Magazine

The Winner's Circle


A tight labor market in slow-growth Europe? That's just what Dutch temporary employment company Randstad Holding is seeing. While manufacturers continue to shed jobs, other companies are crying out for white-collar workers. People with training in finance are especially scarce. "The growth in clerical business has overtaken industrial growth," says Randstad CEO Ben Noteboom. Randstad has cashed in on the demand, expanding 40% in Germany last year, even as that country's economy chugged along at less than 2%.

The rise of service companies, and the jobs they create, is what leaps out of this year's European BW50, our annual ranking of the region's best-performing companies. Nearly half the companies on our list, ranked according to share returns, return on equity, sales growth, and other measures, essentially produce and sell brain work. Banks and insurers are the most numerous, but there are also real estate management companies and the likes of Randstad.

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It has been a long time coming. Inflexible labor rules and government policies that protected unionized factory jobs meant that Europe trailed the U.S. in shifting to a service economy. But the BW50 underlines the extent to which Europe's top performers are now running on intellectual, rather than manufacturing, capital. The stars are companies such as No. 9 on our list, UBS (UBS). The Zurich-headquartered banking group is now not only a top global investment bank but also the world's top wealth manager, measured by the assets on its books.

Energy and mining companies still provide 6 of the top 10 on our list, thanks to the long bull market in commodity and energy prices. For the second year running, for example, Anglo-Australian BHP Billiton is our No. 1, with Rio Tinto, BG Group, and Norway's Statoil ranking among the best. Their mining and drilling activities often take place far away from Europe, but they dominate the European exchanges where they trade.

The shift to services is also changing the balance of power in the European economy. Although Germany remains Europe's largest economy, it contributed only three companies to the top 50, two of which provide financial services: Deutsche Bank (DB) and stock exchange operator Deutsche Börse. That compares with six from Spain and five from Norway. That's not to say that industry is dead. Luxembourg steelmaker Arcelor is No. 5 in our rankings. Arcelor's shares have risen 50% amid a hostile takeover attempt by rival Mittal Steel Co. (MT) -- a deal managed by Deutsche Bank, which has become a force in mergers-and-acquisitions work.

Look closely at any manufacturer, and you'll often find an increasingly nimble operation. Inditex, best known as the owner of cheap and chic clothing retailer Zara, is an example of the kind of company that is making Spain one of Europe's most dynamic economies. Zara's in-house design, coupled with tightly controlled manufacturing and distribution, enables new fashions to move from drawing board to the store in two weeks.

This year we changed the weights we use to calculate the BW50 rankings to favor companies that make the best use of their capital, have superior pricing power, and have been delivering greater recent gains to shareholders. The ratings are based on the Standard & Poor's 350, which covers major corporations in 17 European markets, including the 12 members of the euro zone. The 350 stocks represent about 70% of the value of all European equities and are ranked according to nine criteria. Apart from one-year shareholder returns, margins, and return on equity (ROE), we rate three-year returns, one- and three-year sales, and earnings growth. We also give extra weight to sales volume. That's because it's usually much harder for big companies to achieve large percentage gains in sales and profits. Each company was evaluated according to the latest data available. The cutoff date for measuring shareholder returns was May 31, so we have taken into account the hammering global share prices have suffered since early May.

BREAKING AWAY

Whether they are in services or not, few companies made it to this year's BW50 without being massively international. Ironically, the globalization of European business is partly a by-product of the economic rigidities and high labor costs that have been so troublesome for manufacturers. Companies could expand only if they pushed their operations outside the corseted economies of core Europe. Now their experience abroad may even give them a competitive advantage over their U.S. rivals. Swiss-based engineering company ABB Ltd., for example, has bounced back from crisis by supplying infrastructure to customers in emerging markets. "The leaders in Europe were early targeting China, and now they're moving into India and Russia," says Peter Lawrence, an analyst at JPMorganFleming Asset Management in London.

The downside of being global is that European companies have become vulnerable to economic hiccups in Asia or the U.S. That's a concern as the U.S. economy slows down, possibly denting earnings for companies such as Deutsche Bank that are very active in North America. But European companies could prosper in any case, because of the way they have hitched their fortunes to the world's fastest-growing regions. Vienna energy and chemicals supplier OMV pushed early into Central and Eastern Europe and is now profiting from growth rates in the region that are twice as high as those of Western Europe. "When the Iron Curtain fell, it opened up a big chance for us," says CEO Wolfgang Ruttenstorfer.

With smart management, industrial companies can still be formidable. Sweden's industrial holding company, Investor, came from nowhere to No. 6 on the list as Chairman Jacob Wallenberg, not quite a year on the job, cleaned up the family portfolio and searched for new opportunities. In May, for example, Investor and its private-equity affiliate EQT paid $5.6 billion to buy out what they didn't already own of kidney dialysis and medical clinic specialist Gambro. The plan: Take the company private and break it up.

Come to think of it, such moves sound more like the work of a financial engineer than a traditional captain of industry. The best European companies are those that apply a service mentality to whatever they do.

By Jack Ewing, with bureau reports


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