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CRISIS? WHAT CRISIS?

European corporate executives can’t escape the “C” word. They have been grappling with the fallout from the euro zone’s debt problems for more than two years, watching in bewilderment as the seemingly containable problems of Greece spread across the 17-nation bloc, tipping much of the area into recession and threatening the very existence of the single currency itself. But leading companies aren’t dwelling on the debt crisis. Many of them exited weak businesses and clamped down on expenses well before trouble hit, as similar but earlier woes in the U.S. put them on alert. Now, having gleaned what value they could from improving margins, they are gearing up for greater top-line growth.

“Everybody’s focused on what’s going to happen to Greece today and to Spain and Italy tomorrow, even though European businesses, on the whole — particularly the larger global players — are in pretty good shape,” says Bart van Ark, chief economist at the Conference Board, a New York–based business membership and research group. “They’ve got the cost structure in order, and now they’re asking, ‘How can we grow organically within this global economy?’”

The answer, for many European concerns, lies with innovation. These companies are intensifying efforts to develop new products or improve existing ones to generate growth. Consider Henkel, the German maker of consumer products ranging from laundry detergent to superglue. The company generates about one third of its sales from products launched in the past three to five years. That fresh lineup helped Henkel to post a 5.9 percent increase in organic sales, which exclude the impact of currency moves and acquisitions or divestments, to €15.6 billion ($20.7 billion) last year.

“We consider volatility the new normal in our markets,” CEO Kasper Rorsted tells Institutional Investor. “We need to constantly adapt.”

Companies are also looking to increase their exposure to dynamic emerging-­markets economies and reduce their reliance on the sluggish European market. The U.K.-based mobile telephone operator ­Vodafone Group, long one of the industry’s most global players, with a presence in more than 30 countries across five continents, now boasts 250 million customers in emerging markets, almost twice the number it had only two years ago. The company has been investing heavily in new network capacity, especially for data, to fuel that growth. ­Vodafone has set aside £8 billion ($12.8 billion) to fund further acquisitions of spectrum capacity and related ventures with that in mind, says Vittorio Colao, the group’s chief executive. “Emerging markets are a significant source of value creation as our customer base continues to expand,” he says. Operations in Africa and Asia now represent 20 percent of Vodafone’s market value, Colao estimates.

Acquisitions are also coming back into favor for companies that are in a position to make deals. Unilever, the Anglo-Dutch consumer products giant, spent $3.7 billion last year to buy Alberto-­Culver Co., the U.S. maker of brands such as Nexxus and Noxzema, to bolster its fast-­growing personal care products division. “We’re into buying again,” says CFO Jean-Marc Huët, “although our main story is still organic growth.”

Above all, companies need to be flexible to respond to changing market conditions. That’s certainly the case at European Aeronautic Defence and Space Co., the parent of aircraft maker Airbus. Worried about the French group’s reliance on the civil aviation market, EADS in 2008 began targeting defense activities for growth, with the aim of reducing Airbus’s relative size within the group to 50 percent of revenue by 2020. The financial crisis, however, has hit military budgets hard, while commercial airlines have been quick to rebound. As a result, EADS executives are considering abandoning or modifying that 2020 target, says outgoing CFO Hans Peter Ring. “What we discovered was, Airbus was less cyclical after the financial crisis than anyone thought,” he says.

At a time when growth is at a greater premium than ever, investors appreciate such initiatives. All of these executives win top billing within their industries in the 2012 All-­Europe Executive Team, Institutional Investor’s exclusive annual ranking of the best European CEOs, CFOs, investor relations professionals and IR teams. II surveyed 825 buy-side and 1,470 sell-side analysts from nearly 600 firms and asked them to vote for the best executives in their sectors.

EADS and ASML Holding, a Dutch maker of equipment for producing semiconductors, top this year’s ranking. Their CEOs, CFOs, IR professionals and IR teams each win first-place honors from both buy- and sell-side analysts. Trailing only slightly behind, U.K. media giant Pearson and metals and mining company Xstrata of Switzerland come in first place in seven categories. British American Tobacco (BAT), French luxury group LVMH Moët Hennessy Louis Vuitton and German software provider SAP tie for fifth place by claiming first in six categories.

ADAPTING TO VOLATILITY IS NO EASY TASK. IT requires continual efforts to strengthen product and service offerings, spur innovation and inculcate a more entrepreneurial culture than is characteristic of many big European companies.

“What they are struggling with is integrating innovation into the fabric of their companies,” says the Conference Board’s van Ark. “The goal is to have the whole company think in an innovative way, rather than narrow that down to an R&D ­department.”

Many companies are leveraging new technology to improve their products and services. Vodafone, for instance, is working with Google to enable customers to pay for new applications via their phone bills without having to click through a series of prompts and checks. In February, Vodafone announced a partnership with Visa — the largest of its kind — to enable consumers worldwide to pay for goods and services using their mobile phones instead of coins and banknotes. Says Colao, who is ranked top CEO in the Telecommunications Services sector by both buy-side and sell-side analysts: “The mobile Internet is Vodafone’s main growth engine, fueled by the increasing penetration of innovative smartphones and tablets.”

Pearson, the London-based media conglomerate that owns Financial Times Group, publishing house Penguin Group and a host of educational imprints and learning programs, has also been riding the tech wave.

“For a long time now, we’ve believed that everything we do would go digital,” says Robin Freestone, CFO at Pearson. “We invested quite a lot before the market was there. Some of that probably didn’t make us a return, but what it did do was change the culture of the company.” In 2011, $3 billion of Pearson’s total $9.3 billion in revenue came from digital products, though Freestone says the digital share is still not high enough.

The buy side names Pearson CEO Marjorie Scardino tops in the Media sector, and both the sell side and the buy side said that CFO ­Freestone also deserves top honors. Investor relations professional Simon ­Mays-Smith is the best in the business, both groups say, and the two sides also agree Pearson’s overall IR is the sector’s best.

The Financial Times was one of the first newspapers to tackle the Internet, launching FT.com in 1995. (“We had paying subscribers from the start,” Freestone says. “We never thought that giving stuff away for free was a good idea.”) Penguin introduced its first electronic book in 1998. Last year e-books generated 12 percent of the publisher’s revenue, up from 6 percent in 2010.

This lessens the blow that Europe’s sovereign-­debt crisis has roundly delivered to Pearson. Much of the conglomerate’s revenue comes from the public sector, and governments across the continent are squeezing education budgets. The percentage of the company’s revenue originating in Europe has fallen from 26 percent in 2006 to 24 percent in 2011, and will likely continue to shrink.

“We don’t want to be so heavily weighted in the highly leveraged markets of the world,” Freestone says. “We’re saying, ‘This content is good enough to work in Asia-­Pacific and Latin America.’ Traditionally, most governments have believed that the way to educate their children is very specific to their population, but we believe that great products and education travel the world.”

Pearson has spent some $800 million in the past two years to acquire educational testing and tutoring businesses in Brazil, China and India. In July 2010 the company bought the learning systems division of Brazil’s Sistema Educacional Brasileiro for $497 million. Last year Pearson paid $127 million for a controlling stake in India’s TutorVista, an online tutoring business that connects Indian instructors with students in North America, and $155 million to acquire Global Education and Technology Group, a provider of test preparation for students in China who are learning English.

Business software maker SAP is coming off the best year in its 40-year history, with software revenue growth of 25 percent in 2011, says co-CEO William McDermott, who along with fellow chief executive James Hagemann Snabe is voted best in the Technology/Software segment by both buy-side and sell-side analysts. ­McDermott attributes much of SAP’s success last year to new or improved products. “New innovations are invigorating our core applications business,” he says. One of the products SAP introduced in 2011 was SAP HANA (high-­performance analytic appliance), a database platform that combines in-­memory software and SAP-­approved hardware and allows users to tap into high-speed analytics capabilities. SAP also unveiled a number of applications for HANA over the course of the year, including a new mobile app called the SAP Electronic Medical Record, which allows doctors to access lab results, images and other aspects of patients’ medical records while moving through hospital wards. The company is expanding its reach into Brazil, China, India, the Middle East, North Africa and Russia.

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