A study carried out for Management Today by Dennis Henry and Geoff Smith of P-E International looked at the leading managed investment funds created by takeovers. It shows that from 1985 to 1990 Hanson increased earnings per share by 85% and assets per share by 47%. Pre-tax profits rose by £821 million, but business growth accounted for only 30% of the increase. Improving created value to sales and pay added a hefty £426 million, or 52%, to profits. At BTR and Williams Holdings the picture was the same. Improving created value to sales and pay added £464 million, or 64%, to BTR's pre-tax profits and £104 million, or a whopping 70%, to the Williams name.
All three companies are clearly flourishing, but their strategies for maximising value reflect the different route that each has chosen. BTR's traditional policy consisted of purchasing only within its field of competence, though under its new chief executive, Alan Jackson, the group will be shifting to a more Hanson-like role. Jackson is prepared to resell up to 30% of the assets from newly acquired companies, rather than restrict himself to those where BTR's strong management skills are applicable.
Jackson's achievements in Australia herald fair for a big buy later this year, but Williams' Nigel Rudd has already pulled off his 1991 coup. The £404 million acquisition of Yale and Valor, the locks and heating group, finally took his company into the FT-SE 100 share index; it is also rumoured to have added some £2 million to the company's profits so far.
However, unlike Lord Hanson, who believes that a business has its price and who feels no qualms about selling anything, Rudd invests in what he buys. He operates by purchasing firms with a big market share, then spending and pruning as appropriate to turn the company round.
But, though takeovers may be a vehicle for liberating value, it is specific improvements which count for most. The P-E International survey shows that in every instance the single biggest value driver was created value per pound of pay, which produced uplifts in performance of 22.6%, 20% and 32.6% respectively. In other words, operating efficiency factors are more critical in enhancing shareholder value - and hence share price - than business expansion or, indeed, the restructuring of assets.
Since EPS is a measure of revenue rather than efficiency, its relevance is at best limited. In fact the findings of P-E International show an almost random correlation between growth in EPS and growth in shareholder funds. But the crucial question is whether senior management continues to believe in its validity as a tool for deciding corporate strategy.
Take, for example, the troubled Ocean Trading and Transport. In 1986, despite a turbulent decade in the shipping industry, OT and T had 76% of its capital sunk in container vessels. Then, with corporate raider Sir Ron Brierley breathing down its neck, the company sold off its transatlantic and West African fleets, to concentrate on freight forwarding and environmental services under the new name of Ocean Group. But, though this strategy has driven up EPS (and may well prove rewarding in the longer term), it has cost its shareholders dear. Shareholder funds have plummeted by 20% from their 1986 high.
Building and minerals group Hepworth has likewise been hit by industry-specific troubles. High interest rates initially hammered the housing market, and hence its domestic heating business, but now the commercial and industrial markets have also slumped. Some peripheral acquisitions have further eroded Hepworth's shareholder value.