Sunday, 31 August 2014

the PLC Problem...

We have watched the public scrap between Balfour Beatty and Carillion over recent weeks. Both of these companies are listed on the stock exchange.

At the same time we have seen Tesco struggle the meet shareholder expectation and again this week has announced a further profit warning. Tesco is also also issued on the stock exchange. 

Balfour Beatty and Tesco are on completely different sectors the suffer similar challenges. The stick exchange demands revenue and profit growth at all costs. Ian Tyler and Terry Leahey were Chief Executive at this companies through a boom time when profits and market share increased for both companies. 

Both Chief Executives have been praised for their strategies at these companies which can be denied. They both jumped off at the middle of recession. They both were astute enough to realise that they were already three or four years late on establishing a new strategy for changing times. 

Both were fixated with profit growth demanded by the city and didn't start to sacrifice profit growth for investment in new strategies. Both Chief Executives were replaced by their deputies and both if these deputies have now lost their jobs. Neither of these men can take any blame. Their fate was already set when they took in the role. Balfours and Tesco should have committed to radical strategies three or four years earlier. 

A truly great chief executive is five years ahead of the business and is able to make bold decisions which may effect short term shareholder return. Both ian Tyler and Terry Leahey had one strategy which worked in a booming market. What they couldn't do was change business direction for long term growth. 

Long term sustainability is difficult in a PLC environment when shareholders want growth year on year. Balfour Beatty fell into this trap and bought revenue and profit from acquisitions such as Mansell. More importantly the cash generated from construction was used to fund investment in PFI.

When investment opportunities reduced and growth slowed it became clear Balfours had not integrated any of these businesses into a single group entity. The company was carrying unnecessary overhead and was not benefiting from scale.

Carillion have faired slightly better as they have integrated their acquisitions such as Moslem and Alfred McAlpine 
Additional evidence of long term thinking is the level of investment Teir 1 contractors have made over the years. 
A report published by the government identified that tier 1 contractors invested a meagre 0.1%. By contrast Google spend 14% and Microsoft  13%. I'm not suggesting that construction invests this level of capital but it does show the difference between sectors which are developing and those which are not. 

The point here is that long term sustainability in any sector needs a long term and evolving strategy. The strategy must change and adapt to it environment and the larger the company the longer it takes so the Chief Executive has to be way out in front. Strategies built on growth and profit such as those developed by Ian Tyler and Terry Leahey will ultimately fail. A business must be aligned to the market and the needs of it customers. 

I wonder if the fact that Ian Tyler was and accountant and Terry Leheay a marketeer rather than a builder or a retailer is relevant. 

Ian Tyler had an outstanding strategy for growing profit and revenue and that can not be questioned. But if the objective was for long term sustainability would someone with a passion for improving the construction service have been better long term. 

An interesting contrast would be Laing O Rouke. Ray O Rouke had been driven by changing construction. He has invested hugely in technology and even a manufacturing facility.He is driven by delivering a better value product and changing the perceptions of construction. 

They did not make the profit of Balfour Beatty through the boom, probably because much of it was invested. Today LOR continues to make profit and is well place to adapt  to the evolving sector. 

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