UK: DE LA RUE STRIKES A NEW NOTE. - The 180-year-old security printer is cashing in on the changed world order and on the ever-increasing automation of money handling.

by Hashi Syedain.
Last Updated: 31 Aug 2010

The 180-year-old security printer is cashing in on the changed world order and on the ever-increasing automation of money handling.

Democracy brings with it a wealth of paperwork. New countries need new currencies, new citizens need new passports, elections need ballot papers, voters need registration - and somebody, in this glorious new world order, needs to print them all. Enter De La Rue, a venerable British company with a 180-year history, security printers par excellence, and perfectly placed to cash in on the changes.

After a troubled decade in the 1980s, when the very survival of the company was in doubt, De La Rue has posted some remarkable results. Since 1990 pre-tax losses of £50.6 million have been turned into profits of £104.7million, on turnover up some 60% to £559.6 million. De La Rue, it is fair to say, has done well out of democracy.

But security printing and the new world order is just part of the picture. De La Rue's other main activity is the fast-moving payment systems business, making a range of machines for handling, counting and dispensing money for banks and financial institutions around the world. These now account for nearly 60% of De La Rue's sales and a little less than half its profits. It is, moreover, the fastest growing division of the company, with huge potential for expansion worldwide, as the handling of money becomes increasingly automated.

Last but not least there's a management story to the turnaround, in which the main protagonist is Jeremy Marshall, chief executive of De La Rue since 1989. When Marshall took over in November that year the company was in a mess. A buying spree in the '70s and '80s had turned sour and was proving to be a huge drain on resources, both financial and human. The company had been without a chief executive for nine months, the stresses of the business having caused Brian Malpas to resign from the post on grounds of ill-health.

The management team, such as it was, had just succeeded in disposing of its biggest single problem, pre-press equipment manufacturer Crosfield, to a Du Pont/Fuji joint venture for £235 million. The sale had been fraught with complications with the late Robert Maxwell, a 21% shareholder in De La Rue, putting in a rival (and higher) bid for Crosfield in an attempt to block the Du Pont/Fuji deal. The management suspected that Maxwell's strategy would be to create delays in signing a deal and eventually make a much lower offer after Du Pont and Fuji had lost interest in Crosfield. The majority of shareholders agreed with the management and Maxwell was outvoted.

But just two weeks later De La Rue was in trouble again, this time faced with a takeover bid by Norton Opax. A brief, frenzied battle saw Norton Opax itself swallowed up by Bowater, letting De La Rue off the hook once more. Given these extraordinary happenings, Marshall admits he had reservations about becoming chief executive. 'I hesitated quite a bit, but the more I got to know, the more I realised this was a business with a very sound base that had got into temporary difficulties,' he says. 'It seemed from the outside that there was an obvious opportunity to concentrate on the basic business and if one got rid of peripheral activities, there was a very sound future.'

From the very beginning Marshall developed a four-part strategy. An ex-Hanson executive, he is described by John White, MD of non-currency security printing, as a 'whirlwind of a man with a wide and deep knowledge of every aspect of running a business'. The first priority was to get rid of all the peripheral loss-makers. Next, the performance of the business had to be improved, followed by investment in the remaining divisions and, finally, a programme of strategic acquistions in related areas. This, in a nutshell, is exactly what has been done.

When Marshall joined, one of De La Rue's idiosyncrasies was a management structure so flat that no fewer than 28 managers reported straight to the chief executive. He reorganised the company into three core divisions, payment systems, currency and security printing, each with its own MD.

New blood has been brought to the company too. Marshall himself was the first chief executive to come in from outside. 'The culture was very much one of cradle-to-grave employment,' he observes. There was even a club for retired employees with over 37 years' service and a retirement home for former De La Rue staff. Such a culture, says Marshall, is all right up to a point, 'but you do need some new people. If you've only had people from inside, their only experience is of the De La Rue way.'

Such inexperience no doubt contributed to the company's earlier difficulties as it went on its shopping sprees with a touch of the air of the innocent abroad. The problem was not diversification per se. Unlike the post-War period when De La Rue had been a classic conglomerate with interests as diverse as Potterton boilers and Formica laminates, the later aquisitions were in print-related areas. What went wrong was that they were not always as sound as they at first appeared, or, in the case of Crosfield, ended up developing in unexpected directions. Crosfield was originally bought for its banknote handling systems, while the pre-press scanning side that caused all the problems emerged only later. 'My view is that there's a lot of rubbish talked about wrong acquisitions,' says White, who has been with De La Rue for 17 years. 'The original purpose (in buying Crosfield) was correct and is still the foundation of the payment systems division.'

Marshall has some sympathy with this view. But he also believes that the management simply didn't appreciate the skills required in running fast-growing hi-tech businesses, compared to a mature one like printing money. Furthermore, apart from Crosfield, he says, most of the companies bought were relatively small. 'There may be fewer noughts on the end of the numbers, but it takes just as much time to sort them out.'

First to go under the new Marshall regime was a business which printed airline tickets, closely followed by Printrak, a US company making systems for the electronic storage of fingerprints. The latter was more or less given to its management in what was euphemistically called an MBO. As the disposals took off, so did a programme of rationalisation and cost-cutting. A banknote production facility in New Zealand was closed down and a security printing plant in Gatwick was merged with another in Dunstable. Marshall also introduced tighter working capital controls - and a new, young finance director, Les Cullen, was poached from telecoms giant STC.

As well as hiring new managers and introducing executive bonuses ('I don't like to call them incentives, because I believe most people do their best anyway'), Marshall tackled the lower end of the workforce. Security printing, like the rest of the print industry, was highly unionised. 'Because the company had always been very successful it was understandable that management had not taken on the workforce. But,' says Marshall, 'they had done a wise thing - they had set up manufacturing overseas. When we addressed working practices in Gateshead in 1990, we could do it because of the strength of our overseas plants. There was two or three months disruption, but we were able to divert the work.'

Around 250 redundancies followed, and there were changes in working practices to improve productivity. The Gateshead factory is still less efficient than newer ones in Singapore or Hong Kong. But, says Marshall, the important thing now is that the UK workforce knows what goes on abroad and understands the importance of remaining competitive. 'There's a tendency for the British to assume that overseas people are lowly paid, that they don't have the same level of intelligence or education. But they're absolutely wrong. In the past we didn't tell them about work going overseas. Now we believe we must tell them what's happening.'

Disposals and improved performance have meant extra money for investment and acquisitions. De La Rue is now sitting on a £200-million cash pile, with mounting speculation about what it will buy next. Its biggest purchase to date has been Inter Innovation, a Swedish payment systems company acquired from its founder in 1991.

Payment systems remains the most promising area for future growth. Apart from the recent currency bonanza, printing money is essentially a mature business, growing at a steady 4% a year. It is a very lucrative business, of course, because clients are of the highest calibre and considerations of integrity, quality and service are much more important than price alone. The division has been the traditional engine for growth, providing the cash that De La Rue has used to diversify into other areas.

The company has around 100 international currency customers. Its operational headquarters, in an imposing post-modern building in Basingstoke, is filled with globes and maps of the world, interspersed with montages of currency notes. It first starting printing money in 1860 and now commands two-thirds of the available market worldwide. On top of that, many more currencies are printed using De La Rue machinery, made by its associated company De La Rue Giori.

Most currency customers are smaller or less developed nations, which don't have a central printing facility like that of the Bank of England. The surge in demand from former Soviet republics is the biggest since the dismantling of the empire, observes Michael Pugh, managing director of the currency division and a De La Rue veteran of 25 years. A new currency issue involves four times the number of notes as a normal annual renewal. Designing a new note takes a year to 18 months. Much of the work is done by hand though De La Rue, which boasts the biggest currency design department in the world, has recently developed a unique CAD system to speed up the process.

The main feature of banknotes is intaglio printing, which gives a textured effect to the writing or image. It means the ink never dries but sits in grooves. (If you rub the Queen's head from a banknote on a piece of paper, the ink will smudge).

Intaglio printing is one of the oldest security features in banknotes. It is an expensive process and difficult to copy. Staying ahead of the forgers is, of course, a prime preoccupation. The most frequently forged currency has always been the US dollar (not printed by De La Rue, though made on its equipment), not only because of its international acceptability but also because it is an old design using just one colour that is relatively easy to copy.

'The main threat today comes from colour copiers and scanners,' says Pugh. 'There are more counterfeiters around and we always have to keep one step ahead.' To this end special inks and fluorescent materials have been devised by which the real notes can be distinguished. It all means, says Pugh, that the average life of a banknote design, currently about 10 years, will shorten as new security features are introduced more frequently.

Checking for forgeries is also one of the functions of the sorting and counting equipment made by De La Rue payment systems. 'Sorting is done for two reasons,' says Robert Gardner, managing director of the payment systems division. 'One is to check the quality of notes and the other is to detect counterfeits.' The machines have detectors that look out for certain security features and reject a note if these are not present. 'Usually when a customer is testing new equipment, someone from the central bank will slip in the latest batch of counterfeits to see if the machine will pick them up,' he adds.

A range of machines is available, combining different functions and in different sizes to cater for the needs of a central bank or a smaller branch. But the overriding theme of the equipment is, in Gardner's words, 'to act as a mechanical thumb replacement'.

It was the introduction of ATMs, the hole-in-the-wall cash dispensers, that fuelled De La Rue's first spurt of growth in payment systems in the 1980s. But the greatest potential is now in two other areas. One is EFTPOS terminals for credit and debit cards (De La Rue is already the UK market leader) and the other is in integrated cash handling systems for banks and post offices.

Gardner's vision of the bank of the future is of a user-friendly open-plan area, where all the money is handled by machine. Studies have shown that up to 30% of bank staff's time can be spent counting and sorting cash - that's not only expensive in personnel terms, but also accounts for the layout of banks with ugly partitions between customers and staff to maintain security. 'Two thirds of the space in very expensive high street premises is taken up by back office, with a rather miserable queueing space in front,' Marshall points out.

The problem with this is that people don't enjoy going to banks. The proliferation of ATMs has already kept them away - and fewer visits means fewer selling opportunities for the bank's other services. It is this which attracted De La Rue to Inter Innovation. 'They had become world leaders in persuading banks to move to a more open-plan approach,' says Gardner. More than this, the Swedish company had a number of clients in the vast US market.

So far UK banks have resisted open plan largely because of the cost of refurbishment. While large sums have been invested in computer systems, cash management has been comparatively neglected. 'I go into different banks on a Saturday morning to cash a cheque, just to see how the cash is handled,' Gardner says. 'I look at it from the point of view of what it costs the bank to give you that money. Frequently, the teller has to get up and find more notes.'

In Germany, by contrast, most banks have had open-plan layouts for a number of years, with a central secure point for collecting or depositing cash. It is among De La Rue's most important markets, through its 95%-owned subsidiary Garny. The company sells both security and automation equipment as well as furniture designed for open-plan banking. In a masterpiece of timing, a majority stake in Garny was bought just weeks before the Berlin wall came down in 1989. 'Literally overnight thousands of banks in the East were suddenly faced with a currency that was worth something,' Gardner says. 'They had previously protected security by having a product that nobody wanted.' It was another De La Rue bonanza as Garny won contracts to refurbish banks throughout the East. It even developed pre-fabricated banks as a stop-gap solution to cope with demand.

The one area, ironically, where Germany has lagged is in the use of credit cards. The country, says Gardner, has traditionally had levels of security in banking in excess of international standards which it felt would be compromised by credit-card technology. Now, says Gardner, with the pressure from large card operators like Mastercard and Visa, 'Germany is on the brink of exploding.' This too will mean opportunities for De La Rue to sell its EFTPOS terminals.

De La Rue's third speciality - security printing - is the most fragmented. It covers items as diverse as passports, cheques and payment cards (where it has a 40% UK market share) as well as high-value tickets for concerts or events and gift vouchers for stores. It is a series of waxing and waning markets. The use of cheques, for example, is steadily decreasing and is a low-margin business since most standard cheques have few security features. Credit cards, meanwhile, continue to grow, with new developments like holograms and smartcards.

But the main area for growth will be payment systems. Marshall claims to have his eye on a number of businesses, but none of them are for sale at the moment. City analysts proffer no obvious candidates, though as Marshall points out, neither did they anticipate the Inter Innovation deal. His criteria for acquisitions are certainly tough.'The best', he observes, 'are so close to your business that they disappear as the companies merge. It is very easy to go out and buy things which really don't show long-term synergy - and to get the City to support you.' There is no desperate rush. De La Rue has strong worldwide businesses with plenty of potential for organic growth. Rather than being tempted into unsuitable acquisitions, Marshall would return the money to shareholders. 'If we didn't find anything, we'd give it back,' he says.

But then the avuncular face, with laughing eyes that belie Marshall's reputation as the toughest of businessmen, breaks into a wry smile. 'In April 1991 the founder of Inter Innovation said there was no way he would sell. By November', Marshall adds, 'he had £50 million in his pocket and a consultancy agreement with De La Rue.'

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