Kvaerner ASA

High-flying chief executive Erik Toenseth, the architect of Kvaerner ASA's ambitious but costly expansion during the 1990s, was dumped last fall as losses mounted and the share price plummeted. But his grand scheme for transforming the Oslo shipbuilder into a world leader in engineering and construction lives on. A restructuring plan announced in April by new CEO Kjell E. Almskog calls for Kvaerner to shuck its shipbuilding operations and move into the next millennium as a designer and builder of chemical and pharmaceutical plants, steel and aluminum factories, and oil- and gas-drilling installations. "We need to make Kvaerner half as big but twice as good," says Almskog, 57, who had boosted profits as executive vice president of the oil, gas, and petrochemical division of ABB Asea Brown Boveri Ltd. before being recruited by Kvaerner. Kvaerner, whose headquarters Toenseth moved to London, is retaining businesses in which it can "develop clear competitive advantages and achieve acceptable operating margins." The surviving Kvaerner will consist mostly of the operations acquired in Toenseth's 1996 purchase of British construction firm Trafalgar House Inc., a US$1.4 billion deal that more than doubled Kvaerner's size but also loaded it with debt. Kvaerner now is the world's biggest engineering and construction company, ahead of such better-known names as Bechtel Group Inc. and Fluor Corp. Almskog, systematic and bottom-line oriented, is the antithesis of dealmaker Toenseth. The ex-CEO not only ran up big debts to make his purchases but also drove expansion by shaving bid prices to the bone and providing unusually high levels of upfront funding on some shipbuilding contracts. As a result, profit margins narrowed while working-capital needs ballooned. Toenseth's financial bets couldn't be sustained under the pressure of the Asian meltdown and falling oil prices. Kvaerner was hit by slumping orders for Asian factories and oil-drilling installations even as Korean shipbuilders began cutting prices to levels European builders couldn't match. Although Toenseth began a program of asset sales to shore up Kvaerner's financial position, it didn't move fast enough. The final blow came when stock prices, which peaked at more than $60 in August 1997, closed at $17.66 in Oslo trading on Apr. 13, the day the restructuring plan was announced. Last year Kvaerner posted a pretax loss of $175 million. Almskog's belt-tightening will cut revenues by a third and scale employment down to 55,000 from the current 80,000. His goals include reducing net interest-bearing debt from $1.4 billion to $500 million by the end of next year and showing a 4% profit on sales by the end of 2002. The most dramatic feature of the restructuring will be Kvaerner's departure from shipbuilding. Last year the company's 13 shipyards -- 12 in Europe and one in the U.S. -- generated 12.6% of Kvaerner's revenues. But the division slipped into the red in the fourth quarter and faces continuing cost pressures from Asian competitors. That, combined with the fact that shipbuilding is the least good fit with Kvaerner's other operations, clinched the decision to sell, says Paul Emberley, vice president for corporate communications. The company also will shed a host of money-losing and unrelated operations, including pulp-and-paper machinery, fish processing, a U.S. home-building company, and a cargo airline. Almskog's plan commits the company to sharpen its technological capabilities and design management skills and to focus on technology-intensive markets such as the construction of deepwater-oil- and gas-drilling installations. Concerns were raised when Kvaerner revealed that its major European yards would have to be sold as a package together with its Philadelphia operation to satisfy technology-transfer pledges made to Philadelphia and Pennsylvania in return for development subsidies. But Emberley says the company is confident it can arrange either an outright sale, a spinoff to existing Kvaerner shareholders, or a joint venture from which Kvaerner would gradually withdraw. Righting Kvaerner will be a big job, says Christian Nygaard, a research analyst with Enskilda Securities in Oslo. But he adds that Almskog's track record and the extent of mismanagement in the past "make a successful turnaround seem quite credible."