Page 1-37

Chapter 1

Daharki, a barren isolated place was selected for the huge investment of
a highly complex urea fertilizer plant. Tony Ward Vice President, fertilizer
marketing was accompanied by Shaukat Mirza to under-take a grass
roots market survey to assess the size of the urea market. Essos decision
to invest in a fertilizer plant was driven primarily by its initial desire to
explore the Mari gas fields located nearby. Ayub Khan was also keen to
invite foreign investment in fertilizer manufacturing based on indigenous
gas.

The first construction activity involved building houses and offices at the
site. Due to harsh working conditions at the site the start-up was done by
a relay team of specialists, they would spend six weeks on site and six
weeks back in the US offices.

Before Essos entry into the fertilizer industry the processing of urea was
done in small scale plants in Multan and some urea was imported in
small quantities and distributed by the governments Agricultural
Department at highly subsidized prices. Farmers resisted the use of
chemical fertilizers including urea and Esso was therefore contracted
with the task of converting the mind-set of the farmers. The company
imported urea fertilizers before the plan start-up and mounted an
intensive sales promotion campaign. Esso decided to come out as a
separate wholly owned subsidiary and not make its investment part of
Esso Eastern Esso Pakistan Fertilizer Company Limited (EPFCL).

Esso believed in recruiting the best people and promoted a sense of

fierce competition amongst employees, challenged them fully, and
rewarded them handsomely. During an illegal strike, the management
team took over the plan operations and restarted and operated the plan
at 110 per cent of design capacity for almost a month which broke the
back of the strike.

Shaukat Mirzas journey:

Joined as Special Assistant to the President.

Transferred to Manufacturing Division reporting to Vice President
Manufacturing.
Promoted to Market Research Manager in Chemicals Department
of Esso Eastern: learned about selling skills, supply planning,
chemical tanks handling and customer interface.
Senior Process Engineer at Daharki.
 Process Engineering Section Head: learning experience in
technology and manufacturing operations.
Manager of Esso Eastern Chemicals Department Karachi:
international exposure in Esso Chemicals regional conferences and
management practices, training and development.
Call from regional headquarters in Hong Kong: to help in co-
ordinating the development of a Corporate Plan for the Asia Pacific
region: exposure to matrix management, full diversity of cultures
existing in the large Asia Pacific region.
Two year assignment to establish a Technical Department at
Daharki.

Technical Department assignment:

Situation was quite grim when Shaukar Mirza reached Daharki.

Ahmad Qidwani had left the company to take up a challenging but
highly lucrative assignment to turn around a sick Saudi Arabian
company. He had taken with him some of the most experienced and
highly training middle management staff. The reforming furnace at the
ammonia plant also had serious problems due to faulty design.
Preparations for a revamp of the furnace were slow and behind
schedule. The entire Daharki team was also demoralized and there
were problems with the union.

Senior management was in favour of postponing the turn-around and

furnace revamp because of the loss of experienced resources and lack
of adequate preparations. Shaukat however insisted that they had to
do it. They might lose more people and it would be long time before
the organization could be ready for the modifications. Until then we
would lose a lot of urea production due to the downtime of the
furnace.

In the next 6 months they re-deployed people, hired new ones,

mobilized specialists and persuaded some of the critical resources
who wanted to leave to stay for a little longer till the job had been
finished and the plant restarted.

The Technical Department was re-established with young, high-quality,

highly motivated engineers. Finding a replacement for Shaukat was a
real challenge. Efforts at advertising, using head-hunters or personal
contacts failed so then Shaukat thought of an unconventional solution
and turned to his old friend Zahid Majid.

Left Daharki for Hong Kong: Adviser in Olefins and Aromatics,

the Plasticizers and Intermediates Department.
The company was adjudged the winner of the Management Award for
Corporate Excellence and was amongst the top twenty-five companies
on the KSE. It had been successful in recruiting high-quality Pakistani
staff who quickly replaced the expatriates and in turn became
expatriates themselves. Esso however was not satisfied with the
financial performance of the company. There had been no remittance
of dividends in dollars to Esso due to political instability and the 1971
was with India.

Chapter 2

Jim Walker, President, Exxon Chemical Asia Pacific wanted to see

Shaukat Mirza and told him about a job for him as the Senior Vice
President of Marketing and Government Relations of Exxon Chemical
Pakistan Limited (ECPL). Shaukat Mirza did not want to take the job
but was left with little choice. Mirza had loved his job as the Business
Line Manager for two product lines with responsibilities for the Asia
Pacific Region. The challenge was to develop these small businesses
rapidly in the emerging markets of the region. Mirza learnt about
strategic planning, industry analysis, and competitor analysis.

His immediate task in the Karachi office was to organize a marketing

conference. The second task was to work on the Corporate Culture
Development Task Force to develop a code of conduct statement as
well as the corporate culture value system.

Chapter 3

Shaukat Mirza was appointed President of ECPL in 1988. He attended

the Worldwide Fertilizers Business to make a presentation to Exxon
Chemical senior management. The subject of the presentation was
ECPLs Expansion Project. The reaction of top management was
pleasing.

Also afterwards Mirza attended an outdoor leadership and team

building programme called Quest-1. During this event, Mirza got the
opportunity to ask questions from top management and the answers
he got were remarkably candid which revealed the thinking of
management. He asked then about how they perceived the fertilizer
business in Pakistan would fit into Exxon Chemicals long term
strategies. They said that fertilizers were the least strategic of all of
the businesses and if there was an opportunity to divest the fertilizer
business would be divested. He asked them if they would consider
going along with the expansion investment so that the value of the
business was enhanced, while retaining the option for future
 divestment, they said no as they will have to take a decision soon and
would consider the welfare of the employees while doing so.

Mirza was very much concerned about the welfare of the employees in
case there was a change of ownership of the business. He stressed
that ECPL Chief Executive should be taken into confidence and the
employees should be given a chance to purchase the company. He was
of the view that it would be best if Exxon continued to manage but if
they could not then the new owners must not rock the boat but let the
management philosophy and policies remain unchanged.

Mirza gave names of the IFC and ADB as potential parties that may be
interested in the equity purchase. He wrote to Morley Handford,
Worldwide Fertilizers Vice President, explaining why it was important
to take the employees morale into account and highlighted certain
areas that would require special discussions with the new shareholder
so that employees apprehensions are allayed (points on page 27, 28,
29).

Morley had also received a letter from Mirza where he had proposed a
contingency plan in which Exxons equity would be sold to IFC, ECPLs
Employee Trust, and local Stock Exchange.

Morley wanted Mirza to play a major role in reducing Exxon equity in

ECPL. There were three options: Grindlays Bank in England was
looking for a serious majority investor in the Far East and if the bank
did not come forward with candidates then they would contact three
other parties. The second option was related to domestic options but
only Babar Ali seemed like a good partner. The third option was the
proposal Mirza had suggested; a multiple investor consortium
approach.

Another proposal was that they would work offshore to set up a

company that would buy Exxons shares then sell them in small lots to
IFC, donate to employees, and privately place some in the KSE. But
Mirza believed that majority shareholding would therefore belong to
offshore investors and employees would lose control since they had
limited funds.

Finally Mirza was given the charge to lead the buy-out and given a
letter of authorization to do so. This was the highest point in the
career of Shaukat Mirza.

Pg. 38-66

Chapter 4:
On returning from Brussels Mirza attended the Annual Marketing
Conference where he got an opportunity to start briefing the senior
managers about Exxons plan of divestment. While sharing a cable car,
Mirza took an opportunity to brief Zaffar Khan (VP Marketing) about the
discussions in Brussels:

1. Exxon chemical executive committee did not consider fertilizer as

their core business because it had not generated money for Exxon
except in Pakistan.
2. Political and legal changes discouraged foreign investment.
3. For the betterment of employee and for the survival of Exxon
Chemical Pakistan Limited (ECPL), ECPL should go for expansion.
4. Exxon Chemical is looking for expansion with minimum level of
Exxon equity and still be acceptable to Exxon.
5. There were multiple options available for project expansion
whether to go with single party buyer or multiple. Mirza insisted on
multiple investors option with employee ownership. Mirza was
given an opportunity to develop a proposal for the purchase of the
75% of Exxon share. On failure, then Exxon will go with single
buyer option.
Team of 6 member are formed to tackle the current challenges. That
includes Mirza, Zaffar Khan, Javed Akbar (VP Manufacturing), Imtiaz
Samee (VP Marketing), Mahmud Dossa and Abdul Shakur (GM
Operations).

IFC signed an agreement for providing their services. The after the
agreement the recommended options are:

1. Maintain accurate accounting records to determine the true cost

related to equity structure.
2. IFC would be reimbursed for all the cost regardless of the outcome
of the exercise.
3. Some front end payments are made and rest on the success.
Hany Constantin had informed chevron and their reaction was quite
favourable. Hany was appointed as leader of the agricultural chemical
technology Division engineering team.

Mirza, Zaffar Khan and Mahmud Dossa had a meeting to set the
objectives of the buy-out:

1. Change of ownership must remain compatible with ECPL culture

and management practices.
2. Ownership should have a long term stake to maintain stability and
continuity.
3. Expansion project must materialize.
20 Key tasks and deadlines are established. (Page 41, 42, 43).
On 20 October 1990 Mirza and Hany decided that they had to start-up in
mid-1993 otherwise inflation and exposure to different types of risks
would increase. Hany was confident that ICI UK would not back out of
the deal on the urea plant. On discussion with Zaffer khan and Mahmud
Doosa it was decided that company should on valued on the basis of;

1. Future earning potential

2. Historical earnings record
3. Beak up value
4. Stock market value.
There are certain issues which need to be resolved. (Page number
44)

AFIC agrees to 15% percent equity next year. Mirza had a

conversation with Declan Duff about the structure of employee group.
IFC needed to know who is in the group and who is out of the group.
Declans advice was that we should focus on irrevocable offers from
bankers. If Exxon perceived any risk, they may demand a higher price.

Parthasarthy and Mirza decided to give presentation in front of AFIC

in Manila. On 20 November Mirza informed director IFC about the
visit of his team at Daharki site, the chevron and ICI plant sites and
Edmonton for technology discussions.

Chevron needed the site cleared by the end of 1991. In order to clear
the site we had to take approvals from shareholders, project financing
and government. Mirza planned to meet Morley late November to
report him that we needed to conclude Exxon and employee group
transactions so that we could work on signing agreements based on
sale value. We also needed some time for government approvals.

Project financing was almost 85% complete with IFC participation

while the rest is secured through syndication by IFC, AFIC and IDB.

Chapter 5.

It was January 11 1991, the day when Mirza was appointed as CEO of
Employees group. Dream come true for Mirza, as he won the contract
of expansion ECPL project after successful negotiation with Morley.

On 16 September 1990, Mirza had a meeting with Declan in Karachi,

in which Declan emphasis that as leader of employee Mirza should
make sure that interest of shareholders are protected. Furthermore
there was a need for disclosure to all lending agencies to ensure that
they did not back out when the facts about Exxons divestment
become known.
 IFC saw Exxons divestment as positive and offered to help ECPL in
discussions with financial institutions. In designing private placement
and in developing the possible offer of shares.

On conference call with Declan Duff, Jemal Kassim outlined IFCs

position:

IFC could make sure that all project financing and equity
adjustment protected ECPL interests.
IFC expected to receive management mandate in two weeks.
With regard to restructuring and Exxon equity 35% available
for placement out of which IFC would be willing to invest 10-15
% while the balance of 20-25 % IFC could place with general
public mostly with in Pakistan.
The proposed Exxon dilution plan of 29 September 1990 was:

Exxon 20%
ECPL Employees 20-25 %
IFC 10-15 %
AFI 10%
IDB 10%
15 % in KSE through private placement
Employee Trust was developed for the purpose of acquisition of Exxon
shares. The Employee Trust was established with the following charter;

Acquire company shares

Sell company shares to employees on predetermined basis
Contribute to and undertake activities related to employee
interest
Recognize and reward good employee performances
Financing would be generated by pledging shares in the bank which the
trust had bought from Exxon. To cover the interest cost any dividend
received will be credited to Trust loan account.

Policy for ownership of shares was developed. The agreed terms are;

Permanent employees could apply for any number of shares.

Company would assist in arranging finances as follows;
24 month basic salary of an employee and a multiplier for
length of service 1 + (number of years of service)
If employee applied for shares that exceed the value
determined in above point than s/he would have to provide
financing himself.
Payments termed would as follows;
10% discounted value as initial deposit
 60 monthly instalments @1.5% of discounted value per month
Discount would be only available if employees completed five
years with the company from the date of shares assignment.
Instalment payment would be deducted from the employees
salary
In case of employee selling shares first right would of Trust to
accept or reject offer
Retiring employees would have to retain shares if there for
becoming eligible for discount
If an employee die his survivor could retire the loan and be
eligible for the discounted share price.
IFC was to assist group of employees in planning and directing its efforts.
IFC would evaluate the company on three bases (Net asset basis, present
value of future cash flow both with and without the expansion project).

Work under the agreement commenced from 19 November and signed on

28 December 1990. Mirza authorized the IFC to incur charges for the
preparation of company valuation reports, requesting that these to be
completed by 30 November.

On 23 November Mirza called Declan and tell that Chevron had refused
to extend the option date. Declan asked Mirza if he would be willing to
consider the agha khan federation for 10-20% of equity.

Morley suggested that he could personally visit chevron management

and try to negotiate a one month extension. Declan talked with
institutional investors in the gulf but the response was negative due to
Pakistan current environment. Declan was waiting from the IFC board
approval.

On 9 December Zaffar Khan, Imtiaz Samee and Mirza represented ECPL

at a meeting with Declan Duff and Bill Bulmer of IFC. We reviewed the
work IFC had done on the valuation of ECPL. Bill Bulmer was willing to
offer up to Rs. 55 per share.

The key challenge in the buy-out was arranging government approvals

for equity restructuring and remittances.

IFC advised that the most credible feature was the employees own
involvement. Employees must buy a minimum of 30% for IFC to
participate. There was strong indication that IFC would be willing to take
15% of the equity.

Project financing was a problem area. In the current environment loan

market was facing difficulties. Pakistan was dependent on continued aid.
Mirza and Morley found out the 4 agreements need to be executed with
employee group. These included engineering services agreement,
fertilizer research agreement, fertilizer license agreement and trade
mark agreement.

From 66 98

Chapter 5

For the agreement execution with employee group four agreements

were needed. Moley wasnt expecting any offer till 18th December
hence wanted him to share his offer by 20th December. However, if
Exxon undertook chevrons offer, in case of failure former will be
exposed to 5 million dollar (net salvage value of scalp).

Hany felt Syed Babar Ali as better option on AKFED, he wanted to

form a joint group i.e. former with employee group. However, Syed
Babar Ali and Fakir Syed showed concern for debt-equity ratio and
dire need for extra funds for the project. Former suspected ECPL
management forced into this project. Man of his calibre knew the
value of tangible and intangible acquisitions. For which he wanted to
build a relation of trust exhibiting his commitment.

On the other hand Employee Group while structuring their offer

placed a hint on unfavourable circumstance for sale. Highlighting
their offer not only in terms of finances rather through commitment to
exxon business and safety practises. They wanted Engro brand name,
technologies and ECPL shares. Several conditions were viewed
including bank finance, project financing but Exxon would be liable if
exercised. Hence agreeing to ask for 75% of equity.

Tsusaka suggested giving President Yamana time to consider his offer.

Mr. Yamana was impressed by his proposal and equity participation.
Yet Tsusaka was concerned for government response to Exxon pulling
out. Which could be mitigated by Exxon oil exploration investment,
along with foreign investment and cost effective expansion. This
expansion announcement was also expected to cater drop in share
value. IFC as financial consultant along with ADB and AFIC was
offered project appraisal review, arrangements for co-financing and
equity participation.

Parathasarthy wanted to recommend board for 2 million equity and 5

million loans for AFIC board by the end of December. However board
 would take 2 to 3 weeks for decision. IFC had to be consulted for
these insights as financial advisory.

Molrley was expecting a competitive, reasonable and fair offer from

him i.e. cash upfront in dollars. On the other hand Chevron wanted
the plant for them for methanol production. Morley was insistent to
share my offer and meet competition to discuss the expansion project.

Declan was of the view that it would be wise to have convincing

evidence of solid offer. Giving us the platform to negotiate the price.
He suggested excluding expansion price from the offer to gain strong
footing on price negotiation table that too face to face. However IFC
viewed Exxons pressure to put forward the offer. Considering price
and certainty critical aspects of any offer. Nonetheless in house poll
for price to exxon ranged from Rs. 40 to Rs. 55 per share.

Jemal wanted to send a signal to Exxon for EPCL and IFC are in a
stage to put the package together by IFC strong declaration of intent
within 24hrs. However an offer letter to Exxon was sent with a price
of $2.12 (Payable at Rs. 21.90 per US dollar protected upto Rs.23).
Equity sharing was 39% Employee Group, 15% IFC and 30% others.
Stating that employee share would be purchased by employees group
or Trust with total remaining 30%. AFIC was to take 5-10% of equity
plus loan financing of 5 million. With conditions stated earlier. Letter
also proposed action planned towards closure in case project failure.

Morley wanted Syed baber ali to allocate some shares to employees if

he wants in. Suggesting refusing to meet him up-front, as it will be a
case of conflict of interest. Meanwhile morley was assured by EPCL to
get a promising offer, later expecting support from IFC in next 24hrs.
Since EPCL was part of Exxon hence the deal has to be transparent.

IFC faxed letter of support for EPCL investment with 30% employee
equity, 15% IFC equity, and 30% others (SCB and others). However
IFC reserved the right to align with other successful party incase later
loses their chance. However EG reserved the right to pass on the
letter of support from banks to Exxon.

Components of the letter

Equity Structure of the deal

Effective terms of the deal
Price

However price was to be negotiated in Washigton in order to get IFC last

financing stage building strong financial footing in place. However Syed
Baber Ali was offered 20% equity by EPCL ic case of success. To which
he agreed with 15% shares to employees on the purchased price and
50% for himself and his family business and 10% for bank.

Declan felt that complexity of the deal and multiple investors/funder

make its difficult. He came to the conclusion that there was a lot more
than price to be considered. That offer letter to Exxon was not a
satisfactory arrangement. Key factors to be considered were equity
transfer, relationships and government approvals. To give an offensive,
strong and positive message rather than defensive approach.

Activities of equity restructuring:

Technology support agreement and Engro trademark.

Employee and media communication plan
Employee and Trust equity mechanism and procedures
Dispatch offer letters
Share Purchase Agreements
Financing and Equity
Government approval of sanction letter
Exxon Chemical Purchase order and invoice finalisation
Firming project loans
Import license
Tender for Local contractors
Technology finalization for new plant
Conclusion of Gas supply contract with Mari Gas and Govt. of
Pakistan
Karachi and Daharki office set up
Contract award for Daharki office
Project team
Resolving price formula, tax issues, tax statutory and regulatory
order with government
Third party inspection for AR document

Exxon had three options either to deal with every party individually or
with IFC as an additional one or to go with one partly in place. Hence a
proposal with a price of Rs. 46.50 per share was faxed. This proposal was
drafted in a meeting with IFC in washigton. Based on factors like:

Investment environment in Sindh

Expansion Success
Pakistanization
Non saleable share for three years
Exxon not to fall back on

Agreement on proposal was concluded on a long list of topics

 Share price
Structure of the deal
Investment Agreement
Negotiation Strategy in Brussels
Share Purchase Agreements
Employee purchase deals
Dividends Policy
Rights Programme
Technology Agreement
Information Memorandum

With certain assumptions:

Zero Terminal Value

Reasonable return of 18% in Pakistan
8years plant life

IFC determined the price of each share at Rs. 39 per share. This could go
up by Rs. 2 if return is dropped to 15%. However with the expansion
project value per share was Rs. 45. Finally agreeing on Rs. 46.50 per
share. IFC insisted on five years retention of share with Employees
having 25.1% shares. With a right to seek commitment from rights issue
up-front from investor.