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Cash is king but investors want growth. GEC's new boss could be the one to deliver it
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The Independent Online
There will be no shortage of advice for George Simpson, the chief executive of Lucas Industries, when he takes over in the autumn as managing director of GEC - arguably the most prestigious job in British industry.

Much of the advice will be from investors. The shares have underperformed significantly for 15 years, although there has been some improvement during the past two years. Investors in GEC are clearly frustrated at what they view as an increasingly sclerotic organisation. That frustration explains the jump in the share price in March when news leaked out about Mr Simpson's appointment.

In a career spanning 33 years, Arnold Weinstock created one of the pillars of British industry in GEC. The company set numerous trends: through the merger of General Electric Company, AEI and English Electric, it led the consolidation of British consumer electronics and electrical goods to the detriment, some would say, of a potentially great market - there is now no big British consumer electronics brand.

GEC's continued expansion in defence work has been seen as defensive in itself, and based on who you know, in Whitehall and government, not what you know. While the skills of Lord Weinstock are evident in the careful patchwork of alliances and joint ventures he has created, it has coincided with a rapid decline in the global arms market.

Mr Simpson has yet to shed any light on his vision for GEC, making it difficult for investors to assess how he will deal with the challenges that face the company. Since it has become so entrenched in defence, the most logical move would be to fulfil Lord Weinstock's original ambition and form a European player capable of competing head-on with bigger rivals from the US and continental Europe.

Several options spring to mind. Mr Simpson could team up with Thomson- CSF, the state-owned French electronics group. Or he could merge with British Aerospace, a long-held wish of Lord Weinstock, but one that slipped from his grasp when BAe made a strong recovery after near collapse in 1991. However, both these ambitions have been kept at bay by the French and British governments, alarmed by the prospect of a monopoly supplier holding them to ransom.

Another key issue will be Mr Simpson's attitude to the company's legendary cash pile - pounds 2.6bn at the last count, and contributing pounds 151m to profits. The Weinstock philosophy was always that the cash provided a safety net for the company to use when the going gets tough. It has also allowed the group to make highly competitive bids for work, such as accepting pounds 450m in cash from PowerGen for a power station, beating off higher bids from rivals that would have wanted payment spread over several years. GEC more than made up for the low price through the interest it earned.

Given that cash is king at GEC, many shareholders would welcome a share buyback or special dividend. However, the company has studiously avoided the current trend for these schemes. If Simpson is going to hang on to the GEC cash mountain, investors will want to see him unlock higher returns from the core businesses: power, electronics, defence and telecommunications.

Comparisons with the company's namesake, General Electric Corporation of the United States, have often been made. The upheaval after Jack "Neutron" Welch took the helm of GE was traumatic but effective. His stringent targets for each separate business unit made the company one of the best performers on Wall Street over the past decade. His chief dictum was brutally simple: either be number one in the world in your business, or sell it.

The contrast with Lord Weinstock is stark. GEC has lagged and would certainly benefit from increased growth. But the challenge is enormous, and the prevalent cautiousness of the management culture suggests an overnight miracle is unlikely. Nor, judging by his track record, is Mr Simpson the man to opt for root-and-branch change.

For investors, however, that should not be a deterrent. Lord Weinstock bowed out with some convincing figures: profits before exceptionals breached the magical pounds 1bn barrier for the first time. The increase in the total dividend was the largest for some time - up 10 per cent to 12.51p.

GEC's capture last year of the Barrow-in-Furness submarine builder VSEL gave a pounds 60m fillip to profits. GEC this year won the Ministry of Defence's pounds 3bn contract to build the Trafalgar class of submarine. One joint venture which has yet to fly, however, is its consumer goods link-up with GE, where profits fell to pounds 11m on sales down a fraction to pounds 250m.

The mood in the City is one of cautious optimism. Mr Simpson's achievements at British Leyland, and subsequently at British Aerospace and Lucas, are of someone who believes in slow change for the long term.

There is ample scope for radical measures at GEC: demerger is one which would return fantastic wealth to shareholders. Even if that fails to materialise, the downside is limited. And the possibility of huge restructuring alone is enough, even after the post-result improvement in the share price, to justify a buy tag on the shares.

GEC

Share price 367.5p

Prospective p/e 14.6

Gross dividend yield 4.3%

Year to 31 March 1994 1995 1996 1997*

Turnover pounds 9.7bn pounds 10.33bn pounds 10.99bn pounds 11.5bn Pre-tax profits pounds 866m pounds 907m pounds 1.004bn pounds 1.08bn

Earnings per share 19.8p 20.6p 23.2p 24.8p Dividend per share 10.82p 11.37p 12.51p 13.5p

*NatWest Securities forecasts

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