Companies can be typecast like characters in a spaghetti western - but need they be? A comparison of three corporate players considers whether their performance was shaped as much by management style as by the sector in which they operate.
Remember the spaghetti western? There was never any doubt that Clint Eastwood was the good guy. Tall, dark and handsome, a man of few words and as tough and uncompromising as his villainous rivals, he was always going to be a winner. He was the one who could be relied upon on to deliver when the chips were down. The others were less clear cut. There was just a chance that the ugly one might turn out to be a little less unreliable than he looked. But anyone putting his trust in the bad guy was obviously going to be disappointed, for leopards do not change their spots.
Corporate players - rated by their financial performance - lend themselves to much the same classic typecasting. There's the world class operator, the star of the show, who brings back the prizes time after time. There are also companies which appear past their peak or all too likely to be shot to pieces in some bloody merger battle. Yet occasionally they show sparks of life which suggest that they could have a future after all. They will stand in for the ugly. The bad are those with an indifferent record, whose endeavours generally go wrong, which always seem to be buffeted by fate and never properly in control of their destinies. The FTSE-100 has some fine interpreters of all three roles.
But companies are not at the mercy of some almighty casting director. True, they each have a different history and a culture which it may be difficult to escape or adapt. They belong to different industries, they have their own management styles and ways of working. But they are also - or they should be - capable of learning and of change, so why should they be so insistently typecast? Is it because they have become trapped within a particular business environment from which there can be no escape, or does the fault (in the case of the bad and the ugly) lie in themselves? We decided to look closely at one representative of each type to see what could be learned.
The Good - Reuters
The Good can fairly be represented by Reuters Holdings. Reuters was founded in London a little over a century ago, when the eponymous Paul Julius took advantage of the new Channel cable link to gather and publish opening and closing prices on the Continental bourses. Disseminating information - particularly financial news - has been its business ever since. Although Reuter died in 1899 the company remained in the family's ownership until the mid-1920s when the Press Association acquired control. Early in the last war the Newspaper Proprietors Association took a 50% stake.
For the next four decades Reuters' management was allowed to get on with the business of collecting and transmitting news, as, in effect, a non profit-making organisation. In spite of the relative lack of pressure which this implied, Gerald Long, chief executive 1963-81, was alert to the threat that the computer posed to the news agencies' traditional teleprinter technology. In 1964 Long signed a licensing agreement with Ultronic Systems of New Jersey, whose Stockmaster system provided US security prices. This gave Reuters the right to Stockmaster outside the US. It also gave the company access to new technology at a time when its owners were unlikely to have accepted the capital risk that would otherwise have been involved.
The jointly-owned Reuter Ultronic Report, which spanned the technologies - being deliverable by teleprinter or VDU - was introduced the same year. It was followed in 1970 by a screen-based service, Videomaster. But in 1972 the UK partner took over the whole enterprise and renamed it the Reuter Financial Report. The joint venture had been a great success for Reuters: Ultronic put up £3.4 million of capital which Reuters could not afford, and Reuters made total profits of £4 million. (At the same time, its operating margins grew from 0 to 5%.) But the joint venture had to end if Reuters was to seize a unique opportunity to expand its screen-based information services. This was brought about by the collapse of the Bretton Woods Agreement in 1971, which ended the period of fixed exchange rates and opened the flood gates to foreign exchange dealing and associated developments in the money markets.
The company was now financially strong enough to take the next step alone. This was the launch of the Monitor, a screen-based system like the Videomaster. The innovation was that it gave prices for markets where there was no central price quotation. Andre Villeneuve, now a director, recognised that the lack of a central market (as in, for example, a stock exchange or an open outcry market for futures) presented Reuters with a wonderful opportunity. Transactions in the forex and money markets were conducted between banks and brokers by telephone. Villeneuve saw the advantage of getting market participants to input their quotations and so advertise their dealing rates to others.
The Monitor was launched in June 1973 with 15 contributors-cum-recipients. The next year 109 Monitor contracts were signed. From that point growth took off, as demand for information exploded along with the volume of trading in financial markets. In the 10 years beginning 1984 - when its six major owners brought Reuters to the market, raising £100 million each - the company's revenues climbed from £313 million to over £2.3 billion, an average annual increase of 22%.
At the same time profits were buoyed up by Reuters' generous margins. These expanded from the 5% attained with Videomaster to over 20%, with the result that earnings per share marched closely in step with turnover. A combination of high revenue growth with no slackening of margins is - to say the least - unusual. Moreover cash flow moved in line with profits, bringing a huge increase in shareholder value. In real terms, Reuters has been taking funds from the capital markets at 6-7% and investing these for a return of 20%-plus. Such was the effect of the global dominance that the company achieved in the business of supplying price information to the financial markets.
The family of information products which had their genesis in the Monitor continues to throw out cash like a golden fountain. The Monitor Dealing Service, launched in 1981, enabled subscribers to conduct trades via their terminals. The possibility of using the screen-based system as a mechanism for dealing had been foreseen in Villeneuve's 1972 paper, but was not pursued at the time on account of technical difficulties and possible customer resistance. With the introduction of transaction services - the main ones being Instinet (the equity dealing service) and Dealing Room 2000 (for matching foreign exchange bargains) - Reuters ceased being dependent on a fee income calculated according to the terminal population and use of pages, and was able look to an income based on the volume of transactions.
The question now is whether - or how long - Reuters can keep the various measures of performance galloping ahead, and preferably together. During the past year or so there have been unmistakable signs of a slow-down, and the fact that the company has been diversifying into television and radio, and into several niche markets for computer-driven information, is only part of the reason. It has made acquisitions in the areas of advertising, education and medicine, as well as introducing more products for business and financial users. It has also bought additional software skills. Looking to the future, the new services could help to bridge any gap, but they are by no means all profitable yet, and their ultimate size and shape are quite impossible to discern.
Followers of Reuters currently seem agreed that, for the foreseeable future, the company's growth and income stream will continue to be fed mainly by extending its present information systems into more and more geographical markets, while devising further add-ons for existing customers.
The Bad - Rank
Representing the Bad we have The Rank Organisation. The company was formed in 1937 out of the Odeon Theatres chain put together by J Arthur Rank. The present name was adopted in 1955. The following year saw the conclusion of one of the most miraculous deals in commercial history. Rank put up £600,000 for a 50% stake in a venture called Rank Xerox which was granted the world rights (excluding North America) to an unproven reprographic process. As everyone knows, xerography was an almost instant success. Rank Xerox - virtually independent although officially managed by Rank - soon towered above its UK parent's other interests, and went on to nearly 20 years of uninterrupted growth before feeling the first real impact of competition. Rank, meanwhile, its share price held high by Rank Xerox, invested in bingo halls and motorway services.
In 1962 Lord Rank handed over the chairmanship to his right-hand man, John Davis. After Rank died in 1972, Davis moved the company's centre of gravity away from its longstanding concerns of leisure and entertainment, and towards property investment and manufacturing. The policy proved less than successful. Between 1979 and 1982, pre-tax profits slumped more than 50%, which led to institutional pressure for management changes. Sir John Davis retired and one of the non-executives, Sir Patrick Meaney, moved into the chair, while Michael Gifford, finance director of Cadbury Schweppes, was brought in as chief executive.
The new management disposed of most of the unprofitable activities, retaining the original leisure and entertainment businesses and, of course, the Rank Xerox stake. (The Rank Xerox agreement had by then been twice amended, first in 1963 to transfer Central and South American revenues to the US partner; and again in 1969 when Xerox Corporation assumed operational control.) By the mid-1980s, however, the new management was back on the takeover trail with a vengeance.
In 1986 Rank paid £68 million for Ladbroke's bingo and amusement centres, and a further £38 million for Haven caravan parks. The next year came Showboat amusement centres, and in 1988 a caravan parks operator in the US (for £95 million) along with Video Duplication (£85 million). At the close of the decade the company acquired Canadian Film Laboratory, a 50% investment in Universal Studios Florida (for £115 million), plus more bingo clubs. And in 1990 it concluded this spree by laying out almost double its total spending on acquisitions over the previous four years to buy Mecca Leisure.
All the purchases were squarely in the field of leisure and entertainment with which Rank could claim close familiarity. But the £895 million Mecca acquisition has been widely seen as at the root of Rank's poor performance since 1990. (The next year profits of Rank's own-managed businesses abruptly halved.) It was all too reminiscent of the misguided acquisition policy which led to the earlier crisis. But, looking again, it appears that the acquisitions were not the cause of Rank's malaise.
The fact is that Rank, though often trumpeted as Britain's leading leisure conglomerate, cannot really point to sustained success in its chosen field. It has been into - and out of - too many sub-sectors, often buying close to the peak and selling when the market had collapsed. The recently divested hotel chain is the latest case in point. Rank began in film distribution which led to production, which it later abandoned. It is now back in film finance. It joined the rush into marinas. It bought a chain of pizza houses and sold them four years later. Butlins was once a major business in its own right. Today it looks rather sad as a downmarket sub-division of Rank.
This sorry tale has lately taken an alarming twist. Despite continuing troubles, Rank's own-managed operations recovered from the low point of the early 1980s, and for half-a-dozen years their combined profits exceeded the contribution of Rank Xerox (which had problems of its own). But since 1991 normalcy has been restored. Even with Mecca et al, Rank-managed businesses have accounted for less than 50% of the group's net profits. Over half Rank's profits were therefore outside the control of its management. Moreover it appears that Rank shareholders will never be able to realise the true value of the Rank Xerox stake.
In January Rank announced the sale to Xerox Corp of 40% of its remaining interest in Rank Xerox at a multiple of 11 times historic earnings. This came at a time when Rank Xerox's profits were rising sharply under the triple impact of cyclical recovery, rationalisation benefits and penetration into growth areas such as digital publishing and colour reproduction. The price undershot analysts' calculations by a considerable margin. Clearly Rank failed to achieve any premium on the sale.
This leaves Rank with a new problem, which is to deploy the £620 million proceeds in such a way as to make good its loss of earnings from Rank Xerox. The poor capital value realised by the sale is itself a handicap when it comes to generating a replacement return. Yet Rank currently appears intent upon spending more than £1 billion over four years on such fickle enterprises as Oasis holiday villages, bingo clubs and Hard Rock cafes.
The Ugly - GEC
General Electric Co has many admirers. Why should it be selected to represent the Ugly? One answer - in the context of this article - is contained in the graph. Over the past decade GEC has the worst share price performance of any of the three companies featured here. Its share price relative peaked in the early 1980s, with the end of the bull market in electronics stocks, and has never recovered despite a rally during the recession, which reflected the group's defensive strengths.
GEC can show the greatest continuity of management among the three companies. Lord Weinstock has been managing director since 1963. His finest hour came in 1967-68 when he created the UK's biggest electrical-cum-electronics manufacturer via the acquisition of Associated Electrical Industries, followed soon after by the merger with English Electric. These amalgamations took place under Labour and were actively supported by the then industry secretary, Tony Benn. Weinstock was knighted under Labour and was one of Mrs Thatcher's first life peers - an unusual record.
In his first decade at the head of the enlarged group, GEC was not only the dominant force in the UK industry but a power in the world, big enough to be mentioned in the same breath as, say, Siemens or Philips. Like Siemens, GEC covered the waterfront. It was built up of sub-groups specialising in power engineering, telecommunications and electronics, components and consumer products. Its top management, like the Government, was much preoccupied with industrial structure, and in particular the place of computers. Weinstock once likened restructuring industries to sculpting in marble. 'First you knock the material roughly into shape with a hammer, and then go to work with a fine chisel.' Nevertheless, the style of management adopted by Weinstock at GEC meant that even major operating decisions were taken at the level of the sub-group or business unit. Top management kept tight control of finance through a rigorous system of budgetary control. Operating managers were required to present one-year budgets, and then to explain their achievement in the light of these figures. Failure to meet budget earned severe rebuke. It may be that fear of failure engendered a culture of caution. In any case GEC has produced consistent returns - and built up the famous cash pile - but largely failed to generate growth.
Over the past dozen years, for example, pre-tax profits have grown at just 2.4% compound. In recent years, too, the reluctance of head office to accept returns from new projects which were lower than existing returns has kept the money in the bank, and further limited the group's capacity for generating growth.
In the 1980s the cash pile was one of the two outstanding features of GEC: it reached £1.2 billion by the end of the decade. The other was the number of troublesome, high-profile public sector contracts. The Nimrod early warning aircraft was cancelled by the Government after £1 billion had been spent. GEC had to compensate British Rail over the HS125 locomotive. There were problems with the Foxhunter radar for the Tornado. It seemed that GEC's main businesses had a regrettable taste for cost-plus public sector contracts which did nothing to promote efficiency.
GEC's reluctance to part with its cash pile was justified on the grounds that the money allowed flexibility for manoeuvre. Yet in the late 1980s it could have contributed to the company's demise. As it turned out, the threat of a break-up bid from the Metsun consortium quickly evaporated. The episode may even have stiffened GEC by helping to shape a new vision of the future and a new strategy for its main businesses.
Lord Weinstock had made repeated attempts to capture Plessey, in order to combine that company's telecommunications business with his own. In 1988 he succeeded in a joint bid with Siemens which led to the formation of GPT, in which GEC has a 60% holding. While GEC has the controlling interest, however, its partner is a vastly more powerful company, having moved over 20 years into an entirely different league. The following year GEC merged its power engineering-cum-transportation business with that of Alcatel Alsthom to form GEC Alsthom. In taking the joint-venture route, GEC recognised the need to compete globally in these sectors, something it was unlikely to accomplish with its roots in the UK. As a result, non-UK sales have increased from 45% of the group total in 1988 to 70% today.
Even after seven years, however, the restructuring represented by the joint ventures has still failed to deliver growth. It might be added that joint venturing is far from being a risk-free strategy. The interests of the parent companies invariably diverge over a period of time. So do their relative strengths, and (as in the case of Rank Xerox) a successful venture generally ends up belonging to the stronger partner.
GEC is nevertheless a very large group, and one whose businesses have often had to contend with poor market conditions. In the now dominant defence sector GEC-Marconi has faced a long downward trend in military spending since the collapse of the Warsaw Pact. A declining market, however, has in no way diminished the group's appetite for defence contractors: witness the recent £800 million acquisition of the submarine builder VSEL which, added to the frigate yard on Clydeside, makes GEC the biggest warship builder in the UK.
It is commonly supposed that the group's next target will be British Aerospace. Why - if the story is true - Weinstock should want to gather the entire UK defence industry within the folds of GEC only he may know. The notion that he is determined to recover the group's military aircraft division which he lost on nationalisation in the 1970s (it is now part of BAe) is hardly sufficient. Whether the acquisition of another large, mature, British engineering company is in the long-term interests of GEC must be open to doubt. Is Weinstock once more playing the industrial sculptor? Or is he considering the best interests of shareholders? Maybe he is, for it's true that defence contracts (when they don't overrun) can still be highly rewarding.
So there it is: three big British companies in different industrial sectors. Each has its own management style and approach to matters such as strategy and planning. Each has a record of financial performance which is quite unlike either of the others. Is there any connection between the performance and the style? Indeed, it would be surprising if there were not. If that were the case the business schools might as well close their doors and send the professors out to earn an honest penny in the real world.
The first point to observe is the continuity both of style and of management. Over a period of 30 years GEC has been headed by one man, Rank by two (at chief executive level) and Reuters by three. Reuters' Gerald Long was a journalist turned manager who developed a powerful interest in systems. So was his successor, the Australian Glen Renfrew, so is the present chief executive Peter Job. Professionalism, and a detailed understanding of the company and its business derived from working through the ranks, is what they have in common. It has been to their advantage, of course, that the troops they lead (or led) are also professionals - not least because this implies a large pool of talent from which to choose. As Job has observed, 'The people who run this company have been here a long time'.
Oddly, in the light of the record, Reuters is widely regarded as a conservative business. It spends about £150 million on R&D - a minute percentage of its annual cash inflow - and from time to time it makes an equally affordable acquisition. But it certainly does not spend money because it has money to spend (indeed it has returned sums to its owners by way of a buy-back of shares). Management is not addicted to grand strategies or long-range planning. Rather, it uses acquisitions to feel its way into new market areas in order to accumulate knowledge and design products to fit. It would never, Job insists, leap into an unfamiliar area or buy an unrelated business.
Rank has a tradition of hands-on management, the dictatorial Sir John Davis having been succeeded by the authoritarian Michael Gifford. Both were reputedly formidable figures men. Davis, a chartered secretary, was once chief accountant at Rank. Gifford trained as an economist and has previous experience in computers and the food industry. Rank operates a system of four-year plans. Yet it is difficult to see how any such document can have lasted the course, for Rank's history is a litany of disappointed hopes, large and small. As an example of the latter, Rank failed to win the right to run the National Lottery which is now strangling its bingo business in the UK. Rank seemed to have a talent for moving in on businesses as they approached their peak, and then watching the bookings fall away - hence the continual reorganisations in its leisure divisions. For most of the past 30 years (and more) this was possible only because the company was buoyed up by its holding in Rank Xerox - an investment that had been acquired almost fortuitously, since no one could have foreseen what followed. The price at which it was obliged to part with this stake shows how weak Rank's bargaining position had become compared to that of Xerox.
Lord Weinstock is the same man that he was 30 years ago, as subtle and uncommunicative as ever. It is said that he seldom if ever visits a factory. But practising his brand of conservative financial management in his office off Park Lane, he still exercises full control over a group which, although it has changed dramatically, is also recognisably the same. Weinstock has been accused of short-termism, of stifling initiative at oppressive budget reviews and of looking for a quick return while neglecting the future; alternatively of pursuing grandiose designs which have little to do with giving value to shareholders. But no one outside his own circle knows for sure what vision Lord Weinstock has for GEC, or had in the past.
What's certain is that he could, had he chosen, have led the company in other directions. There is an instructive comparison to be drawn between GEC and its US namesake General Electric. The two share more than a name: they have similar operations in power engineering and transportation, etc. There are also differences. But whereas Weinstock opted for gradualism, GE has been radically restructured under CEO Jack Welch. Numbers of divisions have been divested - which would be anathema at GEC. In particular, while GEC has been strengthening its defence interests, GE responded to the outbreak of peace by selling its defence aerospace business for $3 billion. It may not be irrelevant that GE's pre-tax margins in 1994 were 14.4% compared to GEC's 8.9%, or that GE's compound growth in EPS over a five-year period was 12% against 7% at GEC.
Of course there is nothing conclusive about such comparisons. There are as many ways of managing as of skinning cats, and what works in one place will not necessarily work elsewhere. Other good - and other less good - companies will exhibit very different characteristics. All the same, there are certain consistencies between the patterns of behaviour and the performance of the three companies featured here which managers might be wise to ponder.