Seeds of Change

The CFO of Syngenta on his investor-friendly growth formula.

One of the biggest decisions in Syngenta’s history was taken well before Scala’s arrival, when pharma firms Novartis and AstraZeneca spun off and then merged their agchem businesses in 1999, followed by a flotation the next year. But with falling sales and margins and debates raging around the world about genetically modified crops, the Basel-based firm was not in an enviable position as it made debuts in late 2000 on exchanges in London, New York, Stockholm and Zurich. On the first day of trading in Zurich on November 13th, shares in Syngenta fell below their offering price of SFr85 (€55.5), and struggled to gain momentum for months afterwards. Revenues fell by 4% in 2001.

The new company clearly had its work cut out. Not only was it racing against the clock to deliver on the synergies and cost savings it had promised, there were some parts of the business that had to be built from scratch, including many back-office functions such as treasury.

In 2003, with market prospects looking “a bit better,” Scala arrived as CFO and surveyed the effects of the company’s rocky launch, or “the crisis events” of the past few years, as he describes it. In particular, there were two issues — one internal, the other external — that needed urgent addressing, in his opinion.

The first was Syngenta’s share price. Scala felt that the markets weren’t valuing the company’s shares fairly. That in itself isn’t unusual. In a survey published earlier this year, accounting firm RSM International found that more than three-quarters of European finance executives polled said that their companies’ financial performance wasn’t fully reflected by the share price. But nearly 60% felt it was out of their boards’ control. Scala would beg to differ, and so he got to work.

Scala’s hunch about the valuation “mismatch” was borne out by an internal exercise. Running calculations based on their own financial projections, future discounted free cash flows and net debt, Syngenta’s managers came up with a net worth far different from what was out in the market.

Scala reckons that the misvaluation could be partly explained by the positioning of the company around the time of the IPO, when “expectations were too high, so there was bound to be disappointment.” With the disappointment still lingering, he says, “the analysts were also reacting to the decreasing revenue that had resulted from a rationalisation of production [following the merger], but overlooked the cash flow that the company was generating despite tough market conditions, and the synergies we were achieving.”

Syngenta’s solution was simple, yet bold: Scala, along with the other seven executive-committee members, announced publicly their intention to hit a three-year EPS target of double-digit annual growth. “It was unusual but we wanted to say that our development is better than our revenue growth or the market conditions would suggest,” says Scala, noting that in 2006, EPS was up 14% (excluding restructuring and impairment) and that the company is aiming for growth of between 10% and 15% this year and next.

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