As a boy, I listened often enough to my father repeat the words of his grandfather, founder of civil engineering and building contractor McAlpines. “If you can't start a building business, you should not own one,” the grand old man had told his ambitious grandson, who had in mind expansion through acquisition. Looking back, there seems to have been a great deal of truth in the old fellow’s words. Few acquisitions made in the construction industry have really prospered.
Tersons and Token, both regarded in their day as “go go” contractors, went. The companies that acquired these builders enjoyed their other assets but arranged to have the core businesses closed.
More recently, Trollope & Colls was another company to change hands. This was a firm that once prospered under the care of Victor Matthews, a man who really knew about buildings. But with Matthews gone, Trollope & Colls, then part of Trafalgar House, was sold to Jardine – which knows about many things, but is sadly no expert in building.
When Trafalgar House turned out to be the black hole that those in the construction industry – either out of wisdom or malice – had suggested, the time was ripe for Jardine to sell, which it did to Kvaerner. Kvaerner had made a name for itself sorting out shipbuilding problems that most people in that industry had either failed to tackle or had tackled and failed.
It had an impressive track record, and industry spectators predicted a great success. I suppose Skanska’s purchase of Kvaerner Construction could also be judged a success, but for whom? Much like the oracle at Delphi who predicted for a visiting general that a great victory would be won, I am certain this will be a great deal. But just as the great victory at Delphi was won by the other side, it may well be a better deal for Kvaerner than for the new proprietor.
Only time will tell – and that is the rub with buying contractors: only in time can the true profitability of the business be known. I write profitability, although in truth it is more often the true liability of its commitments that is discovered as time – and money – goes by.
That’s the rub with buying contractors: only in time can the true profitability of the business be known
My great grandfather made his sweeping statement about owning or buying a contracting business for a sound reason. Not because construction is a complicated business, for it is no more complicated than most businesses: the hotel industry is just as hard, involving, like construction, large numbers of individuals. And not because construction is highly competitive or because margins are narrow and risks high. He fully understood all these dangers, and regarded them as occupational hazards.
He said people who can’t start a building business, should not own one because he believed that no accountant could really understand contractors’ accounts. The figures seldom match the reality of the business, not because the proprietors want it that way – on the contrary, accurate accounting can only help them – but because the reality only becomes visible when a business is closed.
Profit and loss is the cash left in, or owed to, the bank after everything else has been taken care of; this figure is more often than not a deficit over expectations and often a deficit in reality. There are liabilities and costs in construction that are lost among the layers of different activities, and while a business trades profitably they are hidden.
Last week was a bumper week for mergers, takeovers and other rearrangements in the construction industry. I would, however, hesitate to let it pass without mentioning Bovis. Bovis is a company whose dream deal of a merger with WS Atkins came to an end when Atkins woke up. Had Atkins dozed on and the deal been consummated, it would have been another of those “great ictories” – good for the owners of Bovis, not so good for the owners of Atkins.
It might have worked, however, because Bovis behaves as a consultant while pretending to be a contractor. Out of the closet as a fully fledged consultant, it would, with Atkins’ powerful reputation and warehouse of expertise, have been unbeatable.
In bed with Lend Lease, however, the glorious prospect of reconstructing Wembley Stadium came unstuck before it got past the self-congratulation stage. Bovis barely had time to finish the celebratory champagne before it was out on its ear.
Postscript
Lord McAlpine is a writer and former treasurer of the Conservative Party.
