Fairey has transformed itself from an ailing defence and aerospace business into a prosperous electronics and electrical power firm. No mean feat, reports Jim Levi.
To survive in today's austere climate, Britain's industrial companies must either adapt or die. To his credit this was something Derek Kingsbury recognised well before the recession began. As a result, Fairey is not merely a survivor, it is in rude good heath. Indeed, the company Kingsbury secured from the Pearson publishing and banking conglomerate, in a management buyout in early 1987, is showing such resilient profits progress it has become a darling of the City fund managers.
Profits at the time of the buyout were £4.2 million but by 1991 had reached £14.5 million. They are expected to reach about £17 million for 1992 and perhaps £20 million this year. This feat has been achieved by retrenching skilfully in the aerospace business and by expanding through a series of modest acquisitions in the industrial electronics field, assisted by cash generated from solid if unspectacular interests in areas like industrial ceramics and insulators for transmission lines. Today, well over 60% of group sales are overseas.
In the traditional aerospace and defence field - among other things Fairey makes the flying controls for the Tornado - profits have come down from about 45% of the total at the time of the management buyout in 1987 to only about 10% in the latest half-year returns for 1992.
A company like Fairey could easily have clung fiercely to its proud historical roots in aviation - but with disastrous consequences. Its origins go back as far as making planes in the first world war, and in the last war its Swordfish bi-planes sank the Italian fleet at Taranto, and crippled the German battleship Bismarck. This ultimately led to its sinking on 27 May 1941 - or scuttling by the Germans themselves, depending on whose version of the event you choose to believe.
But Fairey also has a long tradition of adapting to change. The maker of the revolutionary Fairey Delta, a forerunner of Concorde, and the even more remarkable Rotodyne vertical take-off passenger aircraft, the company ceased to make planes altogether as long ago as 1960 to concentrate on making components.
Derek Kingsbury, an engineer by training, joined Fairey in 1982 from the Dowty Group. Within two years he had bought Red Lion, a Pennsylvania-based maker of displays and controls for a wide range of machinery. Kingsbury was so impressed with the performance of this business - it has grown 20% annually since he bought it - that he decided he wanted more of the same. And this became the basis for the decision to expand rapidly in industrial electronics - which has taken place over the past two years.
Fairey now operates in three broad areas: aerospace, where profits and sales have been in decline; filtration and ceramics, where profits and sales have been at a virtual standstill because of the recession; and electronics and electrical power, where profits and sales have been bounding ahead.
It has, over the past five years, effectively turned itself from a defence and aerospace engineering business into an electronics and electrical power company with over 70% of profits from that source.
The strategy, worked out between Kingsbury and present chief executive John Poulter as the company prepared for a stock market listing in the autumn of 1988, has proved admirably suited to the times. Poulter, with a background as a physical chemist, joined Fairey - shortly before the stock market debut - from BTR where he had run one of the Thomas Tilling operations. A year ago Kingsbury, now 67, handed Poulter the reins of power while remaining non-executive chairman. It has been a smooth and predictable transfer.
"The acquisition activity really got under way in the second half of 1991," Poulter explains. "We have gone from having one very successful industrial electronics business at the time of flotation to a position today where we now have five such businesses."
Fairey bought LaserMike, a leading company in the field of laser measurement equipment in the US in late 1991. This has been followed by the purchase of Arcom, a UK market leader in key components for custom-built industrial computer systems, and the more recent acquisitions of Infrared Engineering, another market leader in its field of infrared gauges in the UK. Finally, in November 1992 it bought an American infrared measuring business called Ircon.
Stockbrokers Albert E Sharp expect 1993 profits to reach about £19 million. The electronics and electrical interests could easily chip in more than £13 million of that total.
Derek Kingsbury, John Poulter and the company's long-serving finance director, Michael Fay, "share a certain conservatism about finance," according to Poulter. It explains why, despite promises to expand in electronics at the time of the flotation of the shares, the company did not hit the acquisition trail sooner. Indeed even after spending over £30 million on acquisitions over an 18-month period the company still had no net borrowings as 1992 ended. Clearly had there not been such a cautious approach to acquisitions, Fairey could have borrowed to buy even more businesses. "We felt there were three priorities for the group after the share flotation," says Poulter. "We had to establish our bona fides with the investment community which in late 1988 and 1989 was not terribly easy."
A second priority was just as pressing - the need to sort out the aerospace business. One of Poulter's first tasks on arriving from BTR was to find a new man to run that business. John Frost was appointed early in 1989. These two issues, it was felt, needed to be addressed before rushing into any expansion in electronics.
"In 1988 our aerospace business was on three sites and employed about 600 people," Poulter recalls. "It was somewhat dependent on the Tornado aircraft - a programme that was clearly coming to an end. Urgency was added to the situation by the ending of the cold war, the defence budget review and the clearly declining perception of the size of the whole defence market."
Both Frost and Poulter grasped that nettle quickly and as a result, by the end of 1991, the aerospace operation had, in Poulter's words, "been established with a substantially new management team in a single refurbished and expanded site near Bristol employing 300 people". He adds: "It remains profitable at a much lower level of sales as befits the climate in which it is now living."
Brokers James Capel suggest that the aerospace division will perhaps make a profit of £1.8 million this year on sales of perhaps £20 million compared with profits of £3.4 million sales on £34 million in 1987.
Managing such a shrinkage while maintaining profitability throughout cannot have been easy although the company did have a stroke of luck in selling its original headquarters site in West London to General Accident for £9 million before the property crisis really started to grip the market.
An unusual side effect of this radical change in Fairey's product mix is that over the five years from 1987 to 1991 sales have risen only by £11.1 million to £88.8 million while profits have grown by almost the same amount by £10.3 million to £14.5 million.
The triumvirate of John Poulter, Michael Fay and Paul Boughton, the commercial director, runs the dozen or so operating subsidiaries in Britain and the US from a nondescript new head office in Egham in Surrey - deliberately located near both Heathrow Airport and the M25 motorway.
All three sift through a steady stream of potential takeover targets and reject the vast majority of them. It is particularly notable that they have gone for companies which are already successful, with good products and well positioned in the marketplace. "It has not been an overhead cut and strip operation," Poulter insists. "We would not shirk from that as we have shown in the aerospace side but we have bought businesses with strengths in their own right which we believe might respond to sympathetic ownership."
Paul Boughton, who joined Fairey just at the time when the first major electronics acquisition, LaserMike, was being completed, spends much of his time searching for appropriate new targets.
"There is an obvious sort of acquisitions supermarket with a lot of junk in it," he says, "and there is a not so obvious supermarket which is not so easy to find and where the better quality merchandise is not often for sale." He stresses that the three of them work closely on acquisitions with no "artificially constructed barriers between us on what we do particularly on the financial side. I can go and buy a company such as Ircon, and we can have a relatively painless and seamless transfer of issues which have been my responsibility to Mike Fay, leaving me free to withdraw and start looking at other prospects."
Poulter says he can oversee the process by looking at a company and spotting some aspect that he feels might not be quite right and which Boughton can investigate further on a follow-up visit.
Poulter sees the advantage of a small head office - there are only about a dozen people - in that the three of them "can interact informally a great deal although of course we do have formal meetings".
Derek Kingsbury is on record as not liking debt, an approach which has served the company well in the recent past. But with interest rates now falling Michael Fay is prepared to contemplate modest borrowing levels. "A gearing of 25% might be beneficial for our shareholders," he says.
All operating companies in the group report in direct to Fairey's top management - there are no layers of management in between. "It is a well-calculated and well-planned approach," says Fay, "with our management reporting systems comparing favourably to those of larger companies."
Poulter devolves nitty gritty decisions over product development and marketing to operating managers but there is what he calls "a hefty interaction" between head office and those operating managers.
When assessing how Fairey has prospered through recession Michael Fay puts it down to several influences, including an element of good fortune: "The pat answer is that we have been in some key niche areas. But we have also maintained our tight financial controls and we have not been stupid in terms of expansion. The other factor is that our exposure to recession in the construction industry has not been too great."
Poulter elaborates: "There has been no special formula. It is just a question of being single-minded in managing the business and in having a high degree of commitment to it. It has been a question of tackling problems, finding ways out and looking after the cash at the same time."
The obvious question now is, with Fairey shares riding high, would Poulter and his colleagues be prepared to change their cautious approach of the recent past and make the kind of "quantum leap" acquisition which so often hit the headlines during the 1980s?
It seems unlikely. Poulter, however, will not rule anything out, but says he is "not uncomfortable with the direction we are going in. We would not wish to be described as acquisitive - just taking such steps to expand in a measured fashion as are appropriate."
Boughton does not rule out acquisitions in other areas outside the field of electronic controls for industry but insists "it is still an area of great opportunity both in the UK and the US". He believes that the fact that they have been buying businesses through the recession has great advantages: "It is a great leveller in sifting out the genuinely quality businesses. When we do our checklist of acquisition prospects we always ask ourselves: how well have they coped with recession?"
In Fairey's own case the answer would have to be very well indeed. Poulter is not banking on recovery, believing industrial companies may have to come to terms with a prolonged period of austerity. "A lot of people have come unstuck in expecting recession to end earlier. It certainly has not ended yet."
For reprints of this article, contact Anne Oakley (071) 413 4336.