Twice it came close to eclipse, but the new management team of Rudd and Leverton believe that Britain's flagship glassmaker now has the momentum to exorcise the ghosts of its recent past.
In the heart of St. Helens, the Merseyside town most famous for its Rugby League team, stands the 12-storey 1960s tower block that used to house the large head office staff of Pilkington. Today, only a handful remain - after heavy streamlining over recent years, the glass-making giant rents out most of the floors.
Roger Leverton, chief executive since 1992, and Nigel Rudd, the Williams Holdings chairman who took over the Pilkington chair last year, want to move out altogether into something in St Helens that would be tailored both to a smaller staff and the information technology requirements of the late 20th century. In their way, unfortunately for them, stands Virginia Bottomley, the heritage secretary. She has listed the existing building, making it very difficult for Rudd and Leverton to sell. There, for the moment at least, they have to stay, saddled with a monument to the group's past when their concern is its future.
But the headquarters is practically the last completely intact relic of Pilkington's traumatic modern history. Most similar totems have gone, or are in the process of being destroyed by the combination of Leverton's work over the past three years and Rudd's instant impact. The group now appears well set to enter the next century with a clear lead over its rivals, as one of the very few British companies that is both a technological and commercial pace-setter on a global scale. It is the first time that Pilkington has enjoyed such pre-eminence since Sir Alastair Pilkington (despite his surname, not a scion of the founding family) put the Lancashire company at the forefront of the world industry by inventing the float glass process in the early 1970s.
Until recently, it was by no means certain that Pilkington would make it through this decade as an independent company. Twice within the past 10 years it has come close to eclipse - first because of the £1.2 billion takeover bid launched by BTR in November 1986, then during the early 1990s recession when it reaped the whirlwind of disastrous diversification.
Pilkington's brushes with disaster stem from its history. It is one of the oldest firms in Britain - it originated in the St Helens Crown Glass company, founded by the Pilkington and Greenall families in 1826 - but it is a relatively young public company. It did not join the stock market until 1970, and its near-fatal problems in the past decade can be traced to a cultural conflict between the paternalist habits of a family firm, ingrained over 150 years, and the unbridled demands of shareholders for profits and earnings growth.
Not that Pilkington has ignored the City - many of the group's difficulties have been caused by misguided attempts to please the financial community. But in trying to do what it thought the City wanted, Pilkington lost touch with management fundamentals. As a result, it not only squandered resources on misconceived diversification, but failed to adjust the core business to changes in the marketplace - thereby threatening to undermine the whole company.
The biggest shock to the Pilkington system was BTR's bid. Until the predatory conglomerate pounced, at the tail end of the late-1980s takeover boom, the St Helens company had been living a quiet life for such a large public concern.
Under Sir Alastair Pilkington and his successor Sir Antony - a descendant of the founding fathers, who became chairman in 1980 - it had gradually expanded its glass business internationally. Pilkington used a combination of licensing deals and, eventually, strategic acquisitions, such as the purchase of a 29.5% stake in the American combine Libbey-Owens-Ford, which it exchanged in March 1986 for ownership of L-O-F's glass division - a big supplier to General Motors - and the L-O-F name.
Then came BTR. Sir Owen Green, BTR's chairman, saw Pilkington as overmanned and undermanaged. 'Pilkington was very much a family-orientated company. It ran on a family basis,' he said later. Thanks to its dominance of the UK building glass market, Green also viewed Pilkington as a 'registered monopoly'. BTR was ready to pay up to £7 a share for Pilkington. It dropped out of the bid when the City started to ask at least £9, partly because of a huge profits forecast by Pilkington but particularly because of the switch in public and political sentiment against hostile bids that had been triggered by the Guinness scandal, which broke over Christmas 1986. Green pulled out, although BTR retained a small stake in Pilkington, and with it the threat of a second bid, for almost five years.
Hostile bids that fail can produce highly beneficial effects, galvanising the defending side into action which transforms the company for the better. But while the BTR bid certainly had a catalytic impact on Pilkington, the changes it triggered led the company to the brink of self-destruction.
The only positive result was a reduction in the workforce, generating cost savings without which Pilkington had no hope of meeting the profits forecast that had helped to save it. But the psychological impact of the bid was something else. According to one senior British executive who knows Pilkington well: 'The company was deeply scarred by the BTR bid. Even today, a lot of the conversations go back to 1986-87. Clearly, the bid was the most traumatic thing to happen to the company in the past 30 years.' Pilkington had won, but the victory did nothing to help it reconcile its cultural contradictions - family firm versus public company. Instead of coming to terms with the City, the company therefore emerged with its ambivalence intensified.
'Pilkington loathed the City, but the company also feared it because of the concern that there could be another takeover bid,' says the Pilkington watcher. This deeply disturbed corporate psyche gave birth to a diversification move that was so misconceived that it has become a classic of its kind.
Sir Antony Pilkington and his colleagues felt under pressure from the City to diversify in a bid to offset the cyclicality of the flat and safety glass business. Pilkington chose to move into opthalmics, a decision which had some rationality in the sense that the group already owned a spectacle lens business, Sola, which turned in reasonable profits. In 1987, it paid about £375 million for the Visioncare hard contact lens and solutions subsidiary of Revlon, the American cosmetics group.
But while the theory looked fine, in practice the deal proved ruinous. Shortly after Pilkington bought the company, a combination of health scares and the rapid growth of soft and disposable lens sales knocked the bottom out of Visioncare's market. It never recovered. 'They read the market completely wrong,' says one analyst. 'On top of that, it was a fashion business which they were not equipped to run; and the three components of the division - spectacles, lenses and solutions - were really stand-alone businesses, not a single entity.' Pilkington was not entirely distracted - in the late 1980s, in a phased deal, it secured the strategic purchase of Flachglas, the German glass-maker - but it was severely shaken. And just as the awful truth about Visioncare was dawning, the Anglo-American recession struck with devastating impact on the group's automotive and building glass markets.
Sales plunged from about £3 billion in 1989 and 1990 to around £2.6 billion in 1991, 1992 and 1993. The impact on profits as the high fixed cost base was exposed eventually reached meltdown levels: pre-tax profits slumped from more than £300 million in 1989 and 1990 to the £100 million mark in the following two years, and then dived to £41 million in Leverton's first year. That year, 1992-93, Pilkington made a bottom-line loss and paid a 4p dividend out of reserves. The dividend itself had been decimated: it peaked at 10.5p in 1990 and was held the following year. At the same time, gearing was rising dangerously, reaching 75% as Leverton arrived. The share price sank to 70p in his first year: in 1990, it had peaked at 270p. Investors were left bemoaning the fact that they had spurned BTR's indicative offer in 1987 worth 350p.
Leverton, an experienced hand with senior posts under his belt at Black and Decker, MK Electric and RTZ, knew he was staring a crisis in the face. 'Prices fell 20-30% overnight in the recession,' he says. 'With interest rates high, you could not sustain the situation as it was.' His recruitment to the chief executive position that was now vacated by Antony Pilkington made him the first outsider hired into the job. 'From that point, Pilkington ceased to be the family business that it had always been,' says the analyst.
Leverton made several rapid judgments. 'The first major change was the recognition that we could not continue to develop more than one business,' he says. 'We had to make the decision to go back to our roots and concentrate on the core competency of float and safety glass.' A spate of disposals ensued, but the main activities for sale - the opthalmics side - proved hard to shift. The contact lens market was flat on its back and there were few buyers for anything other than Sola, the one respectable operation in the grouping. It was 1995 before the solutions side was sold. And early in 1996, Leverton was still working on the sale of Barnes Hind, the contact lens business at the heart of Visioncare.
To his credit, Leverton never allowed the lingering Visioncare headache to distract him from his main task: to strengthen the glass interests that were now, more than ever, critical to Pilkington's future. 'We set out a very clear strategy for that business,' he says. 'We recognised that if we were to run with a single business, then in order to try and mitigate some of the problems of a cyclical business we needed to be a leading international player. We set ourselves the target of being number one or two in the geographical markets we chose.' There were four: Europe, the US, South America and Asia-Pacific. The last two were the smallest, but also Pilkington's best: it had established springboards for growth in Brazil, Argentina and, particularly, China, where SYP, a joint venture in Shanghai, was quoted on the city's stock market. But in its two major markets - Europe and the US - Pilkington had fundamental weaknesses.
In North America, Pilkington was much too dependent on a single customer, General Motors, which accounted for almost its entire US business. Three years later, thanks to determined efforts both to expand the automotive customer base and to develop a building industry business, the GM share of sales was less than a fifth of the total.
Pilkington's biggest problems were on its home ground of Europe, where its underlying margins were much too low and therefore highly vulnerable to declines in volume. The company suffered from several deficiencies: it did not control enough of its distribution, it needed to add more value to its products, its marketing was poor, its motor industry presence was weak and, above all, its cost base was too high. As a result, it was losing ground to its main competitors: Saint Gobain of France, the Japanese giant Asahi which was driving into Europe after buying Glaverbel in Belgium, and the American company Guardian.
'To get away from the problem of a typical process business, which was fast becoming a commodity business totally reliant on supply and demand, Pilkington needed to do two things,' says Leverton. 'We had to create a much greater element of added value to give us better control over our margins and our business, and we had to absorb a far greater percentage of our float glass production in-house, rather than selling it as a third market commodity.' Saint Gobain had already thrown down the gauntlet: in 1990: it bought the British third-party distributor, Sola, as part of a published strategy to become around 90% in-house controlled and to establish a bridgehead in the UK. In 1993, Leverton retaliated. He acquired the glass distribution and merchanting arm of Heywood Williams, a deal which doubled Pilkington's in-house share of its glass output to 60% and bought it a quarter of the British distribution market. It also drove up gearing to 86% - but Leverton remained undaunted. He was determined that, despite Pilkington's rocky financial state, the group must seize strategic opportunities which would help it break the vicious circle in which it had been trapped by the Visioncare debacle and the industry slump.
Leverton was therefore quick to invest in eastern Europe, where Pilkington established a plant in Poland, and most importantly, in Italy when the state-owned glass manufacturer SIV came up for sale a few months after the Heywood Williams deal. SlV was a market leader in vehicle glass for the indigenous European volume manufacturers Fiat, Volkswagen, Renault and Peugeot Citroen. It perfectly complemented Pilkington, whose European automotive glass business was skewed towards Rover and the top end manufacturers Mercedes, BMW and Jaguar. A link-up in Europe and America with NSG, Asahi's Japanese rival, helped Pilkington into the British transplants built by Nissan, Honda and Toyota. But before SIV, Pilkington held 16% of the European automotive glass market - well behind Saint Gobain which had 40%. By buying SIV, Leverton could more than double that share overnight to 34%, bringing Pilkington well within striking distance of its French rival.
Leverton, facing tough competition in the bidding from Guardian, played things delicately. 'This was the first privatisation in Italy, and I didn't believe they would sell it totally to a foreign company. We needed to handle the union situation and reduce the workforce by 25%, so we needed an Italian to help with that. And SIV had a lot of surplus assets.' So Pilkington formed a joint venture with an Italian company and each partner bought 50% of SIV.
Pilkington's biggest breakthrough in building glass was organic rather than acquired. K glass, a revolutionary form of double-glazing with stunning energy conservation properties, had been launched well before Leverton's arrival. But Pilkington's marketing shortcomings meant that its potential had scarcely been tapped. It accounted for no more than 4% of the group's British turnover in 1992, and had not been sold overseas. Today, the product generates one-fifth of Pilkington's UK sales, a rapid expansion enormously helped by Pilkington's new control over its distribution system. K glass also represents 15% of sales across Europe. It is going like a train in Germany, where recent changes to the building regulations to promote energy saving have put it in high demand. Pilkington is maintaining its innovatory drive. It has just launched a glass product for furniture mirrors which affords significant cost-savings.
While K glass conserves energy, Leverton's efficiency drive has saved substantial sums of money. He has succeeded in cutting £230 million in costs since 1992 - about 4% of Pilkington's overhead, and 1.4 times the rate of inflation - including a 15% reduction in the workforce to about 36,000 and a 32% productivity improvement.
One of the key moves was to reorganise Pilkington's 10 European float lines. When Leverton arrived in 1992, these were organised on a geographic basis - three served the UK, others supplied Germany and so on. By replacing the geographic division with a system in which each line supplies particular products for the whole of Europe, Leverton was able to achieve the higher efficiency ratios that come from longer production runs. One percentage point of improvement in the efficiency ratio is worth £8 million to Pilkington's bottom line: Leverton has improved the group's ratios by about five percentage points so far, and says: 'There is still quite a way to go.' Analysts agree that, despite Leverton's sizeable savings, that comment applies to the overall cost base. They believe the impetus provided by Rudd, with his experience of making Williams companies lean and mean, can make even more fundamental inroads into the accumulated corporate overhead. 'For a long time, Pilkington was run almost like a holding company,' says one analyst. 'When it bought businesses such as L-O-F and Flachglas, it then left them alone. Although they had common technology, in a financial sense Pilkington was really just an investor.' The result is an agglomeration of head offices and management hierarchies that Pilkington is only now breaking down. 'There is a whole bureaucracy in the business.Leverton has done a lot to attack it, but there is still a need to reduce the lines of communication and have the business run as an integrated world business,' says the analyst. One significant recent step by Leverton was to split the Flachglas operation, previously an amorphous mass detached from its customers, into two streams, one dedicated to the motor industry, the other to the building market. As a result, the previously sprawling Flachglas head office in Gelsenkirchen has been streamlined.
Rudd himself believes there is large scope for further cuts in working capital by increasing the use of information technology. 'The traditional way of running a process business where you are delivering just-in-time is to have buffer stocks, which builds up work in progress,' he says. 'By using IT, once you have gained the confidence of the line managers in the system, you can drive a huge amount of capital out of the business.' But despite the task that lies ahead to make Pilkington's £2.3 billion of assets sweat harder, Leverton and Rudd are sure that they have turned the corner. The pivotal day was 31 October last year. That was when the group launched a £303 million rights issue - its first since the 1980s - to strengthen the balance sheet and fund two acquisitions: the £120 million purchase of the outstanding half of SIV, and the £55 million acquisition of the Scandinavian and Swiss operations of Interpane, a glass distributor. The SIV deal consolidated Pilkington's position as the world's leading supplier of automotive glass; Interpane furthered its strategy of vertical integration, increasing its control over its European market.
Significant as the acquisitions were, the most important milestone was the stock market's unusually positive reaction to the hefty rights issue. Encouraged by news that first half pre-tax profits were 70% up, the shares rose 7p to 189p - a sign that, at last, Pilkington was exorcising the ghosts of its unhappy relationship with the City.
For Rudd, this is only the beginning: 'It is impossible for us to take the cycle out of the business and promise the City that there won't be a drop in profits come the next fall in demand,' he says. 'But the City has to believe that the company has done all it can to put itself in a very strong position going into the downturn. Pilkington now has momentum; what the group has got to do is deliver.'
Andrew Lorenz is business editor of the Sunday Times.
PILKINGTON: Financial Facts
Turnover Operating profit
UK 485 39
Europe (excl-UK) 963 33
North America 800 49
Rest of world 428 74
Group costs etc - (51)
Exceptional items* - (592)
Total 2,676 (248)
Year ended March '95
* primarily goodwill write-off on Barnes Hind Visioncare.