After the annual general meeting in 2001, the process of finding a new chairman for Ericsson began. This post had often been ‘inherited’ by the retiring CEO in connection with the appointment of a successor, but this was not to happen on this occasion.
Lars Ramqvist’s candidate to chair the board was Ulf J. Johansson. Johansson had resigned as managing director of Spectra-Physics in 1996 and now had a number of important posts in the commercial sector, among them chairing the board of the Royal Institute of Technology and Europolitan Vodafone AB (the name taken when Vodafone acquired a majority holding in Johansson’s creation Europolitan).
Another candidate was Michael Treschow, the CEO of Electrolux since 1997, ex-CEO of Atlas Copco – and with a reputation as a successful company doctor in the business press, where he was sometimes called ‘Mike the Knife.’ And it was Treschow who was approached in the summer of 2001 by Bo Rydin and Percy Barnevik. One condition was that Treschow would resign his post as CEO of Electrolux and his membership of the board of Investor. Treschow accepted and took a place on Ericsson’s board in the autumn of 2001 to get “work experience”.
“When I became a member of the board I had no idea what to expect,” Treschow says. “I thought telecommunications was an exciting sector. For the whole of my career I have been working with restructuring. I thought it would be enjoyable to be able to focus on investment issues – but I ended up in the largest reorganization in memory. Everything I had been involved with previously was peanuts in comparison.”
The choice was not popular in every quarter at Ericsson; it was claimed that Treschow knew nothing about the industry. Hellström was one of those who threatened to resign in protest, and neither Barnevik nor Rydin could persuade him to change his mind. Ramqvist was the one who managed to talk Hellström into staying on.
YET ANOTHER CUT – AND A RIGHTS ISSUE
Ericsson’s earnings were catastrophic in 2001 but Treschow had been told things looked better for 2002. “The management thought the result would be positive up until the annual general meeting in March 2002 [March 27] – as much as a 5 percent operating margin. I did not know the business and could not understand its ups and downs – that’s when my uncertainty started,” he says.
“By the end of the first quarter we could already see that it was not going to work. We talked to a number of banking advisers. At the board meeting on April 22 [the first chaired by Treschow], we discussed various scenarios. It was clear both that the company had to continue to make major savings and that new capital was needed if we were going to be able to survive at all. A lot had to be done in one month.”
The company decided on a SEK 30 billion rights issue. There was no major discussion about the amount. “For us it was important to get in enough capital to make sure that we would not have to repeat the process. Our advisers recommended the figure of 30 billion.”
THIRD ROUND OF CUTS
At the same time another round of cuts was announced, the third, that would involve savings of a further SEK 10 billion and continued redundancies. During 2002 the number of employees was reduced from 85,000 to 65,000; with this third savings package, by the end of 2003 this figure was to be as low as 54,000.
This was probably the most critical phase in Ericsson’s history. Sandström recounts: “In the summer of 2002, our customers began to ask whether we were going to survive. There were lots of awkward questions. Dare we place orders with you? Will you still be around so that we can upgrade later? Are you really going to survive?”
The announcement of the new share issue caused Ericsson’s share price to fall by 24 percent. This can largely be attributed to the dilution of share value that a new issue involves. But the share price continued to fall because of speculation.
The new issue involved a long process, Treschow recalls. “It was a preferential issue so there were stringent regulations about the documentation. Another thing was that our banking advisers suggested that the issue should be guaranteed by the banks, which is extremely unusual. The guarantee would cost money. And one condition was that the major Swedish stockholders were to contribute the first 10 billion [8 billion from Investor and Industrivärden, 2 billion from the others]. Opinions may differ about the necessity of the guarantee, but that was the situation.
“A consortium of banks – Morgan Stanley, SEB/Enskilda Securities, Goldman Sachs International, Handelsbanken Securities and Schroder Salomon Smith Barney – guaranteed the remaining 20 billion. They were well paid for doing so, several hundred million.”
Author: Svenolof Karlsson & Anders Lugn