UK: WHY TI GROUP WENT WEST.

UK: WHY TI GROUP WENT WEST. - In just 10 years TI's chairman has turned over almost the entire business portfolio of the group as well as shifting its geographical balance.

by Andrew Lorenz.
Last Updated: 31 Aug 2010

In just 10 years TI's chairman has turned over almost the entire business portfolio of the group as well as shifting its geographical balance.

The disposal that TI Group announced on 31 January was a small one - three minor subsidiaries sold for £44 million - but it was also a milestone for Sir Christopher Lewinton, TI's chairman. With more than 60 deals in the decade since he joined the company, Lewinton has implemented a corporate transformation that, amid all the industrial restructuring of the last decade, remains unmatched. The January divestment brought Lewinton close to an unprecedented clean sweep of the business he inherited.

TI had annual sales of £1 billion when Lewinton was recruited in 1986 by Ronnie Utiger, then TI's chairman, from Allegheny International of the US. Last year, sales were 50% higher at about £1.5 billion. But only about £100 million of that turnover came from businesses that were owned by TI when Lewinton joined. Accles & Pollock remains the only survivor from the Tube Investments metal-basher created in 1919 by a merger of Midlands steel-tube manufacturers and distributors. There is also a smattering of tiny businesses but with the January divestment, their sales contribution will fall to negligible levels. In just under 10 years, Lewinton has turned over almost its entire business portfolio.

The company to which Utiger introduced Lewinton was dominated not by its original tube businesses, but by a consumer products range stretching from Creda and New World cookers through Russell Hobbs kettles and Glow-worm heaters to Raleigh bicycles. TI was struggling. In particular, Raleigh's failure to withstand surging import competition had undermined profits and exposed the group to intense takeover speculation. Evered, a mini-conglomerate run by the Abdullah brothers, Raschid and Osman, even attempted to launch a bid.

Utiger saw off the Abdullahs and stabilised TI. But Utiger (who died last year) recognised that he needed a change agent to revitalise the group. He picked Lewinton. The managerial complexions of the two executives could not have been more different: Utiger the painstaking, low-profile British industrial veteran; Lewinton a charismatic transatlanticist, his high-profile, high-remuneration attitude as much a product of US corporate culture as his year-round tan was of the Florida climate.

To Utiger's great credit, he did not allow their differences of character to stand in the way of his judgment that Lewinton was right for TI. Investors have good cause to be grateful. When Lewinton took over, TI was valued by the stock market at less than £300 million and was heading for pre-tax profits in 1986 of £43.5 million. Today, TI has a market value of well over £2 billion, the group has re-established itself as one of the country's premier manufacturers, and pre-tax profits this year should exceed £200 million.

The basis for this remarkable recovery was Lewinton's analysis, especially acute given his background in consumer products, that the group 'did not understand the consumer goods business and did not have a consumer culture.

TI's basic culture was engineering. I therefore decided to focus on its basic culture and build the engineering business.'

The strategy that Lewinton developed is now in its third phase. The first, heralded in the mission statement that he published shortly after arriving at the company's Mayfair office, was to be 'an international engineering group concentrating on specialised engineering businesses, operating in selected niches on a global basis'. Key businesses, it said, 'must be able to command positions of sustainable technological and market share leadership'.

The second phase, which Lewinton ushered in in 1992, reflected the move by manufacturers away from basic hardware assembly and called for TI businesses to have 'a high knowledge and service content'. The third, where TI is now pushing ahead, declares that it must 'both anticipate and meet customers' needs'. Crucial as they have been to TI's success, these latter refinements of the strategy would have been bricks without straw had Lewinton not succeeded in laying the reborn group's foundations with enormous speed and wide scope.

The key deals, executed within a nine-month period from June 1987, were the sale of Creda to GEC and the rapid acquisition of two companies which have become the pillars of today's TI. First came John Crane Houdaille, the Chicago-based world leader in mechanical seals for industries which include chemical, oil and gas, motor and marine. Then, in March 1988, Lewinton bought Bundy Corporation, one of the top manufacturers of small diameter tubing for the motor and refrigeration industries.

Today, Crane and Bundy - progressively expanded by a series of bolt-on purchases in the intervening years - account for almost 80% of group sales. They are also responsible for TI's unusual geographical balance.

With about 40% of its business in North America and less than a quarter in Britain, TI is more international than most of its compatriots. When Lewinton arrived, 55% of TI sales were in the UK and much of the rest went to the Commonwealth countries.

Unsurprisingly, given the extent of the turnround task, Lewinton has made mistakes. Most of his problems have arisen from his long quest for a third major business to stand alongside Crane and Bundy. In 1988, his first attempt to build this third division married TI's existing Abar Ipsen industrial furnace operation to Thermal Scientific, a highly rated heat-treatment furnace company. The operation proved disappointing and within four years the entire business had been sold. A move to court Spirax Sarco, a maker of steam traps with an excellent growth record and a heavy emphasis on knowhow and service, was foiled when the Spirax management rebuffed Lewinton's advances. By 1991, however, Lewinton had identified two possible acquisitions: Dowty, which had diversified from its core aerospace business into polymers (successfully), and information technology (with unfortunate results); and Vickers, which was struggling with the impact of recession on its Rolls-Royce cars subsidiary.

Lewinton's number-one target was Dowty. Initially Dowty's board spurned his advances, and he did not want to launch a hostile bid. But by the early spring of 1992, the impact of the Gulf war and the world recession on the aerospace industry had combined with Dowty's electronics travails to knock the stuffing out of the company. A string of predators - Lucas, Smiths and GKN - were eyeing it closely. Lucas and Smiths had good aerospace businesses and were not prepared to pay up for Dowty, let alone chance an aggressive bid. GKN, which wanted to expand into aerospace, was keener and had no qualms about going hostile. But before anyone else could move, Lewinton shed his reservations and pounced.

The TI chief had prepared the ground well. S G Warburg, one of his financial advisers, had lined up another client - Cray Electronics - to buy most of Dowty's IT operations. And in a canny move, Lewinton had hired Baring Brothers to act alongside Warburgs. Barings had been an unofficial second adviser to Dowty, and no one in the City, save Dowty's principal advisers Lazards and Cazenove, knew more about the company. In what proved a fatal misjudgment, Dowty acceded to Barings' request that it be released from its semi-official, secondary role as joint merchant bank. Dowty's top management never believed that Lewinton would dare go hostile.

Lewinton was certainly taking a risk: TI was open to attack on at least two fronts. One was the high pay levels for directors that Lewinton had instituted, including big bonus schemes that helped Lewinton himself earn more than £1 million in 1989; another was TI's acquisition accounting, which involved hefty use of provisions and had raised eyebrows in the City.

On 23 April 1992, TI bid £509 million. The terms were carefully calculated by Barings to deter rival bidders. Once TI had achieved that, it declared the first offer final and set an early closing date for the bid - both unusual takeover tactics but ones which worked. TI won at a canter; Lewinton's gamble had apparently paid off. Six months after the takeover, TI surged into the FT-SE 100 index of Britain's top companies.

In September 1992, briefly, it became Britain's most highly-rated engineering group after BTR.

On the aerospace front, however, things had started to go awry. First, Norman Askew, the only senior manager in the group with an in-depth knowledge of the aerospace industry, was headhunted to become chief executive of East Midlands Electricity. Lewinton poached Tony Edwards from Lucas to replace Askew, but by then Dowty was being hit by a more serious problem: the aerospace industry downturn proved unexpectedly protracted, and the longer it lasted, the more it looked as if TI had overpaid. The shares began to suffer. Soon, a prolonged period of stock-market under-performance set in.

Lewinton acknowledges that Dowty 'would have been a far better deal, and we would have had to work far less hard if our forecasts for the aviation industry had proved to be right. They weren't. It has taken two years longer than we expected to pick ourselves up. Along with about 8,000 others, we thought the industry would recover two years earlier.' Nevertheless, he maintains that Dowty has been a successful purchase. 'It was the right thing to do. We bought it for two core reasons - the landing-gear business which we have made a world leader, and the polymer side, which has proved to be an even better business than we thought. And we found a third - the propellers business - which we never planned. With its existing contracts, we will become a world leader in propellers too.'

Lewinton's key move, which underpinned an acquisition that was beginning to look wobbly, was to ally Dowty's landing-gear business with that of the French group Messier-Bugatti, a subsidiary of the state-owned, aero-engine company Snecma. Industry insiders believe Messier was Lewinton's second choice and that the TI chairman's initial aim was to take over CPC Industries, the Cleveland-based landing-gear company that was Dowty's main competitor. But TI was beaten to the punch by B F Goodrich, the old tyre-maker that had dropped its original business to move into aerospace.

Goodrich snapped up CPC and TI had to look elsewhere.

In December 1993, TI signed a joint venture with Snecma. 'That secured the customer base, and the engineering culture of the two businesses was very similar,' says Lewinton. Like many joint ventures, it involves an element of compromise: profits are shared on a sliding scale which gave TI a majority share initially, tapering down to parity in 1997. In the circumstances, the venture was about the best deal that TI could do. And with the aerospace market reviving, it should pay off in years to come.

But it reduced the biggest part of Dowty to the rank of associate and diluted the contribution and status of aerospace as a TI core business.

If the group is to build a new, wholly-owned, major leg out of the Dowty deal, it will be in polymer engineering, part of the industrial (as opposed to aerospace) wing which dominates the group. Polymer, now run by a TI high-flier, Tony Belisario, sits closely with Crane in a fragmented industrial segment which TI reckons to total annual sales worldwide of up to £3 billion.

That gives polymer, which has annual sales of about £100 million, plenty to go for. With its balance sheet now moving into a position of net cash, TI has ready resources to fund a £300-£400 million polymer acquisition or acquisitions.

Avon Rubber is one of the few British firms which could be a target, but some analysts reckon Lewinton is more likely to find what he is looking for in America. Such a move would increase the US preponderance inside TI, but it would not worry Lewinton. His background, inclinations and business credo all make him much better disposed to the US than to mainland Europe, and he believes that the TI culture of maximising shareholder value is at odds with some of the ordinances now emerging from the EU in Brussels, such as the requirement for every large company to set up a Europe-wide works council. Lewinton was genuinely taken aback when he realised that Britain's opt-out from the Maastricht social 40e chapter was little defence against the works council edict. 'The dominant economy in most of the industries where we operate is the US,' Lewinton says.

'Europe is a concept that is talked about very loosely, and not very well understood by many people. It's very unlikely that we will see a common monetary unit in Europe; therefore I think the US is still the driving-force in the world.'

Lewinton's relish for the rough, tough, free-market world of American business is equipping the group in two key ways to succeed in the 21st century. He has an American's awareness of the growing importance of the Asia-Pacific region, and both Crane and Bundy are already making important inroads into areas such as the fast-rising motor industry of South Korea.

Bundy, for instance, has established a close relationship with Daewoo.

John Potter, the former head of Crane who is now effectively TI's chief operating officer, says: 'The major manufacturers in Asia-Pacific are eyeing Western markets, and we have to be prepared to service them when they come into North America and Europe, as well as on the ground in Asia.'

Still more importantly, Lewinton's sensitivity to US business trends has made him acutely aware of the changing relationship between a component supplier such as TI and its industrial customers. Across the sectors where TI is active, end-user companies are increasingly demanding from their suppliers a global level of support, a heavy commitment to innovation - and severe price restraint. These demands - for globalisation, service, technology and price control - add up to a requirement for one thing above all: investment in factories, processes, and products. Only the leading companies in their sectors will have the resources necessary to meet those demands.

That, say Lewinton, Potter and Brian Walsh, TI's vice chairman and finance director, is where TI will score. 'The only way around the price squeeze is to deliver a continuing stream of new product,' says Lewinton. 'If the customer believes what you have is of value, then he'll pay for it; if all you are going to do is to wrap up your product in a new bit of paper, he won't.' By generating the resources to keep the customer satisfied, Lewinton and his team believe they are securing a competitive advantage over many rivals who will find it increasingly difficult to stay in the race. 'The engineering world will consolidate, just as electronics, aerospace and food are consolidating,' Lewinton says. 'The big players will win, because you have to service your customers on a global basis.'

Both Crane and Bundy are staying ahead, using different techniques to move up the value chain. Within its specialist niche, Bundy has five different capabilities or areas of expertise. These equip it to supply anything from individual components for vehicle fuel and brake lines or refrigeration tubing to the kind of complete system that assemblers are increasingly demanding. Walsh says that 'Bundy can extend value by a multiple of up to 10 times with relatively minor incremental investment', opening the way to high returns on investment. 'Each of the five segments are at different levels of market penetration,' says Potter. 'That's enough to keep us going for the rest of my working life without bumping our heads on the ceiling.'

Crane has by consistent innovation moved into higher value products.

So far, its greatest achievement is the Type 2800 seal, initially developed for the chemical industry and launched just over two years ago. It was the world's first zero-emission non-contacting pump seal. Because it is non-contacting, it eliminates an enormous amount of wear and tear; because it does not leak, it saves on energy.

In one vital area - top management succession - TI's future is unclear.

For several years, TI watchers have been wondering who would emerge as Lewinton's successor in the now-vacant post of chief executive. Potter is seen as running ahead of Walsh in the competition. But Lewinton, now 64 and showing every sign of staying at the top for several years, says there is no competition. Indeed, he maintains that selection of a chief executive is not the issue it was when he arrived. 'The first five years were a question of survival, and I had to play a particular role as a personality. But the last five years have been team-building, and as we move into the next decade the team is in place. The decisive factor for companies in the future will be the balance of the board and the composition of the top team, which has to have complementary skills.'

The size and spread of the company on which they will exercise those skills also remains a matter of some speculation. Not because the existing core businesses lack organic growth potential - Lewinton says TI has 'enormous potential for organic growth: it could become much, much bigger with what we've got'. The question is whether TI would make a quantum leap with a large-scale acquisition. Given the pressures for restructuring in the world engineering industry, there is a strong possibility that such an opportunity will arise. All Lewinton and his team will have to do is decide whether to take it.

Andrew Lorenz is business editor of the Sunday Times.

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