Returns for investors shot up, too, until inflation slowed and Trafalgar House hit trouble. The party was over long before Norwegian giant Kvaerner bought the firm in 1996, but for a while, the good times returned.
Kvaerner president Erik Tonseth seemed to be staging his own 1980s revival, arguing that conglomerates made sense and launching ambitious plans for growth. Kvaerner was going to develop Britain’s tallest building – the City’s Millennium Tower – planned to revive Govan shipyard and build a giant new headquarters in west London’s Chiswick.
Then, as debts started to mount, Tonseth was ousted by investors and Kvaerner announced last month that it was to exit five operational areas that employ 25 000 staff.
Now, it has thee core divisions: the £1.4bn-a-year construction arm, process engineering, and oil and gas.
The razzmatazz of owning the QE2 is nice, but it doesn’t make enough money … if it’s not a core area, we shouldn’t own it
Kvaerner Construction chief executive Keith Clarke says: “Kvaerner will be radically different from the group that had eight core areas, which was more like the conglomerate Trafalgar House used to be. We will go from a broad conglomerate-type structure to businesses where we can make sustainable profits. It will be things we are actually good at.
“Corporate ego is a terrible thing. Unfortunately, all the fantastic corporate excitement of having lots of divisions doesn’t lend itself to exciting returns.
“We would rather be dull and boring and profitable for shareholders than terribly frantic and exciting with boats and flags.
“The razzmatazz of owning the QE2 is jolly nice but it doesn’t make enough money – and if it’s not a core area, we shouldn’t own it.
Dukes Hotel, acquired in May 1989, joins the Ritz and Stafford as the group’s third five-star hotel in the heart of London. Dukes is a beautifully preserved Edwardian building which offers 36 bedrooms and 26 suites
Trafalgar House 1990 Annual Report
“At one point, Trafalgar House owned a typing school. We owned newspapers, we owned hotels. Now investors want a core team that really knows its businesses.” Clarke says the need to focus applies even to Kvaerner’s construction business; he doubts the wisdom of firms that are attempting to combine contracting and facilities management. He sees Kvaerner’s business as worldwide traditional contracting, often on a large lump-sum basis, and its key asset as its ability to manage risk.
He says: “You have to wonder why the contractors who say ‘we wash windows, we vacuum carpets’ are in construction at all. If they need to diversify to get adequate returns, how does that serve their shareholders? “If you take one business with inadequate returns and another with adequate returns, why not leave the market where you are not performing well? What’s all this averaging up business? You can make the average return a lot better if you ditch the inadequate bit.” Kvaerner plans to increase its returns by improving the construction process and using its specialist contracting arms to drive more profit out of projects. Clarke also wants his international network of businesses, such as Gammon, Hong Kong’s biggest contractor, and large outfits in India and Egypt, to use local knowledge to boost returns.
Knowing local clients and suppliers well is a better way to operate overseas than occasionally taking a stake in the world’s biggest projects, Clarke says. For this reason, he does not see any need for Kvaerner Construction to merge with other contractors.
But he is on a mission to get the construction sector better understood in the City. Conceding that contractors, “like farmers”, have been prone to blame anyone other than themselves, he says major players have something to offer.
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Keith Clarke: We’d rather be dull and profitable than all boats and flags