The logic behind pulling a conglomerate apart
Friday 12 September 1997
Enter the smooth-talking Mr Strachen from RTZ. Unfortunately his first stab at the problem - to focus on businesses with the highest growth potential - seems to have been considered not focused enough by the City. BTR's share price has continued to underperform over much of the last year. So now he's going further, a lot further. On top of the pounds 2.3bn of annual sales he's already disposed of, there now comes a further pounds 2.8bn. The ballast already gone, Mr Strachen is proposing to throw out some prized possessions too in his bid to halt the descent in his company's share price. Out goes the relatively high-margin packaging interests. By the time he's finished - hopefully by the end of next year - he will have divested roughly half the group he inherited less that two years ago.
Whether this is enough to do the trick is anyone's guess but it is certainly true that by the time it's all over, BTR will have become a relatively coherent engineering group. Even if the whole process fails to deliver much in the way of extra shareholder value, this will be a beast that investors can understand and get to grips with. The same could not have been said of the old BTR and other conglomerates that sprang out of the rolling 1980s.
Mr Strachen's efforts may be dramatic, but he's hardly alone in what he's attempting to do. This is the age of what has aptly been described as the "velcro company", a stick them together and pull them apart again culture of corporate endeavour. The examples of it are legion.
Having been built up from nothing in a frenzy of unrelated takeovers in the 1980s, Hanson eventually split itself into four. ICI split in two. The rump chemicals business then disposed of its heavy industrial interests and bought Unilever's speciality chemicals business. That in turn has allowed Unilever to focus on its core consumer interests. Meanwhile Guinness is trying to buy GrandMet with the ultimate purpose, it would seem, of focusing on the two companies' branded drinks divisions and disposing of the rest.
Other than earning investment bankers and corporate lawyers a great deal of money, is there any point in it all? Ultimately there may not be, but there are certainly powerful forces driving the process. For a start it allows managements to concentrate on what they are good at. Nobody would get away these days with saying, as the big conglomerates once did, that all management is the same whatever the business. Managers without intimate knowledge of the needs of their markets, and the ability to respond to its demands, will fail.
In BTR's case, it will fail without cutting-edge technology in the industries it has chosen to focus on. To develop that, it needs to invest in a way that would not have been possible under the management by numbers yoke of conglomerate ownership. Nor is it just the demands of the global market place that drive the process. It is obviously the case that a glass bottle manufacturing company of the type BTR plans to dispose of is worth more to a company already in that business than it is to BTR. So with luck there should be shareholder value in what BTR is doing, despite the market's scepticism.
Perhaps the most remarkable thing about the present trend is how different it is from what was thought to create shareholder value in the 1980s. Then the fashion was for hostile takeovers of unrelated, underperforming companies. Now the trend is for agreed deals, generally at international level, in a way that brings similar businesses in the same markets together.
It ought to be said that the logical end game of this process of global corporate restructuring is not, from a public interest perspective, a particularly edifying one. What it implies is that each industry would eventually become dominated by just a handful of industry specific companies, with alarming consequences for competition both at a national and international level.
For most industries, however, that's a long way down the line. Those who resist the flow will find themselves left behind. Mr Strachen is undoubtedly adopting the right approach here. Yesterday's big jump in the BTR share price ought to mark a turning of the tide.
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