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ECPL employees led buy-out experience.

An Event of great significance in the corporate history of Pakistan.

The first ever employee led buy-out of Engro Chemical Pakistan Limited (ECPL) from Exxon Corporation was an event of great significance in the corporate history of Pakistan. It generated a great deal of interest in the employee ownership concept as it heralded the arrival of collective entrepreneurship of the professional salaried class.

Employee ownership is desirable because apart from wider dispersal of ownership which is socially needed, the employee buy-out enables employees to enjoy the fruits of their labour. This is highly motivating and leads to greater efficiency and productivity of an enterprise. With the government pushing for speedy privatisation of state-owned enterprises the timing of the Engro buy-out seemed very fortuitous as it unleashed tremendous energies for employee buy-outs in other enterprises. The ECPL buy-out is unique from most management or employee buy-outs in the world. Firstly, as it involved all of the employee population, and secondly, because it involved a major urea plant expansion at a substantial capital cost.

Two factors provided the driving force behind the employee buy-out of Exxon equity. First was the need for the company to expand and grow for long term survival and the second was to protect the organisational culture and the value systems that the employees had become used to working for one of the largest multinational companies in the world - Exxon, for more than two decades.

Exxon owned 75 per cent of the ECPL equity, while the general public including public sector financial institutions owned 25 per cent of the shares. ECPL urea plant was set up in 1968 and at that time this was the single largest foreign investment in the country and Exxon commanded over 70 per cent of the market share. Over the next 20 years although the plant was gradually expanded to more than 150 per cent of the original design capacity, it lagged behind the industry in urea capacity increases. Consequently, ECPL market share continued to decline until it reached the current about 12 per cent level.

To check the declining market share, ECPL developed a long range strategic plan. As part of this plan a world scale new urea plant was considered but it required huge investment and could not be considered economically attractive. In order to reduce the investment, ECPL with the assistance of Exxon Chemical Technology division, came up with the idea of relocating used ammonia and urea plants. The cost of this expansion project, which would more than double the ECPL existing plant capacity, was estimated at approximately US $120 million (Rs. 300 crores). This was a large investment judging from any standard and therefore created a dilemma for Exxon. On the one hand, Exxon fully supported the expansion project as being attractive and critical to ECPL's long term survival. And on the other, Exxon did not see investment in fertilizer business as consistent with its global business strategies. Fertilizers were not Exxon's core business. Exxon had already disinvested or closed down fertilizer plants in Philippines, Malaysia etc., and only two plants had remained one in Canada and the other in Pakistan.

Under the circumstances, Exxon decided to disinvest in favour of a party that would see fertilizer as core business and be willing to invest to expand the facilities. But the main concern was that after Exxon's disinvestment ECPL's expansion project could be in jeopardy and the employees value system/culture could be threatened. This could make it difficult to run the company successfully. The interests of the company, its customers, its employees and all of its shareholders had to be protected. An employee buy-out appeared to be the only way the expansion project could proceed on which ECPL had done considerable work to bring it to such an advanced stage of development. It was gratifying that Exxon Chemical management agreed to give ECPL management the option to purchase Exxon equity in ECPL on certain conditions.

All of ECPL employees and annuitants, numbering over 500, were invited to participate in the ownership plan. The employees though disappointed to hear Exxon's plans to disinvest, were overwhelmingly enthusiastic about the employee buy-out. They recognised that this was the only way for the expansion project to proceed and to protect Exxon's system of management, vision and values. Apart from this, the project itself was expected to be an attractive investment.

A team of senior managers was set up to develop the various facets of the buy-out such as formation of Employee Trust, raising financing to facilitate the employee purchase of the shares etc. An equitable formula was developed for allocation of shares amongst all employees. A plan was developed and successfully implemented for placing the remainder of the equity that the employees could not themselves purchase.

The complexity of the buy-out can be gauged from the fact that the stock market capitalisation of 75 per cent of ECPL equity amounted to over a billion rupees. Since the expansion project was an integral part of the employee led buy-out proposal, approximately US $120 million (approximately Rs. 300 crores) on top of the equity capital had to be raised at a time when the Gulf war was on and commercial banks had little appetite for long term project financing in Pakistan.

The ECPL buy-out strategy was based on leveraging the company for raising funds for the expansion project and leveraging the employees to raise enough finances that would give the employees the management control. As commercial banks were shy, the IFC was approached for support. They were invited to participate in the equity buy-out also as partners of the employees group while their advice was solicited in putting together the equity acquisition package. IFC liked this idea and agreed to help. AFIC, CDC, NDFC and other financial institutions soon followed with an equity stake as well as with funds for financing the urea expansion project.

All formalities associated with the share purchases as well as project financing had to be completed before the three-month deadline. The magnitude of the task can be realised by the fact that there were ten lenders for project financing as well as employee financing. Seven institutional investors and over 450 employees/ annuitants (more than 84 per cent of employee work force) purchased the 75 per cent Exxon equity. Wide geographical diversity which included teams operating from Washington, Edmonton, London, Brussels, Manila, Islamabad, Karachi, Daharki and various field locations in Pakistan was covered. Legal contracts covering all lenders and equity participants, technology support agreements/raw material supply agreements and purchase contracts were negotiated. Government approvals were taken covering disinvestment by foreign shareholder as well as for project implementation. The task was accomplished within the given time-limit.

In analysing the success of the ECPL employee buy-out, following factors stand out: A high quality high performing and highly motivated employee team totally committed to achieving a commonly agreed goal/vision; strong professional management with a respected trackrecord; an expansion project which would add substantial value to the company and make a major contribution to the national economy; strong support from Exxon, the original owners, and international and national financial institutions.

The buy-out achieved all its objectives: the expansion project is going ahead at full speed; in two years the plant capacity would more than double to 600,000 tons urea/year at a cost of approximately $120 million; the company's market share in 1994 is forecast at 18 per cent versus the nine per cent if it had not expanded; the net assets would grow from Rs. 275 million at year end 1990, to over Rs. 3000 million by year end 1993. And more than anything else, ECPL would now be better positioned for future growth and diversification.

There are challenges for employee ownership of corporations. The ECPL experience has been a particularly rewarding one but it must be realised that in any corporation buy-out a certain caution is also needed. In the euphoria to become owners, the employees should resist the temptation of seeking ownership of any enterprise and at any price. The longer term fundamentals of the enterprise must be critically examined to see if there is a real value added and whether they would have the strength to be able to compete in that business. It may be that some of the units have to be shut down and scrapped because that unit or industry does not enjoy comparative economics or competitive advantage. For such enterprises,it would be a grave mistake for the employees to try to buy-out the units for the short term expediency of protecting jobs.

The employees owners have to recognise that they are now acting as entrepreneurs and taking business risks. The pressure to perform would be enormous as in case of failure, they will not only lose their jobs but their hard earned savings too, apart from earning the stigma of failure which will be difficult to erase.

A pre-requisite for successful employee ownership is a united disciplined team with effective leadership which is responsible, mature and responsive to a rapidly changing environment. The employee team should have a commonly shared vision which all of them are aspiring to achieve and for which they are prepared to make sacrifices. It was such a vision of the future that led Exxon Chemical Pakistan's management team to the single minded determination to go for the buy-out against heavy odds. The employee team has to be able to produce leaders of high integrity, energy and enthusiasm, who have the necessary managerial, and professional skills to inspire the organisation to set high goals and achieve them willingly.

As there is no single individual entrepreneur who is calling the shots in an employee buy-out, the success of the enterprise will depend on the development of stable healthy institutions and policies, through professional management. This is the only way to survive in a highly competitive environment. It must be the objective of the employees to continuously increase the productivity of operations. They must pursue cost effectiveness, eliminating waste and evolving a highly streamlined organisation. As only through cost competitiveness can long term job security be assured and new jobs created.

The employee owners have responsibility going well beyond their own group. They will have obligations to other shareholders who require an attractive return on their investment. They must operate as good corporate citizens conducting their affairs in an ethically and socially acceptable manner, following the laws of the land, paying all taxes due and supporting the communities they are part of. The trend towards employee ownership should be encouraged nurtured and supported so that it develops along healthy professional lines.

The employee owned corporations have a great opportunity to lay the foundations in a way that would unleash powerful forces for the good of the economy and the people. It is a great experiment, full of promise, and every effort must be made for it to succeed.

Shaukat Raza Mirza began his career with Esso Eastern in 1962. After a series of assignments in the United States and Pakistan, Mr. Mirza was transferred to Exxon Chemical Pakistan Limited in 1968. He was appointed as Technical Manager at the Daharki Urea Plant in 1974. After serving in Executive capacities abroad he returned to Pakistan in 1984 to assume the charge of Senior Vice President, Exxon Chemical Pakistan Ltd. which position he held until his appointment as President of the Company from February, 1988. Mr. Mirza holds master degree in Chemical Engineering from the University of Birmingham, England. He is a member of the Executive Committee of the Management Association of Pakistan.
COPYRIGHT 1992 Economic and Industrial Publications
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Industrial Relations in Pakistan '92; Engro Chemical Pakistan Ltd.
Author:MIrza, Shaukat Raza
Publication:Economic Review
Article Type:Cover Story
Date:May 1, 1992
Previous Article:Stock exchange mechanism - present and future.
Next Article:An appropriate labour policy for Pakistan - employers' point of view.

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