UK: TIME TO UNPICK GEC.

UK: TIME TO UNPICK GEC. - The odds are that George Simpson, the new boy at GEC, will soon start dismantling the empire that Arnold Weinstock built.

by Andrew Lorenz.
Last Updated: 31 Aug 2010

The odds are that George Simpson, the new boy at GEC, will soon start dismantling the empire that Arnold Weinstock built.

Back in 1969, the journalist Graham Turner interviewed Arnold Weinstock, managing director of the General Electric Company, in his fifth floor office at Stanhope Gate, Mayfair. Weinstock, then 44, had just completed a phenomenal six years. Through, first, the revitalisation of GEC itself and then the takeovers of Associated Electrical Industries in 1967 and English Electric the following year, he had almost singlehandedly transformed Britain's fragmented electrical engineering sector. His achievement, one observer commented years later, was towering: 'Weinstock saved the industry'.

Weinstock himself saw things much the same way. 'Some of us here,' he remarked to Turner, 'have the feeling that we are engaged in a crusade'.

The crusade's purpose was the revitalisation of his industry, which was by then demonstrably losing ground to its continental European and American rivals.

Weinstock's remark contained no self-righteousness or braggadocio. A proud but rigorously analytical man, his business style has always been understated to the point of reticence. What the comment did reveal was a certain patriotism often found in immigrant families (Weinstock's father, a tailor, came to north London from Poland in 1906), a long-term driving force and, perhaps, a sense of destiny and dynasty.

On September 6, when Weinstock handed over the reins at GEC to George Simpson after 34 years as managing director, his crusade was still unfinished.

Critics of Weinstock's GEC - and there are many - believe the great enterprise ran out of steam years ago. His caution, they say, cost Britain the chance to create a company to rank with America's General Electric or Germany's Siemens. One former member of the Industrial Reorganisation Corporation, the Wilson government's vehicle for restructuring industry which encouraged GEC's expansion, said recently: 'If we had known how Weinstock would turn out, we would never have backed him as we did'.

The essence of the case against Weinstock is that, as he and GEC grew older, his prudence became parsimony, his dynamism atrophied and his audacity was supplanted by chronic risk aversion. As a result, it is argued, GEC abused the predominant position it had established, missing opportunities for expansion that would have enhanced not just its own performance but that of UK plc. In this portrayal, Weinstock cast a giant, but ultimately baleful, shadow over the industry, stunting its growth.

That picture is both harsh and unfair. It is not that Weinstock has refused to put his hand in his pocket: he has often bought businesses at generous prices. But Weinstock, a racing rather than a betting man, has gone for sure things, for businesses with hard contracts in place or prospect, rather than for uncertainties where the reward might be higher but the risk was also greater. Risk elimination is clearly impossible in business, particularly in a high-technology concern such as GEC. But Weinstock has consistently sought to reduce the risk element to the barest minimum.

His caution has lost opportunities for GEC and UK industry. Mobile phones are one obvious case of a market that should have been tailor-made for the company, particularly given Britain's pioneering role in developing cellular services. Yet Weinstock's distrust of the more volatile areas of consumer electronics has undoubtedly served GEC, and the British taxpayer, better than the roller-coaster ride to which investors in Philips, the firm with which GEC used to be adversely compared, have been subjected by the group's huge investments in the cut-throat consumer electronics business.

Weinstock himself says GEC has always been guided by two factors: 'We have done things to get technology and to obtain access to markets, but not because something showed a short-term financial advantage'. His remarkable achievement was to grow the sales, profits and dividends of GEC through an era when most of the UK manufacturing sectors in which he operated were contracting. Far from being blamed for contributing to this trend, Weinstock deserves credit for having bucked it.

The year before Weinstock took over as managing director, GEC made pre-tax profits of £4 million on sales of £135 million in 1962. Last year, pre-tax profits before taxation totalled nearly £1 billion on sales of almost £11 billion. An investment of £1,000 in GEC in 1963 would have grown to more than £50,000 today, outperforming the FT All-Share index by more than 150%.

What those figures do not show is that most of the capital gain was achieved in the early years, when GEC's growth was truly outstanding. Between 1969 and 1975, powered by the combination of efficiency gains and volume expansion created by the Associated Electrical and English Electric deals, the group increased earnings at a compound rate of 25%. In the late '70s, however, the rate slackened, becoming pedestrian during the '80s, particularly when the company's peformance was compared with the go-go conglomerates such as Hanson and BTR.

For Weinstock and GEC, unlike most British companies, the '80s were rough.

Weinstock was antipathetic to the Thatcher revolution, speaking out publicly against the Government's attitude to manufacturing during the House of Lords' trade and industry committee hearings which in 1986 condemned the lack of a strategy for manufacturing industry. At the operating level, GEC's travails were exemplified by the lead role of its Marconi subsidiary in the misguided Ministry of Defence (MoD) attempt to convert the RAF's Nimrod maritime patrol aircraft into a vehicle for AWACS warning and surveillance duties, which cost the British taxpayer a fortune. Meanwhile on the stock market, GEC performed almost as poorly as Distillers, a company in which, coincidentally, Weinstock once considered investing some of GEC's abundant reserves. Cash was the only element in GEC that showed strong growth at the time: and even this, Weinstock's cash mountain, was viewed as a symptom of excessive caution rather than a tribute to the powers of his legendary financial controls.

City disenchantment grew. When David Hopkinson, then head of M&G, a leading pension fund manager, retired in 1987, he said one of his biggest regrets was that BTR had just chosen to bid for Pilkington rather than GEC.

But Weinstock has never paid the City what the City regards as due deference. 'We have never run the business for the purpose of changing the share price in any direction,' he says. 'We have only run the business for the sake of making it more prosperous. That should follow itself into the share price.'

The main reason GEC appeared to stagnate in the '80s was that almost every big strategic move Weinstock attempted was, for one reason or another, frustrated. He tried to buy a significant stake in the struggling German electronics group AEG, only to be blocked by nationalistic opposition.

He proposed to the Government that GEC facilitate the privatisation of British Telecom by taking a large minority stake in the company in 1984, only to have Thatcher turn him down flat.

Weinstock had himself to blame for one missed opportunity. He turned his back on a proposal by Arthur Walsh and Roy Gardner, who had left Marconi to run STC, that the two groups should launch a break-up bid for Sir Ernest Harrison's Racal, with GEC taking over Vodafone. A year later, in 1988, Weinstock did ally with Lord Sharp of Cable & Wireless to break up Racal, this time with the idea that GEC would take the company's electronics operations while C&W got the mobile phone operator. But Harrison pre-empted them by demerging Vodafone.

Most serious, because it impacted GEC's core business, was government hostility to GEC defence industry takeover moves. In 1985, Weinstock's bid to buy British Aerospace was thwarted by the BAe board and the MoD.

Two years later, both the MoD and the Department of Trade and Industry (DTI) blocked GEC's £1.1 billion bid for Plessey, its arch-rival in defence electronics and telecommunications.

It took Weinstock two years to manoeuvre himself into a position where he could implement his grand designs on Plessey. Even then, to overcome MoD and DTI objections, he had to compromise by re-bidding for Plessey with Germany's Siemens. Weinstock remains angry about the Plessey hold-up. 'It cost us about £300 million,' he says, referring to the higher price that GEC subsequently had to pay, and the losses Plessey incurred on some of the businesses it bought in a bid to escape GEC's clutches.

'They paid out money they should not have paid out, and lost money they should not have lost,' Weinstock says. 'A lot of that £300 million went down the drain, and the whole business held up all the other things we needed to do.'

As a result, GEC itself became takeover prey. While Plessey launched a half-baked bid for GEC, America's General Electric tried to gobble up its namesake. That attempt, in 1989, is the closest anyone has come to taking over GEC. After much manoeuvring, Weinstock saw off GE's ferocious chairman Jack Welch. 'He out-negotiated us,' one GE executive admitted later. Weinstock's concession was to conclude joint ventures in consumer appliances and switchgear with its would-be predator.

The GEC that Simpson has inherited is built on the new foundations laid by Weinstock at that time. Apart from GPT, the joint venture in which Siemens holds a 40% stake, and the consumer appliances division, which is a 50:50 set-up with GE, that period also saw the formation of GEC Alsthom, a joint venture in power and rail engineering with Alcatel Alsthom. Weinstock also concluded a space systems venture with Jean-Luc Lagardere, head of Matra. GEC now finds itself in the position of owning 2.5% of the Lagardere group.

Simpson could not be taking over at a more critical time for the strategic development of Marconi. For the relationships that Weinstock has fostered with Alcatel and Matra have given GEC a foot in both camps of the rival bidders for the Thomson group, whose privatisation the French government wants to complete by the year end. Weinstock has been working towards the union of Marconi and Thomson-CSF, the group's defence electronics subsidiary. In sonar (where both companies already have a joint venture), radar, missiles and communications technology, the two are a near-perfect fit.

But the obstacles to such a hook-up have been high. The French government will vet any foreign holding over 10% in any part of Thomson. Indeed, Lagardere has lined up a number of companies over and above GEC to take stakes in different parts of Thomson-CSF for precisely this reason. GEC's best chance of a union with Thomson-CSF would be for Alcatel to acquire the whole company. That prospect took a great leap forward in late August when GEC-Alsthom agreed to acquire Framatome, the state-owned nuclear power equipment company.

For all three parties - GEC, Alcatel and the French government - the Framatome deal is a means to an end. It makes limited industrial sense, giving GEC-Alsthom a nuclear equipment capability and enlarging the group by one third, increasing it to current annual sales of £10 billion. It aids the government's privatisation programme. Above all, it enables Alcatel - which owns 44% of Framatome - to sell its shares, raising cash to fund its bid for Thomson. That opens the way for Weinstock to achieve his long-term objective and unite Marconi with the relevant pieces of Thomson-CSF.

Weinstock's high-level contacts in the French government could have enabled him to manoeuvre his way through the French determination to avoid a blatant takeover of Thomson businesses by foreign companies. But will Simpson pursue an alliance with Thomson? This will be an important test of his attitude to Weinstock, who is retaining an office at Stanhope Gate with the title of chairman emeritus. If Simpson goes for a Thomson deal, he will need Weinstock's help.

Simpson, whose forte is operational rather than strategic management, does not like joint ventures, however. Where Weinstock, the great European, has seen such alliances as a means of internationalising GEC - because outright takeovers were impossible in the relevant businesses - Simpson takes a more literal view. He believes that, lacking in any single source of control, joint ventures are a recipe for confusion and under-performance.

Certainly the spate of ventures Weinstock formed in 1989 have met with mixed fortunes. The alliances that have failed to gel are those Weinstock concluded with GE in consumer appliances and low-voltage switchgear. By contrast, GEC Alsthom has been an outstanding success, a grouping made coherent by the fusion of French operational management and GEC's financial systems. And GPT has succeeded despite the disparity in its parents' technical and financial muscle. Will these ventures survive Simpson's distrust of such alliances? The odds are in favour of an eventual sale of GEC's 60% stake in GPT and the possible flotation of GEC Alsthom, something which was already on the agenda under Weinstock.

Where Weinstock and Simpson should be at one is over the perennial debate about a link-up between Marconi and BAe (where Simpson was deputy chief executive until 1994). For GEC, the aspiration to combine Marconi and BAe Defence has burned strongly for the last decade. 'BAe has this prime contractor position, which we covet,' Weinstock remarked during the battle between the two groups early last year to take over the Trident submarine builder VSEL. In systems terms, with more than half the value of a combat aircraft, for example, now in the avionics, Marconi can do nicely by itself.

But it is still only a supplier. As BAe's huge profits on the £20 billion Al Yamamah deal with Saudi Arabia demonstrate, the big money in defence is now made by the prime contractor. 'If we came together to be the British prime contractor, it would be the best of all things,' says Weinstock.

The MoD, objecting to the kind of vertical integration such an alliance would involve, has always opposed a BAe-Marconi tie-up. But this attitude seems obsolescent in light of developments in the defence industry, particularly the emergence in the US of several vertically-integrated groups led by the giant Lockheed Martin, the world's largest defence and aerospace company.

However, Sir Richard Evans, BAe's chief executive, believes BAe's first priority should be to form a horizontal alliance in Europe with fellow combat aircraft-makers Aerospatiale-Dassault, now being created in France, and Daimler-Benz Aerospace. But Evans has left the door open to an eventual deal. And if, as many observers expect, the European triple alliance takes longer to assemble than Evans hopes, a combination with Marconi could come sooner rather than later.

If the key to such mega-mergers is the relationship between the two protagonists, then there should be little difficulty in unlocking an agreement. Although Simpson was initially seen as a threat to Evans, when Sir Graham Day appointed him from Rover to the BAe headquarters team in 1991, the two men get along well. One industrialist who knows both men says: 'Dick and George want to do this deal. It is just a matter of time and timing.'

More straightforward for Simpson is the relatively simple task of selling GEC's tail of businesses, many of them found in the quaintly-titled industrial apparatus division, and including electrical accessories and AEI cables.

AB Dick, an American printing equipment-maker, is another obvious disposal candidate. Weinstock was reluctant to sell many of these companies, because the proceeds would be insufficient to prevent earnings dilution. They would also be below book values. But Simpson, approaching GEC from a different direction, is likely to take a large up-front provision and sell such operations regardless. He also has to decide what to do with Picker, the US medical scanner business, whose natural partner is Philips. With disposals large and small, analysts at the securities house ABN Amro Hoare Govett say: 'GEC could raise almost £2.5 billion from disposals, equivalent to almost £1 a GEC share'. Such a move would endear itself to GEC shareholders, who have seen their investment increase from just over 300p a share over the last year, as the City got wind of Simpson's appointment. The prospects of further share price growth have not been dented by the fracas over Simpson's pay package, and the subsequent toughening of the performance targets that, if hit, will enable him to take early retirement as a multi-millionaire. The new, stiffer targets may provide extra incentives for Simpson to restructure his business portfolio.

The £10.5 billion question - that being GEC's market worth at 380p, around the price the shares were trading when Weinstock stepped down - is whether Simpson will go the whole way and effectively liquidate GEC. Between the big joint ventures and the peripheral subsidiaries is a group of profitable and growing niche businesses: the petrol pumps company Gilbarco, the ink jet printer Videojet, Avery Berkel, the weighing metrology business, Satchwell industrial controls and others. These businesses could form the core of a reborn, much-diminished but probably highly rated GEC - or Simpson could sell them all, either piecemeal or as a single demerged entity.

For those who share Weinstock's view that 'GEC should be a permanent and expanding part of the British industrial scene', such a dissolution - while yielding substantial instant returns to shareholders - would be an inglorious coda to Weinstock's magnum opus. It is, however, a distinct possibility. Two years from now, when the lease on Stanhope Gate expires, George Simpson may be moving the General Electric Company to a much-reduced head office, on a very short lease.

Andrew Lorenz is business editor of the Sunday Times

GENERAL ELECTRIC COMPANY: THE BUILDING BLOCKS

Division Comprises Turnover Profit

1996(£m) 1996)£m)

Electronic systems GEC Marconi, includes 3,049 291

and defence joint ventures with

Thomson-CSF and Matra

Power systems GEC Alsthom (50% stake, 3,752 177

JV with Alcatel Alsthom)

Telecoms GPT (60% stake, JV with 1,070 158

Siemens)

Consumer goods General Domestic 250 11

Appliances Ltd (50% stake,

JV with General Electric),

includes Hotpoint, Creda, Canon,

Redring and Xpelair brands

Electronic 550 50

metrology

Office equipment 299 37

and printing

Medical equipment 675 32

Electronic 387 34

components

Industrial 348 20

apparatus

Distribution 428 20

and trading

Other 182 0

Interest 151

Total 10,990 981

Source: GEC Annual Report & Accounts 1996

GEC: SLOW PROGRESS IN RECENT YEARS

1992 1993 1994 1995 1996

Sales (£millions) 9,435 9,410 9,701 10,330 10,990

PBT (£millions) 863 863 866 891 981

EPS 19.9p 19.7p 19.8p 20.6p 22.6p

Source: GEC Annual Report & Accounts 1996.

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