSH) & TOW S
DCF Stra teg i c
A s s es s m ent SW OT
Stra teg i c Di l em m a s
F oreca s ti ng &
Scena ri o A na l ys i s
Di s cus s i on Sub- concl us i on
PESTEL, P5F & Peer A na l ys e, G eneri c Com peti ti ve Stra teg y, Benchm a rk A na l ys i s
Exog enous F a ctors OT1
Externa l F a ctors OT2 Sub- concl us i on
Com pa ny A na l ys i s : 1: Peer A na l ys i s ( V a l ue- cha i n)
2: F i na nci a l A na l ys i s 3: Lea ders hi p/Org a ni z a ti on 4: Stra teg i c Ri s k Ma na g em ent
SW
V a l uecha i n A na l ys i s , F i na nci a l A na l ys i s ,IF RS a ccounti ng rul s , Du Pont pyra m i d, Trend- a nd com m on- s i z e a na l ys i s , Da ys on ha nd a na l ys i s , Mi tchel l ' s Sta kehol der F ra m ework, Org a ni z a ti on- a nd Lea ders hi p Theori es , Ri s k Ma na g em ent Theory, Sta ti s ti ca l da ta ( SSH) , Ri s k Ma na g em ent Ef f ecti venes s
Concl udi ng Rem a rks to the Res ea rch Ques ti ons Externa l A na l ys i s
Sub- concl us i on
Interna l A na l ys i s
Overwi ev of Key F i ndi ng s
Determ i na nt A na l ys i s &
Stra teg i c A na l ys i s
Setti ng V a l ue Dri vers
Expl ore other pos i bi l i ti es - wha t ha ppens i f we cha ng e one or m ore va l uedri vers ?
W ha t ca n we l ea rn?
1 2
3
4
5 6
7
8
9
8
An overview of the “2013 Auriga” at the time for the divestment including a stakeholder overview, to provide basic information on the company and the gallery of characters involved.
External Analysis – Exogenous and External factors
The idea of this chapter is to define the different factors affecting the company. The section will start out with a description of the different markets in which Auriga operates, subsequently followed by an analysis of bot exogenous and external factors, by the use of the following theories and models:
PESTEL analysis, to uncover exogenous elements affecting the industry as a whole. As there are many macro factors influencing a global company, the PESTEL framework will categorize and identify key strategic elements to take into consideration in later stages of the paper when identifying trends that will make its way into the competitive environment16.
Porters Generic strategy to identify Auriga’s current strategic path
The Porters Five Forces (P5F) framework has been chosen because it uncovers the competitive environment and the degree of attractiveness of being part of the agrochemical industry. Besides the apparent benefit of casting light on the competitive environment, it is stated that at least parts of the framework are present in every business analysis, as well as the competitive environment is believed to have great impact on a company’s performance.17
The P5F will be complemented with an industry peer-analysis on financial ratios that will be calculated as averages over an eleven-year period and at the same time divided into the two main tiers in the industry – tier 1 and tier 2. The purpose is to uncover at what levels the different piers operate and to cast light on potential differences, if any. This information will be helpful in evaluating key figures in later chapters of the paper.
Each of the two sections will be rounded off with a sub-conclusion named OT 1 and OT 2 resembling the Opportunities and Threats in the SWOT analysis which will be described in a later section.
Company Analysis – Internal Factors
This chapter will set out with a financial value-chain analysis on Auriga and its peers, produced on 2013- data. The value-chain will contain the following building blocks; production, Sale & distribution (S&D), Administration, R&D and depreciation. The point is to recap the newest financial information at the time for the divestment, to assess where in the value-chain Auriga is superior to its competitors, and where Auriga has room for improvement.
The Value-chain analysis will be followed by a complete in-depth financial analysis with a full scale reformulation of profit statement and balance sheet to bring forth a true picture of the company´s core profitability and cash-flow generating capabilities18. Profitability will be analyzed using the “Du Pont pyramid”19 combined with trend-, common-size- and peer-analysis20.
16 Henry, Anthony, “Understanding Strategic Management” (2008), Oxford University Press, ISBN: 978-0-19-928830-4, page 51.
17 Henry, Anthony, “Understanding Strategic Management” (2008), Oxford University Press, ISBN: 978-0-19-928830-4, page 61 og 68. 18
Christian V. Petersen & Thomas Plenborg “Financial Statement Analysis” FT Prentice Hall Financial Times, ISBN: 978-273-75235-6, Page 68.
19 Christian V. Petersen & Thomas Plenborg “Financial Statement Analysis” FT Prentice Hall Financial Times, ISBN: 978-273-75235-6, Page 94 and 120.
2020
Christian V. Petersen & Thomas Plenborg “Financial Statement Analysis” FT Prentice Hall Financial Times, ISBN: 978-273-75235- 6, Page 111.
9 The next section will describe the overall governance structure of Auriga and perform an analysis of the key stakeholders identified in the exposition. Mitchell’s Stakeholder Typology framework21 will be applied to assess the salience of different stakeholders on the basis of three attributes: power, legitimacy and urgency in relation to the divestment and the possible future strategic opportunities. When assessing different
stakeholders, it is natural at the same time to also touch upon the organizational structure and different corporate governance issues that potentially could affect the company, its operations and its future strategy.
The section will furthermore draw on different leadership and organizational theories.
Innovation is a key factor in securing the strategic options that are to be the basis for future growth. The strategic risk management section will describe and analyze different risk measures - among these the risk management effectiveness relative to industry peers. The section will be based on the findings of Torben Juul Andersen, Professor at the Department of International Economics and Management, and his article from 2009; “Effective risk management outcomes: exploring effects of innovation and capital structure”.
The section will be rounded off with a sub-conclusion named SW resembling the Strengths and Weaknesses in the SWOT analysis which will be put together in the following chapter.
Strategic Assessment
The essentials from both external sub-conclusions and the internal sub-conclusion will be listed in a SWOT analysis framework, in the well-known internal strengths and weaknesses and the external opportunities and threats. The section joins the forces of both the financial analysis and the strategic analysis, and rounds-up the ex-post parts of the paper. Blue numbers will identify operational value drivers extracted from the exogenous analysis, red numbers operational value drivers from the external analysis and black numbers operational value drivers from the internal analysis. Each entry will be accompanied by an impact assessment and a short description of which financial items it effects.
Setting the Value Drivers
This chapter kicks-off the ex-ante looking part of the paper and will identify key financial value drivers which define the underling fundamental development of Auriga. Each financial value driver will be connected to relevant operational value drivers identified in the exogenous, external and internal analysis.
Each entry will contain the same numbers and colors used in the sub conclusions and the SWOT analysis, thus making it easy to recognize its origin. The financial value drivers recognized will later be applied in a DCF model to calculate three different strategic scenarios and a fourth combining all three scenarios.
Strategic Dilemmas
Drawing on elements defined in the SWOT, this section will assess and combine strengths, weaknesses, opportunities and threats, by applying the TOWS-matrix to structure forward looking strategic dilemmas.
Each entry can be traced back to the SWOT analysis and the three sub conclusions by number and color.
Forecasting & Scenario Analysis
This section starts with a brief description of models applied and next, on the basis on the strategic and financial analysis, investigates three different strategic opportunities/paths for Auriga to follow. The three paths are subsequently combined in a fourth path, hereby investigating Auriga’s full potential as a stand- alone entity. Lastly an analysis of the divestment relative to Auriga’s different strategic options/paths is executed. Sensitivity analysis to supplement DCF calculations and the offered price from FMC could have proven useful but due to the limitations of the paper it has been discarded.
21Ronald K. Mitchell et. al.,, ”The Academy of Management Review”, Vol 22, No. 4 (Oct. 1997), pp. 853 – 886, Academy of Management, http://www.jstor.org/stable/259247 - page 874
10 Discussion and Conclusion
Lastly the findings in the analysis and the chosen path will be discussed and put into perspective for future situations and improvements in similar cases.
2. Exposition
22The exposition provides an introduction of Auriga and thus creates a foundation for moving on to the external analysis in chapter 3 and the internal analysis chapter 4.
2.1.1. Industry Terminologies
This initial section will provide brief description of the most important terminologies in the agrochemical industry.
Agrochemical is the term for a range of products, used for the purpose of enhancing or securing yields in the agricultural industry. Agrochemicals can be divided into two main categories; pesticides and fertilizers.23 According to the European Commission a pesticide is; “…something that prevents, destroys, or controls a harmful organism ('pest') or disease, or protects plants or plant products during production, storage and transport”24. The term includes; herbicides, fungicides, insecticides as the most commonly used pesticides in the agricultural industry. Herbicides are used to kill or inhibit unwanted plants (weeds) that compete with the wanted plants (crops) for light, water and nutrition25. Herbicides can be non-selective with the same effect on all plants, or selective by which the herbicide only affects certain weeds26. A Fungicide kills or prevents growth of fungi’s or fungal spores and an insecticide kills, harm, repel or mitigate pests that might attack and harm crops27.
The main product segments within the Agrochemical industry are described below:
Crop protection
Production of different kind of pesticides a described above
Seed treatment Development of crop protection products which are applied directly on the seed before it is sown.
Hybrid seed Development of new and better seeds by crossing two different, but related plants in a controlled environment - Almost the same as cross-pollination of two related plants - only done much faster. A big advantage/disadvantage with hybrid seeds are that seeds from the crops planted do not have the same characteristic as the seed planted and therefore are not suitable for use.
GMO Seed28 Often referred to as traits. The two main groups within this segment are:
Development of new crops which are genetically modified to resist specific pesticide products so that the spraying of the pesticide does not harm the crop. E.g. Monsanto have
22 Gyldendal, Den Store Danske homepage:
http://denstoredanske.dk/Natur_og_milj%C3%B8/Milj%C3%B8_og_forurening/Vandmilj%C3%B8,_spildevand_og_olieforurening/Ch eminova & Cheminova homepage, http://www.cheminova.dk/dk/om_os/historie/ & Danmarkshistorien .dk by Aarhus Universitet - http://danmarkshistorien.dk/leksikon-og-kilder/vis/materiale/cheminova-auriga-1938-2014/?no_cache=1 and webpage of Auriga.
23 P. Hough, “The Trading and Use of Agrochemicals”, Department of Law, Middlesex University London, Springer Science, page 2, http://www.springer.com/gp/book/9789400774537?wt_mc=ThirdParty.SpringerLink.3.EPR653.About_eBook#aboutBook
24 European Commission homepage on Pesticides: http://ec.europa.eu/food/plant/pesticides/index_en.htm
25 The Essential Chemical Industry – online homepage: (18th March 2013) Crop Protection Chemicals, CIEC Promoting Science at the University of York, http://www.essentialchemicalindustry.org/materials-and-applications/crop-protection-chemicals.html
26 Auriga Industries A/S annual report 2011, page 12.
27 The Essential Chemical Industry – online homepage: (18th March 2013) Crop Protection Chemicals, CIEC Promoting Science at the University of York, http://www.essentialchemicalindustry.org/materials-and-applications/crop-protection-chemicals.html
28 GMO = Genetically Modified Organism
11 developed crops that can tolerate Rond-Up and other type of Glyphosate products29. Development of new crops which are capable of protecting themselves against pests and fungi and which have improved nutrient uptake30. Seeds from crops grown with patented GMO seeds are often not allowed to be planted, as this violates the manufacturing companies’ right to the seeds31.
To understand the dynamics of the industry it is important to distinguish between tier 1 companies and tier 2 companies:
Tier 1 companies are defined by possessing the capabilities and the resources to research and discover new active ingredients and by having a global market presence. Tier 1 companies are large corporations often with divisions outside the agrochemical industry.
Tier 2 companies are defined by capabilities to produce/synthesize off-patented active ingredients, develop new products based on off-patented active ingredients, and a global market presence. Auriga is considered to be a tier 2 company.
Active ingredients are the main substance in pesticides and many pesticide products contain more than one active ingredient. In order to produce pesticide products, active ingredients are mixed with different inert ingredients which among other things can help increase shelf-life, attract pests or helps spread the product more evenly on surfaces.32 The different key active ingredients used in the industry can be seen in appendix 1.
Tier 1 companies have the capital and knowhow to research and develop new active ingredients that can be used in new pesticides. E.g. in the 1970s, US company Monsanto patented the active ingredient Glyphosate which was used in their Herbicide block-buster Roundup. Today their patent has expired, making is possible for other players to produce and mix their own Glyphosate products. Today Glyphosate is still the most widely used active ingredient in the agrochemical industry33.
Formulation is a process wherein active ingredients produced by the company or bought from third parties are mixed with other chemicals and additives to produce pesticide products designed for various uses in the agriculture industry.
2.1.2. Auriga History
This section will briefly describe the origin of Auriga and the path the company has traveled to become the company it was up until the divestment to FMC in 2014. The purpose is to create a basic understanding of the company and its history which will prove useful in later chapters. The description will briefly touch upon the 2013 key figures of the company. For a complete history of Auriga – including “The early days” see appendix 2 and appendix 12 for an overview of Auriga’s stock price development
2.1.2.1.1. Recent history
In the 1990s competition was fierce and in search for new ways to increase topline growth and mitigate risk Cheminova aimed to diversify their business into new markets. This change of strategy had already started in 1987 with the acquisition of the Fur based Skamol A/S which manufactures and markets thermal insulating
29 Monsanto, Annual Report 2015 – page 4
30 Monsanto, Annual Report 2015 – page 4
31 Monsanto homepage: http://www.monsanto.com/newsviews/pages/why-does-monsanto-sue-farmers-who-save-seeds.aspx
32 National Pesticide Information Center homepage: http://npic.orst.edu/ingred/
33 Ecochem homepage: http://www.ecochem.com/ENN_glyphosate.html
12 materials for a wide range of heat intensive industries. Not a line of business with a fit to the current value chain.
Ten years later in 1997, Cheminova closed two other significant acquisitions when acquiring the last 70% of the share capital in Hardi International A/S and Indian Lupin Agrochemicals. Hardi International A/S produced sprayers for the agriculture industry. Before the acquisition Hardi International A/S performed at an acceptable level, but after the change of ownership the performance decreased and on serval occasions Auriga had to inject additional capital. Acquisition of Indian Lupin Agrochemicals gave access to new production facilities in India and helped penetrate the Indian growth market.
A few years later the company changed the name of the holding company to Auriga.
In 2006 the company decided on a major strategic change with the public announcement of initiating process towards divesting both Skamol A/S and Hardi International A/S, ending a diversification strategy that started 20 years earlier. The realization was that keeping a continuous strong position in the agrochemical market would demand a full focus on this key area34.
The divestment was effectuated in 2007 with Skamol A/S being sold with an acceptable profit and Hardi International A/S with a loss. The divestments had a total negative effect on the 2007 annual report35. Post the strategy change Auriga continued developing and expanding their markets with the acquisitions of Uruguayan Abielux S.A. and German Stähler, opening of representation offices in Thailand, Kenya, Croatia and Romania and partnering up with Libanese AgriNova, granting them distribution rights to the Cheminova product portfolio in the Middel East, Turkey, North Africa and the Gulf area36.
2.1.3. Access to Documents Concerning the Sale Granted to Kurt Aabo I order for Auriga to divest Cheminova to FMC Corporate, AURF had to change the instrument of foundation, to be allowed to deviate from the clause of being the sole owner of A-shares. A change of the clause has to be accepted by the Danish Business Authority – confer the Law on Foundations clause 21 section 3.37
Former Information Manager with Auriga38, Kurt Aabo39 has been granted access to documents concerning the acceptance of changing the instrument of foundation. To see documents provide by Kurt Aabo see appendix 3.
The key points and documents will be described in the following sections.
2.1.3.1. First Application for Changing the Instrument of Foundation
On the 8’th of September 1998 the law firm; “Pedersen & Jantzen” applied, on behalf of the Aarhus Research Foundation, for the Danish Business Authority’s approval of a change in the instrument of
foundations article 7 section 4 which stipulates that the foundation at all time is to possess at least 51% of the total voting rights in Cheminova Holding A/S. The argument for changing the instrument of foundation is
34 Auriga Industries A/S, Annual Report 2006, page 1
35 Auriga Industries A/S, Annual Report 2007, page 1
36 AgriNova homepage: http://www.agrinova-sal.com/profile.html
37 Retsinformation homepage: https://www.retsinformation.dk/forms/r0710.aspx?id=163656. Please note that a change to the law has been proposed and enacted by parliment on the 3’rd of June 2014.
38 Sperling, Anna von “Cheminova skal stå skoleret for ministeren”, Information on the 16’th of November 2008 https://www.information.dk/2007/07/cheminova-staa-skoleret-ministeren &
Kamstrup, Lars, ”Aktionær: Ejer har et ansvar ved salg af Cheminova”, Dagbladet Holstedbro-Struer on the 30’th of August 2014, http://m.dagbladet-holstebro-struer.dk/lemvig/aktionaer-ejer-har-et-ansvar-ved-salg-af-cheminova
39 Aabo, Kurt, Søndervej 5, 6280 Højer, telephone number: 40569930, email: kurt.aabo@live.com
13 that the industry is experiencing a consolidating trend, which results in several challenges for the company as:
Large competitors have advantage in economics of scale enforcing them to develop their own patented products.
The Large competitors have a broader product palette with products supplementing each other
The large competitors dominate the net of distributers
Large competitors are able to carry out a price policy that could be a problem for the company It is expected that the industry will move towards having five dominant players, and that it in these market conditions would be beneficial to be able to enter a strategic alliance to secure own economics of scale. Such an alliance would make it difficult to be able to continue as the majority shareholder.
The Danish Business Authority approves the application in a letter dated 30’th of October 2008, with a notion that if a deal is made, the foundation has to account for its current status, and account for how the deal will affect the foundations object of clause.
Negotiations concerning the sale was conducted, but without a fruitful result.
See the original documents in appendix 5
2.1.3.2. Second Application Clarifying the Earlier Approval
On the 5’th of December 2008, the law firm “Kromann Reumert” made an application with the Danish Business Authority as a continuation of the approval from the 30’th of October 2008, to clarify the notion concerning the two issues that was to be accounted for in the case of a sale, and confirm that the notion does not influence the approval of the possible change in the object of clause.
The application is answered on the 22’nd of January 2009, where the Danish Business authority confirms, that the last notion does not influence the essence of the approval to change the instrument of foundations article 7, section 4.
Considerations concerning the sale were terminated due to the development of the financial crisis.
See the original documents in appendix 6
2.1.3.3. Renewal of Earlier Approvals
In a letter dated 17’th of June 2014, the law firm “Kromann Reumert” applies for renewal of earlier approvals concerning changing the instrument of foundations article 7, section 4.
The background to the application is that the board of directors with Auriga has initiated a process to uncover strategic opportunities in a consolidating market – including the possibility of a sale.
It is stated, that the wish from the board of directors to divest Cheminova is in line with the foundations own analysis concerning the asset structure of the foundation, and the foundation being a suitable owner for Cheminova.
The foundations argument for renewal of earlier applications is that a divestment of Cheminova could provide the foundation with a better return on its investments, minimize its total risk, and secure or even increase the basis for endowments.
The foundation concludes the following:
The risk of having a large share of its asset base tied up in a single stock is not optimal
The agrochemical industry is experiencing intense consolidation trends which make economics of scale even more important in the future.
14
If you as a company is not an active player in the consolidation in the industry, you are at risk to be bought
The foundation does not have the resources to support a future consolidation of Cheminova, which does not make the foundation the right owner of Cheminova.
The application is enclosed in a memorandum produced by the board of directors of Cheminova dated 14’th of May, which argues, that Cheminova currently is in a strong position to proactively lead discussion on value creating consolidation, and that the company will risk marginalization over time and loose its competitive advantage, if it does not use this momentum.
The application is further backed by a memorandum also dated the 14’th of May produced by the accountant of the foundation, “PwC” that also concludes the Cheminova has gone through a positive development in the last two years, and that the timing of a sale of Cheminova in 2014 to secure the endowments are good.
The Danish Business Authority approves the request, to change the Instrument of Foundation article 7, section 4, on the 19’th of June 2014 with the notion, that they are to be presented of the sales agreement before a sale is final. See the original documents in appendix 7,8,9,10 and 11.
The conditional sale to FMC mentioned in the introduction is announced in a company announcement dated the 8’th of September 2014, and announced final
2.1.4. Auriga in 2013
In 2013 Auriga is a global enterprise with a large palate of products within herbicides, fungicides and insecticides mainly distributed to countries in Europa and the Americas.
The company slogan “Helping you grow” has a two-fold meaning. Firstly Auriga wants to produce new and innovative solutions within crop protection to secure the yield of farmers. Secondly Auriga wants to create value for all stakeholders – being economically, professionally or humanitarian.
The company employs 2,200 people whereas 850 are employed in Denmark, mainly at the headquarters in Harboøre.
In 2013 Auriga’s revenue summed close to DKK 6.6 billion producing a net income of DKK 290 million.
The company had subsidiaries in 24 countries, representation offices in another 4 countries, production facilities in Denmark and India and formulation sites in UK, Germany Australia and Italy. For an overview of Auriga’s global business units from 1996 to 2013 see appendix 13.
15 2.1.5. Stakeholders
When expatiating the history and development of Auriga it becomes evident that there are numerous stakeholders to Auriga. It is therefore suitable to shortly identify the key stakeholders, that are of potential influence to the divestment of Cheminova in the “Interest Power – Matrix" below. Some of the entries are self-evident, and others will be given a short explanation.
Figure 2-2: Interest Power Matrix41 (Source: Own Creation)
AURF is the largest single shareholder, and the majority holder of voting rights.
40 Auriga Industries A/S, Annual Report 2013, page 40
41 Eden, Colin & Ackermann, Fran, (1998), ”Making Strategy: The Journey of Strategic Management”, Sage Publications Ltd, ISBN:
9781446217153, chapter C7.1 – page
Figure 2-1: Auriga 2013 – Revenue by Segment and Region (Source: Own Creation)40
16 ATP as the second largest shareholder and because of their size and expertise believed to be a weighty partner in the companies they choose to invest in.
Advisers to the foundation are professional consultancy houses and law firms that are hired as advisers on different matters concerning the future strategic considerations.
Environmental groups are believed to have an interest of the future of a chemical company.
FMC as the acquirer of Cheminova.
3. EXTERNAL ANALYSIS
This chapter will conduct an analysis of the external and endogenous factors, by applying a PESTEL analysis, a Porters Five Forces analysis, and a peer-analysis based on industry numbers.
But first and foremost the different markets where Auriga is present will shortly be described in the following.
3.1.1.1.1. Global overview
Auriga operates its global activities from their head office in Harboøre, Denmark.
The company produces active ingredients at production facilities in Denmark and India and micro nutrition formulations are produced in Headland, Great Britain. The company furthermore has formulation and packaging plants with subsidiaries in India, Australia, Germany, Italy and Great Britain.
The next sections will go through the main characteristics of the different regions defined by Auriga42.
42 Auriga Industries A/S, Annual Report 2010, page 12-13
17
Figure 3-1: Global Overview – Auriga Industries A/S
(Source: Own Creation with data from Auriga Industries A/S Annual Report 2013, pages 39 and 62)
3.1.1.1.2. Europe
The European market makes up around 26%43 of the world market of pesticides and approximately 38%44 of Auriga’s revenue. The crop structure of Europe is rather dispersed with both the big corn crops but also wine, fruits and vegetables. The region is strictly regulated concerning the use of GMO crops – see the PESTEL analysis in chapter 3. A typical farm in Nord and Central Europe is between 50-80 hectares in size concentrated on few crops, while a farm in south Europe typical has 5-30 hectares with many different crops.
In Nord and Central Europe wholesale and retail is often merged where in south Europe distribution is more fragmented with many small distributors and retailers45.
Despite the sometimes difficult weather situations and a pressured market for glyphosate Auriga has experienced growth in the years up till 2014. The growth is primarily driven by launching new products, better market penetration with new subsidiaries in Austria and Serbia and opening of representation offices in Romania and Croatia.
Besides their headquarters and production facilities in Denmark Auriga holds a wide network of subsidiaries, representation offices and formulation plants throughout the region.
3.1.1.1.3. Latin America
The region includes Brazil, Argentina, Colombia, Mexico and the rest of Central- and South America, with Brazil and Argentina accounting for 80% of the regions market-value. Latin American makes up around 28%46 of the world market of pesticides and approximately 30%47 of Auriga’s revenue in 2013. The most
43ADAMA, Annual Report 2013, page 25
44Auriga Industries A/S, Annual Report 2013, page 39 (2,522,089/6,597,749)
45 Auriga Industries A/S, Annual Report 2012, page 12
46ADAMA, Annual Report 2013, page 25
47Auriga Industries A/S, Annual Report 2013, page 39 (1,984,867/6,597,749)
18 used crops are corn, maize and soybean. Auriga holds subsidiaries in Columbia, Argentina, Uruguay and in the main market of Brazil. A typical farm in North Brazil if often more the 50,000 hectares and equipped with high technical devises enabling farmers to be highly effective. Distribution is done directly to big farms and cooperatives and through wholesale and retailers.
Auriga has experienced growth in revenue in Latin America in the years leading up to 2014. The main reasons are better direct present with products being sold directly to both big farms in Brazil and Argentina and small farmers in Mexico, launch of new differentiated products, increase of farmed areas and good weather conditions.
The region is characterized by long payment terms which affected Auriga’s revenue negatively in 2009 when they implemented a stricter credit policy48. The region is also characterized by a general decline in sale of glyphosate products.
3.1.1.1.4. North America
The region includes US and Canada. North American makes up around 19%49 of the world market but only approximately 9%50 of Auriga’s revenue in 2013. Major crops in the region are corn, maize and soybeans.
Auriga has subsidiaries in both US and Canada. A typical farm is between 500 – 2,000 hectares and highly effective. Distribution is much alike in North and Central Europe, just much bigger. Wholesale and retail is characterized by a few big companies with a large amount of shops.
North America has experienced increased glyphosate resistance and therefor new differentiated products, especially to crops like soy and cotton51 are considered key elements in raising revenue.
Auriga experienced difficult years in 2009-2011 due to declining sale of glyphosate products, poor inventory management and difficult weather conditions in Texas. Opposite in 2012-2013 Auriga experienced two-digit growth figures due to registration and launch of new differentiated products - amongst others based on the active ingredients flutriafol and gamma-cyhalotrhin.
3.1.1.1.5. International
The region includes India, Australia, Asia, the Middle East and Africa. Asia accounts for 24%52 of the world market and approximately 17%53 of Auriga’s revenue in 2013. Auriga holds subsidiaries in China, Taiwan, Russia and India. Auriga has a production plant in India, an associated company in Lebanon and
representation offices in Kenya and Ukraine. In Australia, Auriga has a formulation and packaging plant and the company states that they hold good relations with established distributers. In India, which is the main market for Auriga in this region, a typical farm is 1.2 hectares in size and family owned. Distribution is characterized by a large amount of independent wholesalers’ and larger farmers buying pesticides in the cities and selling to smaller farmers in their local village.
This high growth region presents a highly volatile development from year to year due to a tricky monsoon in Asia and political instability in especially the Middle East.
Market share and market growth in the different geographical areas are stated in the figure below:
48Auriga Industries A/S, Annual Report 2009, page 8
49ADAMA, Annual Report 2013, page 25
50Auriga Industries A/S, Annual Report 2013, page 39 (604,927/6,597,749)
51 Auriga Industries A/S, Annual Report 2009, page 13
52ADAMA, Annual Report 2013, page 25
53Auriga Industries A/S, Annual Report 2013, page 39 (1,095,902/6,597,749)
19
Figure 3-2: Global Overview– the Market with average numbers from 2009 to 2013 (Source: Own Creation with data from ADAMA Annual reports 2009 – 2013)
3.2. Exogenous Factors
The PESTEL-analysis is a strategic analysis with focus on external factors immediate to the agrochemical industry and Auriga. Due to the difficulty for Auriga to alter or affect the external environment it is important to have a clear view of all factors which may influence the company and its future strategy.
The aim of the section is to derive the nature of Auriga’s business environment and uncover the dynamics and complexity of the industry. Key findings from this section are later highlighted in the SWOT analysis and used in the Forecasting & Scenario analysis chapter to determine specific levels for value drivers used when evaluating different possible enterprise values for Auriga.
3.2.1. PESTEL
3.2.1.1. Political factors
Due to the potential environmental and health impacts related to agrochemical products, the industry is object of high political attentiveness and products have previously been banned for further usage54. With a continuously increasing degree of environmental- and labor protection laws55 there is a high political risk for companies operating in the agrochemical industry.
An opposite point is food security for the growing population which also continues to attract political and public attention. According to the Food and Agriculture Organization of the United Nations (FAO) global agriculture has to increase its production 70% to be able to support the world’s growing population in 205056. As crop protection has been and still is a beneficial instrument for securing and increasing yields in farming, the political awareness could have a potential positive effect on the industry – especially in regions
54Ministry of Environment and food of Denmark homepage: http://eng.mst.dk/topics/chemicals/legislation-on-chemicals/fact- sheets/fact-sheet-banned-pesticides/
55Auriga Industries homepage: http://www.auriga-
industries.com/download/sustainability/csr_reports/csr_rapport_2013_uk_web.pdf
56 FAO homepage: http://www.fao.org/sustainability/en/
