Lords Hanson and White, these days awash in a sea of innuendo, will be glad to read some statistical backing for at least one of their claims of injustice.
It is many an ordinary mortal's impression that the impressive profit growth of Hanson plc is something of a sleight of hand - that in fact Lord Hanson makes his profits by wheeling and dealing in companies, rather than by making and selling things. But according to a statistical study by independent consultant Geoff Smith, neither of these is the critical factor behind the legendary annual 35% pre-tax profit rise average of the past five years.
"He doesn't make his money by buying and selling companies. He does it by making these companies perform," Smith observes. He points out that of Hanson's total earnings of £4.16 billion from 1986 to 1990, only 18% came from asset sales. Smith has also analysed just how Hanson obtained its £821 million rise in pre-tax profits over the five years - excluding the asset sales, which are routinely recorded as extraordinary items.
Source of Hanson plc profits
£ million Per cent
Profit before tax up 1986-90 821 100
Improving created value in
relation to sales and pay 455 55
Interest earned on cash
(includes asset sales profits) 150 18
Business growth 216 27
Smith's work shows that, during the five-year period, profits from interest earned on cash reserves (including cash generated by asset sales) accounted for 18% of the total pre-tax profit rise. Growth of the Hanson businesses, ie. sales growth from new and existing businesses, accounted for 27% of the five-year rise. But the primary reason for soaring profits was a genuine improvement in the businesses' performances - accounting for a hefty 55% of the profit rise.
Smith measures performance by looking at how much growth there is in "created value" - that is, the difference between sales revenue and the cost of all the outside materials and services that go into making the products. These include such things as raw materials, electricity and insurance. In effect, Smith has isolated the value added by Hanson plc to outside resources. The value thus created generates an income which is in turn paid out to resources like employees, fixed assets and shareholders' funds.
Overall, what Smith is arguing is that over half of Hanson's pre-tax profit growth is due to the fact that the group makes businesses perform better than they had done before - by some combination of reducing costs, raising prices and increasing efficiency, or by simply doing more business to achieve financial goals.
Smith's findings appear to confirm the conventional wisdom that if Hanson is to retain the love of its shareholders, it needs ever bigger and bigger businesses to take under its wing and reform. Though buying and selling of assets does not generate the bulk of its profits, it is a necessary prerequisite to add on new sources of revenue that can be squeezed to produce the very best profits.
Says Smith: "If Lord Hanson wants to keep lifting his profits by 30%, he has to buy a big and - importantly - underperforming company at a good price. And they're not thick on the ground. The strategy of the last 10 years has probably almost run its course."
"Probably" is not a heartening qualification for ICI chairman Sir Denys Henderson. He would prefer "certainly". But no doubt Sir Denys will be relying not on signals from outside but on inside intelligence (not to mention his own resolution) to prevent ICI disappearing into the Hanson maw.