Ten years ago, the smart contractors were perceived to be those that were part of a huge conglomerate embracing everything from ships to secretarial colleges.
Those empires have been slowly shrinking, but in the past two months the pace of change has accelerated – with announcements that Tarmac is to split in two, P&O is to float Bovis, Balfour Beatty parent BICC is to exit cables, and Kvaerner is retrenching, with construction as one of only three core businesses.
All this has been prompted by the City. According to ING Barings corporate finance director Tony Williams, the City no longer sees conglomerate life as sexy. Now it wants contractors to be “lean, mean and cashed-up” .
So, a pension fund investing in construction does not want other interests clouding its calculations. And an investor keen on shipping will not be interested in fee-based contracting.
Schroder Securities’ Robert Donald, one of construction’s top analysts, argues that too many companies have spread themselves too thinly.
He says: “Why does focus matter? A company has two limited resources: its people and its money. If you have too many divisions to spread both over, you don’t get value from either.
The City no longer sees conglomerate life as sexy. It wants contractors to be “lean, mean and cashed up”
“The skills set needed for hotel management is totally different from contracting. A centre looking at all this can only dilute its input. The manager should maximise the company’s performance around a focused product area, then reduce the risk by spreading geographically. The fund manager can then be left to use his skills to judge where to invest.” Conglomerates, the City now argues, get “soft” work from companies in their own stable, making it too easy for managers to be irresponsible. “The more pure the industry gets, the more healthy the competition is,” Williams says.
So, Bovis will not work for P&O because the City demands that P&O get out of property: it says the cash the firm has tied up in bricks and mortar can be better invested elsewhere.
Contractors could be forgiven for being bewildered by the City’s thinking. After all, some of the people calling for firms to break up are the same ones who congratulated them on the breadth of their portfolios 10 years ago.
Tarmac chief executive Sir Neville Simms believes analysts should “knuckle down” and do more maths to understand complex companies.
But he is getting on with demerging Tarmac’s construction and materials businesses all the same. Bovis chairman Sir Frank Lampl is also bracing himself to dance to the City’s tune, although he insists he will stick to his tested management methods.
And once companies such as Bovis, Tarmac, Balfour Beatty and to a lesser extent Kvaerner have been stripped to their contracting bones, a new spate of merger activity could begin.
What a difference a decade makes1989 The offices boom Tearing down the Berlin Wall and peace in Europe Steelworkers strike at Canary Wharf demanding £12 an hour Tory MPs debate how to celebrate the millennium – and Margaret Thatcher’s 21st year in office The latest pop sensation is Kylie Minogue, a 21-year-old nymphet Plans to redevelop Birmingham’s Bull Ring are unveiled The plasterboard industry is examined by the Monopolies and Mergers Commission Baggy jeans are the thing William Hague is a 28-year-old non-entity Interest rates soar The £1.7bn Jubilee Line Extension is planned The redevelopment of Battersea Power Station grinds to a halt Tarmac is Britain’s most profitable contractor England is thrashed in the Ashes series Ringo Starr is Thomas the Tank Engine Top footballers get £3000 a week 1999 The lottery boom Tearing apart Kosovo and war in Europe Steelworkers strike at the dome demanding £10 an hour Labour MPs debate how to celebrate the millennium – and the Tories wish Thatcher was still in office The latest pop sensation is Billie, a 16-year-old nymphet Plans to redevelop Birmingham’s Bull Ring are approved The plasterboard industry is examined by the European Commission Combat trousers are in William Hague is a 38-year-old non-entity Interest rates tumble The £3bn Jubilee Line Extension is finished (almost) The redevelopment of Battersea Power Station grinds to a halt Tarmac is unlikely to be Britain’s most profitable contractor England is thrashed in the Ashes series Neil Morrissey is Bob the Builder Top footballers get £30 000 a week
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