Interest rates were high and times bad but two young men felt their idea's time had come. By Jim Levi.
If not this autumn, then almost certainly next spring the David Brown Corporation will go public. The event will mark the end of the vital first chapter in the remarkable revival of what has always been one of the most respected names in British engineering.
The turnaround has been achieved in two years and in the teeth of recession. It is partly a tribute to the skills of the new young management team brought in to make the changes. Sadly, it is also an implied condemnation of the sloppiness of the previous management who appeared to make many elementary errors in the way they ran the business.
The recent track record says it all. Once the largest privately-owned industrial group in Britain - its interests had included shipbuilding, tractors and Aston Martin high performance cars - David Brown lost its way in the 80s. Between 1986 and 1990 operating profits slid alarmingly from £6.2 million to only £400,000 as the business retrenched to concentrate on its traditional skills in gears, pumps and power transmission systems driving everything from battleships and tanks to the humble supermarket conveyor belt.
Sir David Brown, whose grandfather had founded the business in Huddersfield 130 years earlier, had quit Britain in the 70s in disgust at a Labour government decision to nationalise his Vosper shipbuilding interests. By the end of the 80s he was ready to sell out.
The buyers were Chris Cook and Chris Brown (no relation), two young engineering industry managers whose combined breadth of experience was impressive, including spells at Hawker Siddeley, TI Group, Jaguar, Lucas, British Steel and GEC. In 1989 they were both working in tandem at FKI Babcock - each running a division of the company. Cook came into industry via a degree in production technology from Brunel while Brown read law at Oxford and then an MBA at Cranfield. Cook is now 41 and Brown 37.
Against a singularly unhelpful trading background the blend of experience and energy of the new young metal masters of Huddersfield pulled operating profits back up to £8.1 million in the first year under their ownership and, in the trading year just ended, the figure rose again to £10.8 million.
Both men first began musing about setting up their own business during the reshuffle of FKI when it de-merged from Babcock. Word of their entrepreneurial interest reached Bankers Trust in London who invited them in to talk about a management buy-in.
Cook recalls: "We both quite fancied the idea but assumed they had a company in mind. They did not. They saw their role as providing the money. We had to find something to buy."
Brown remembers that "within a couple of hours of discussion we had identified David Brown as the most likely target. I had actually tried to buy it myself while running GEC's gears division." He now describes the company as "an ideal candidate for a buy-in in virtually every respect".
It was privately-owned; it had a great name and reputation in engineering around the world. The main bugbear was its weak financial performance. "But we concluded it would be addressable by better management. So we bought it. It took nine months."
Sir David Brown, then in his mid-80s, had retained control of the family business from his exile in Monte Carlo. Cook says of the negotiations: "There were a number of times when he had second thoughts as we went down the negotiating process. It was obvious he would have preferred it to remain in the family as long as possible and at the time one of his grandsons was still in the business. But in the end he came to terms with the idea that keeping it in the family was no longer possible."
In the end, in January 1990, a deal was struck and Sir David collected £46 million and retained a link with the company in his role as its honorary president.
Neither Cook nor Brown had much capital. With mortgages and loans they raised £100,000 each to earn themselves a joint stake of 20% in the business. "Of the £46 million we needed, some £7.8 million came in the form of equity and the rest was debt," Cook explains. "Most of the debt was raised from American and Canadian banks although Midland Bank came in at the 11th hour." Local banks' reluctance to provide the loans was understandable. As Chris Brown points out: "It was not perhaps the best time to do the transaction. Interest rates were 15% and everyone in the City was predicting recession. Meanwhile a number of heavily leveraged buy-out deals - Magnet, Lowndes Queensway and MFI - were going sour on them."
None of this put the two men off nor the venture capitalists from Bankers Trust, Morgan Grenfell, Charterhouse and the local Yorkshire Fund who provided the bulk of the equity finance.
In the circumstances at the time it may have4 seemed a brave, even foolhardy venture but neither man recalls being too worried. "It just seemed an exciting idea and worth having a go at," Brown says now and his partner Chris Cook insists: "I don't remember us sitting around very much thinking it might fail. We were all fired up and convinced the business was capable of doing much better though we did not envisage it being quite so successful so quickly." The patient was certainly very sickly when they took control and began their extensive review. All they had was a financial plan when they walked through the door of the Vulcan Works for the first time to begin a detailed, five-week study of the business which was to provide them with the data for a detailed operating plan.
"We found very weak management exhibited in particular by almost non-existent financial controls," Cook says. "Frankly we were appalled by this. The monthly management accounts were only profit and loss accounts and not balance sheets. Balance sheets were only produced once a year. Thus a lot of vital information about cash in the business was simply not available to management. In a business like this was, bumping up against its borrowing limits, cash performance was obviously the key factor."
Both men were genuinely shocked to find how few people in the organisation had any notion of the cash position - the operating managers in the company's network of a dozen plants were one stage removed from cash controls. An earlier reorganisation had attempted to de-centralise controls but cash management - invoicing, paying bills and collecting debts - remained at the centre of the business.
"We felt the operating units were much smaller than we would have liked," says Brown. "The management of these units did not have enough responsibility and were simply not organised to handle cash matters - a complete nonsense really, since they are the people affecting cash flows day in and day out. They simply did not know how their business was performing in cash terms."
The set-up was a hang-over from the days, not many years before, when the business had been more or less completely managed from the centre. There had been an attempt to de-centralise but it had gone off half cock. "In a way, what you got was the worst of all worlds," says Cook. "It would have been better to have kept it entirely centralised than to do what they did."
If the first impressions were a shock, there was one encouraging discovery. "We found the performance targets being set were very low," says Brown. "We inherited budgets which in certain cases had units targeting to make a loss." He admits now that "what we achieved in the first year was merely achieved by suggesting to people that they were capable of doing better". Local management, he says, often responded by saying they could do better "but nobody ever asked us to before".
"That really was a plus point," he says. "We thought we had bought a business where they were striving to do well and failing. In fact it was not even striving to do well in financial terms. In one unit people were being paid a bonus to achieve a target of a one per cent return on sales."
If financial controls were poor so too were the production systems and the way manufacturing was organised. "The company was back in the dark ages in manufacturing terms," Cook claims. "We had the thinking of the 60s rather than the modern approach to manufacture, aimed at lower working capital and faster throughput times. We had a huge amount of stock for the level of output and despite that, we had very poor customer service."
There was another uncomfortable discovery awaiting the new duo. In its period of decline, training, particularly management training, had been neglected by the company, though in the past, David Brown had been renowned for the quality of such training. "As a result the quality of the management was, it is fair to say, a disappointment to us," Brown recalls. "There was a very wide range of very talented people with shopfloor skills and technical skills at all levels. But there were very few people poised to take up senior management positions with competence." They would certainly have preferred to promote more people from within the business.
"In the end we had to bring about 25 middle and senior managers from outside," Cook says. "We had not expected to have to bring in as many as that. We have now taken steps to grow more management talent in-house." Norman Boyd, managing director or Radicon, the largest division of the group, is typical of the front line management skills Cook and Brown drafted in to help them with what he calls "a massive programme of change, and changes that will have to have the enthusiastic support of the workforce if they are to succeed".
The first changes he introduced were simple ones, a lick of paint here and there, better toilet and canteen facilities "to show them we cared and wanted them on our side". He made, and continues to make, his presence felt on the shopfloor. "In the past senior managers were hardly ever seen there," he says. Now he is down in the workshop most days. "I had the impression that in the past senior managers did not know what was going on," he says.
To poor financial controls, outdated manufacturing methods, poor customer service and lack of management succession could be added a fourth problem: limited sales and marketing skills.
Technically the group possessed great strengths, but those resources were often focused on the most technically challenging areas rather than on those which could earn the best returns. Additionally it had remained, and to some degree still is, an old British and Commonwealth based business.
Brown says the company is "technically at the front of the pack in the areas we concentrate on and it is extremely rare for us to lose a sale on technical grounds. We are as good as or better than the rest." But although David Brown has a presence in a large number of countries, it is not sizeable in Europe and North America and in few segments of the business is it a global player. Two-thirds of its sales remain within the UK and future organic growth strategies will have to be based on building a genuinely international business.
Both men stress their belief that what they found at David Brown "was far from typical of British engineering companies of this size". Cook's view is: "Most of the undermanaged or totally mismanaged companies in the industry had already been snapped up during the acquisition spree of the 80s by the likes of BTR, TI Group and FKI. That was why David Brown was a unique target for us. When we drew up our list of possibly buy-in targets only David Brown and a handful of others met our loose criteria."
Chris Brown has a more jaundiced opinion: "There are elements of all those failings in a number of engineering companies today. The lesson from all this surely is that management must be on the look-out for that sort of decay and sloppiness. It is very easy to get into that position, particularly on the question of setting performance targets." He stresses that it is "so easy to talk yourself into believing that this is the best you can do. My experience in coming in fresh into a variety of companies is that that syndrome is always present to a greater or lesser degree. Incumbent management inevitably tends to believe that however well they are doing, that is the best possible. That is never the case. With David Brown, there is considerable upside."
Both men admit that it would not have been possible during the last 18 months of recession to have got the improved performance they achieved out of David Brown from a large cross-section of the rest of British industry.
But the message", says Cook, "must be that there is always room for improvement. While we have bust a gut here for two years and got considerably better results we certainly would not suggest David Brown is an excellently managed company - doing as well as possible. We have made our mistakes and we have a number of things we want to tackle."
What they admit they have achieved is a short-term financial improvement. Now to take the group on to a higher plain their targets are becoming progressively ambitious. Sales per employee, as low as £30,000 in the mid-80s, reached £50,000 in their first year of ownership and at the end of last finished at £59,000. "Our target is now £75,000 per man," Brown says, "and we already have two companies in the group doing better than that."
Latest results, covering the second year of their reign show, according to Cook, "a small amount of real growth for the first time in several years. We bucked the trend in what was really a most difficult year for most British manufacturers." Sales crept up only slightly from £77.5 million to £81 million but as operating margins and cash controls improved, borrowing plunged from £17.3 million to only £10.4 million and profits before tax surged from £3.8 million to £8.3 million. In two years borrowings have been cut by £14 million "and we have done it without selling the family silver," Cook insists. "A number of MBIs have been based on selling everything off. We did inherit three loss-makers and could not find a mug to buy them so we had to close them, but the turnround was achieved by tackling working capital through better management controls and improving profit performance."
In their first year some £6 million was taken out of the £16 million of stock they inherited, despite an increase in sales. "Nor have we been disinvesting to cut borrowings," Brown points out. "In our second year we spent £4 million - getting on for twice the rate of depreciation - on capital investment, yet we are getting our debt down."
The return on sales, again according to Cook, is "better than a BTR target return at 13.4%". The injection of new management and the reorganisation of the business into four divisions (standard products, vehicle transmissions, special products, and pumps) could not by itself have enabled the group to grow profits and sales through the recession. "In fact we have a wide spread of markets and not all of them have been in recession," Brown points out. "Military tracked vehicles, helped by the Gulf War, have not been in recession and neither has the petrochemical industry. Elsewhere we have simply had to run faster or enter new markets." One they successfully entered last year was rail traction gearboxes and they now supply British Rail's latest 225 InterCity expresses. "If you can take 5% of a market you were not previously in, most of the other players will not notice," Brown says. "There are a lot of potential markets like that for us to attack."
In the countdown to flotation David Brown has appointed City bankers Barclays de Zoete Wedd to map out the ground, while Derek Kingsbury, who brought the Fairey engineering group to market out of the Pearson empire in the mid-80s, has recently joined the company as chairman.
It is now clear that Cook and Brown intend to build David Brown into a major international engineering business. "Organic growth is an important element in our strategy, but that alone will not match our aspirations," they say. "We intend, through acquisitions and partnerships, to play a leading role in the international rationalisation beginning to take place in our business."
They are not waiting for a quote. A couple of small businesses have already been acquired in recent weeks and an intriguing joint venture with a Hungarian rail equipment company has been forged to give the group its entree into the eastern European markets.
A further rise in profits seems likely in the current year and a stock-market value for the business of the order of £100 million seems a reasonable expectation. It would give the two new heroes of Huddersfield, home town of Lords Hanson and White, a paper fortune worth around £10 million apiece.
They both enjoy working as "a doubles team" though each separately manages two divisions of the corporation on a day-to-day basis. "You are less likely to make a big mistake working as a twosome," says Chris Brown. "When you come to your big mistake your partner is likely to spot it ... and stop it."