UK: SIEBES SNOWBALL. - Other companies grew spectacularly in the '80s but few so far or so fast as engineering group Siebe. The architect of that expansion remains confident it will continue. Others are not so sure.

by Andrew Lorenz Lorenz.
Last Updated: 31 Aug 2010

Other companies grew spectacularly in the '80s but few so far or so fast as engineering group Siebe. The architect of that expansion remains confident it will continue. Others are not so sure.

Just down the hill from Windsor Castle stands the head office of the least-known big company in Britain. Until recently, its chairman - who was also its chief executive - wielded the kind of absolute power that British monarchs lost centuries ago. Now Barrie Stephens has handed over the chief executive post to his crown prince, Canadian-born Allen Yurko. But Stephens remains non-executive chairman, and has no intention of disappearing yet from the business he ruled for the best part of three decades.

Born 67 years ago in Gower, near Swansea, Stephens has built Siebe into Britain's second-largest engineering group. British Steel is the only UK engineering business with a larger stock-market worth than Stephens's creation. With a market value of almost £2.3 billion, Siebe's nearest challenger is GKN. It has a higher value than Rolls-Royce, British Aerospace, Lucas Industries and the other blue-chip household names of the UK engineering industry.

Yet outside the British investment community, Siebe's size and Stephens's achievement remain almost totally unrecognised. That is partly because of the inconspicuous nature and distant location of Siebe's main businesses, which make controls for a host of applications ranging from oil refineries to air-conditioning systems and fridges. Industrial, temperature and appliance controls account for about three-quarters of Siebe's £2 billion annual sales, and turnover in America represents more than half the group total. Almost all the big acquisitions with which Stephens expanded Siebe to its present scale were made in the US beyond the scope of British media and public interest. Ironically, considering his stream of takeover coups, Stephens's highest profile move in Britain was a failure: a 1986 bid for APV, the now struggling process plant manufacturer and contractor. APV shareholders must be wishing it had been accepted.

But the lack of recognition for Siebe's remarkable growth is also a reflection of the character of its master-builder. A towering presence inside the company - where he is referred to, and deferred to, by his initials, EBS - Stephens has kept his external profile low. 'That is not because we were too arrogant or conceited,' he explains. 'It is because we were running very fast, and are still running very fast. If we had our way we would like to be left alone to continue to run our corporation aggressively, to beat up on our competitors, and first and foremost to look after our clients: without them, we would have nothing.'

As an order of priorities, a mission statement and a description of the group's motive forces, that sums up Stephens's Siebe: expansion-driven, ploughing a solitary furrow to the point of isolation from its compatriot peer group, ferociously tough on both managers and competitors, and supremely customer-orientated. In a British context, the company's character has less in common with its fellow engineers than with the conglomerates - Hanson, BTR, Williams and Tomkins - which have grown to prominence in the past 15 years.

Stephens says he had no specific role model but speaks admiringly of Lords Hanson and White and of Sir Owen Green, BTR's former chairman and chief executive. Like Hanson and White, he has been powerfully influenced by the American business culture - for the first 14 years of his career he worked for US companies, 13 of them in America. Like Green, Stephens runs a spartan operation: the Windsor headquarters is compact to the point of being cramped; Stephens' own office is modest, largely occupied by his large mahogany desk and chairs and a sofa upholstered in green leather.

Save for one item, the room is bereft of totems from Siebe's rise. The exception is a brass diving helmet which has sat in Stephens's office since the day in 1964 that he started at what was then Siebe Gorman, a tiny manufacturer of diving equipment founded in the 19th century by an Austrian army lieutenant called Augustus Siebe. When Stephens, a former British army lieutenant, arrived after being headhunted by PE International from his American employer, Siebe had pre-tax profits of £100,000 on annual sales of £1.4 million, and a share price of 5s 1d - fractionally more than 25p. 'If you had been nuts enough, you could have bought the entire company for £510,000,' Stephens recalls. 'PE had asked if I would consider becoming managing director. When you are 34, slightly egotistical and superbly cocky, you say what I said: "sure". At the end of the first week I went home and said to myself, "What have I done?", because we had mismatched inventory pouring all over the pavement.'

You don't have to go ferreting in the archives to track the progress of Siebe (it dropped the Gorman in 1987). The record is proudly displayed in Siebe's accounts, occupying a full page in the 1994 version, which details the group's key financial statistics in each of Stephens' 31 years at the helm. Critics of certain aspects of Siebe accounting - the company's inclusion of intangible assets in its balance sheet and its regular use of acquisition provisions have attracted considerable comment over the years - might say that this is the least controversial of the ways in which the company does not conform to standard practice.

The Siebe record is at once impressive and enigmatic. It shows that in the nine years after Stephens arrived, sales grew gently to £4.1 million and pre-tax profits to £700,000. In 1973 Stephens took over James North, another safety-equipment maker and sales more than quadrupled to £18.4 million, while profits more than doubled to £1.6 million. But by 1982, 18 years after he joined the company, Siebe was still a modest concern. Pre-tax profits that year totalled £4 million on sales of £53.2 million; shareholders' funds were £20.7 million and earnings were 4.2p a share. Then in the ensuing decade, Siebe sales increased 30-fold; the profits rise was even more remarkable - the pre-tax figure mushroomed 50-fold. Siebe went from the slow lane to supersonic speed with a spate of takeovers, two of which alone almost doubled the size of the company overnight.

Even Stephens offers a metaphor rather than an explanation for the transformation. 'When you were a lad,' he says, 'and had snow at Christmas time or whenever, and you went out into the garden and made a snowball and rolled it around, every time you went up and down, the ball would get bigger. Then, all of a sudden, the ball was a hell of a big ball. It's the theory of reciprocality: the bigger you get, the bigger you get - so long as you focus. If you lose your focus, you are dead in the water.'

It took several years for Siebe to find its focus in the controls business. The origin was a veritable acorn: two small electronic controls companies inside Tecalemit, a Plymouth-based maker of garage equipment which was three times Siebe's size when Stephens bought it in late 1983 with a hostile bid worth £17.5 million. The two companies had combined sales of £1 million. Stephens told Roger Mann, the finance director who has been his right-hand man for 21 years: 'We don't know anything about controls. These little companies are dragging their feet; we have to get rid of them.' Three months later he changed his mind: 'I said to myself, "There's something in this after all: one, there are not too many people excelling in this business; two, there's a bit of a mystique in it".'

He was still far from focused on controls by July 1985, when he made the big time by buying CompAir, the leading UK maker of compressed air equipment for £78 million from IC Gas. But there was a surprise in the CompAir portfolio: it included four pneumatic controls subsidiaries. That made five in all, Stephens having merged Tecalemit's tiny duo. 'I decided that this was for us,' says Stephens. 'It was sophisticated, clever, all the people in it were global players and we were able to operate under their guns.'

APV was a big user of controls, and Stephens bid £220 million for it in 1986. He lost - just about the only serious reverse of his career. 'We shouldn't have lost,' he says. 'We failed to do something we embarked on and it was unforgivable. That's not what corporate heroes are made of.'

The defeat was a watershed for Siebe. Stephens has never made another major British acquisition attempt. Instead, he turned his sights to America. In October 1986, less than four months after the APV failure, Siebe paid £341 million for Robertshaw Controls, largely financed by a £225 million rights issue. Stephens had laid the ground well. He knew Robertshaw was up for auction and had enlisted top-notch advisers, headed by Bankers' Trust and Lazard FrAres. 'We had done our due diligence quickly, so we got them. And the horizons opened up.'

The ink was barely dry on the Robertshaw deal when he bought a 25% stake in another American company, Ranco, whose air-conditioning and fridge controls and presence in Europe and Japan complemented Robertshaw's position - in controls for warmth - in the US market. 'Two weeks after we bought the holding, the Ranco board put the blessed company into play. I thought, "Holy mony [along with sonofabitch, Stephens' favourite exclamation], we are going to be locked in as minority shareholders and that's going to be dreadful", so quick as a wink, we bid for the other 75%.'

The two deals took Siebe's debt from £194 million to £327 million. The company would have been 180% geared had Stephens and Mann not revalued the Robertshaw and Ranco assets upwards - an unusual move - by £175 million. Part of the revaluation was the creation of £35 million in intangible assets, a device which Siebe has since employed to considerable effect, though not without attracting a good deal of flak.

Undeterred, six months later Stephens paid £132 million for Barber Colman, another US temperature controls company, and called on investors again, this time with a £207 million rights issue. The deal was in the process of completion when world stock markets were devastated by the October 1987 crash. Siebe, having built a £22 million controls business into a £600 million business with three deals inside 12 months funded by two huge rights issues, suffered a share price collapse. Even then, Stephens did not stop, making several small purchases including the German steam-controls company, Gestra, as he battled to rebuild the share price.

The recession, which started to bite in 1989 in America, posed a new problem. But it also vindicated Stephens's rigorous controls and constant monitoring of his subsidiaries' performance: he descended on his businesses almost monthly to conduct operational reviews and wasted no time in telling the local management if costs needed to be cut. This, together with Siebe's system of subsidiaries' detailed weekly and monthly reporting of key financial ratios to Mann and Stephens, gave the company early warning of the decline in orders and the ability to react. But just when Stephens was battening down the hatches, he got the opportunity of a lifetime. 'It was July 1990 and I was sitting here in this office,' Stephens says. 'The phone rang and one of my advisers said, "Foxboro is for sale".'

The Massachusetts-based maker of advanced industrial controls had come a terrible cropper after spending $250 million on a state-of-the-art controls system called Intelligent Automation (I/A). This would have given the company technological leadership of the industry so long as it could be made to work. Cost overruns during the epic development effort had weighed Foxboro down with so much debt that the company had been driven into the ground. Despite the question mark over I/A, the recession, his own gearing level and his promises to shareholders of no more big takeovers, Stephens knew it was a chance he could not afford to miss. 'The one thing we were lacking in controls by then was process control capability,' he says. 'Our major competitors - Honeywell, Emerson, Siemens - all had it.'

Siebe's main rival was Mannesmann, the huge German engineering concern which, like Siebe, was aiming to join the premier league of controls companies. But Stephens and his well-oiled acquisitions team did the business. They won by about $18 million with a bid worth $656 million. At £357 million in sterling, it was Siebe's biggest-ever acquisition. Stephens never doubted the wisdom of his decision. 'I thought I/A would work. It was in trouble at the time but technically it was streets ahead of everybody else. The City's response was pretty muted; they said we had bought a busted flush.'

That is an understatement. Robert Speed, engineering analyst at stockbroker Henderson Crosthwaite, recalls the reaction at his previous firm, UBS Phillips & Drew: 'Bob McCoy, the leading Wall Street process-controls analyst, was brought over to address our salesmen on the deal. He got on the microphone and said "These boys have got themselves a goddamn bag of bones".' Aghast at the purchase price, the consequent level of Siebe's gearing - 260%, stripping out intangibles and taking Foxboro at stated value - and the problems of Foxboro, the stock market panicked. Siebe's share price halved to 250p. Paul Compton, now engineering analyst at Credit Lyonnais Laing, wrote later: 'Even a revaluation of Foxboro from £102 million of shareholders' funds to £368 million did little to calm nerves.' That brought gearing, including intangibles, down to 105%, but Siebe's price languished for months. For Stephens and Siebe, it was make or break. Undaunted Stephens told analysts and investors: 'Just be patient; you will see that we have bought the crown jewels.' Then he set to work on the Foxboro turnround.

Foxboro had two main problems: it was hugely overmanned, and its customers had no confidence in the I/A system. Stephens almost halved the Foxboro workforce from 7,700 to 4,000, closing two of its five US factories together with plants in Britain and the Netherlands. White-collar numbers were slashed. 'There were 50 people in the corporate affairs department; now there are three,' he says. Working capital was completely out of control, primarily because the business had such a high level of debtors. Some ran to 180 or 210 days, because people who had taken delivery of the I/A system did not believe it would work and therefore had not paid for it. To make it work, Foxboro had employed more than 600 software personnel on the project. Not for long. In total, Siebe estimated that it took $100 million out of Foxboro's costs. Some of it was lost in cutting the company's prices to make them more competitive, but in 18 months the Stephens treatment increased Foxboro margins from zero to 16%. Within four years, Foxboro's 6% market share had been doubled, catapulting it from industry laggard to leader.

Foxboro was and remains Stephens's crowning glory, its turnround the achievement that carried Siebe over the threshold dividing Britain's large manufacturers from the industrial elite. 'Foxboro,' Stephens says simply, 'is our best acquisition. It has brought, and will bring enrichment to the owners of Siebe plc.' But, he adds immediately: 'We haven't finished yet.'

Some City pundits are not so sure. They question whether the new top team of Stephens the chairman and Yurko the chief executive can keep the vice-like grip that has extracted premium margins from the controls business. Terry Smith of the securities boutique, Collins Stewart, and author of the book, Accounting for Growth, which accused many of Britain's top companies of using creative accounting to inflate profits, says: 'Siebe has margins of 15% and its nearest rival Honeywell has, on balance, 12%. You have to ask yourself if those margins are real and, if they are real, whether they are going to last. A lot of Siebe's control systems are not particularly clever - they are electro-magnetic rather than electronic. Stephens has run Siebe with a rod of iron and has therefore extracted extraordinary performance from some very ordinary businesses. Moreover, the use of provisions in acquisition accounting makes it very difficult to see what the real situation is. Capitalisation of intangibles is a classic.' An industrialist who knows Siebe well believes it is 'a good business, but it may be only about 75% as good as it appears to be.'

Such concerns have dogged the Siebe share price in recent months. The pro-Siebe case is put by Henderson's Speed, who thinks pre-tax profits in the year to 31 March will climb from last year's £217 million to £270 million, with earnings rising from 31.4p to 36.8p. The company 'retains the vigour and single-mindedness which Stephens instilled', he says.

Yurko, 43, has already made a mark - in itself a tribute to Stephens' talent-spotting and smooth management of the succession. In contrast to the old guard of Stephens, Mann and Colin Bonsey, the planning director who has been with Siebe for almost 19 years, Yurko joined the company only five years ago, with a background in finance and widespread experience of the controls industry. On his own testimony, he shares Stephens's 'tough, no-nonsense approach to costs', and has 'an aggressive attitude to managing'. But he also aims to 'nurture good management' and go for growth.

Yurko says the accounting questions over the company 'are becoming a non-event. People now look at cash flow and real operating profit.' As for the acquisition provisions, Yurko says: 'The provisions are explained by the fact that we are so tough when we buy a company in raising the margins and restructuring. If anybody can look the City in the eye and say that they've used the provisions effectively, it's us. Look at Foxboro.' But he acknowledges that some things will change. 'It will be evolutionary as much as revolutionary. I didn't come with guns blazing.'

Speed detects several points of departure from the Stephens philosophy, including a 10% target for organic growth, a trend towards smaller acquisitions (with three strategic moves, Yurko has added a European dimension to Foxboro's controls and is also pushing hard into Asia) and a drive to de-gear the balance sheet. After running at more than 100% for much of the past decade, debt gearing is now down to 19% of stated shareholders' funds. Even if the £330 million of intangible assets are excluded, gearing is now well below 50%.

Stephens himself has enormous confidence in the future. Siebe may be valued at around £2.3 billion but, he insists, 'it is worth £5 billion. This can be one of the top 20 corporations in Britain and certainly in the Fortune 100'. It is a tribute to Stephens that Siebe can even contemplate such heights. But such a personal achievement cuts two ways, as analyst Compton once noted: 'This company is more dependent upon one man than many other large conglomerates.' He added: 'The management succession issue is the major danger facing Siebe over the next five years.' That remark was made three years ago. For some observers, Siebe has yet to pass the final test of successfully transferring power to its new generation.

Andrew Lorenz is deputy business editor of the Sunday Times.



1983 Norton (North Safety Division) 16.8 Diversified products

1983 Tecalemit 17.5 Diversified products

1985 CompAir (inc.£20m debt) 78.0 Diversified products

1986 Robertshaw 341.0 Temp. & appl. controls

1987 Ranco 100.0 Temp. & appl. controls

1987 Barber-Colman 132.1 Temp. & appl. controls

1990 Foxboro 356.7 Control systems

1993 Eberle 20.4 Temp. & appl. controls

1993 Eckardt (inc.£12m debt) 81.5 Control systems

1994 NAF Group 18.2 Control systems

1994 Triconex 56.9 Control systems

1994 ACT and Eliwell 22.7 Temp. & appl. controls



Product category Turnover Profit

Temp. & appliance controls 714.1 105.5

Control systems 646.2 104.7

Compressed air 191.0 15.3

Specialised mechanical eng. 180.2 9.8

Safety & life support 131.0 29.4

Property development 1.0 1.0

Total 1,863.5 265.7


UK 189.9 38.6

Rest of Europe 462.3 42.1

US 934.9 129.9

Canada 35.1 6.8

South America 43.0 16.9

Pacific 174.3 28.1

Africa 24.0 3.3

Total 1,863.5 265.7

Shareholders' funds (£m) 950.1

Number of employees 29,938

* for year to 2 April 1994.

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