Mr Hutchings said that giving money back to shareholders would tie Tomkins' hands on any large acquisition because its currently poor market rating meant that it was forced to pay for deals with cash. He said the company was looking to make an acquisition of between pounds 1bn and pounds 2bn, although any deal would probably not be within the next year, given the amount of management time being spent on integrating Gates.
With Tomkins' shares rated at a sizeable discount to the market, because of its association with the unfashionable conglomerates sector, it cannot buy other companies with its shares and so needs to conserve its pounds 370m cash pile. Even with its cash reserves, an acquisition of the proposed size would mean borrowings almost matching shareholders funds, a level at which investors become nervous.
Mr Hutchings added that Tomkins was generating a return on the capital it employed of almost 19 per cent compared with the cost of those funds of only between 10 and 12 per cent. In those circumstances, he said, giving money back to shareholders would destroy rather than create shareholder value.
He was speaking as Tomkins announced profits for the six months to October of pounds 168.8m, an increase of 33.9 per cent on the comparable period in 1995. As well as a pounds 20m operating profit contribution from Gates, profits were boosted by the latest period covering 27 weeks rather than the usual 26, and by the strength of the pound increasing the value of dollar profits.
Mr Hutchings said: "The integration of Gates is proceeding well and we are delighted by the quality of its operations. Tomkins is in excellent shape and we look forward to delivering another encouraging performance in the second half."
Tomkins said its record first-half figures were the 13th successive rise in earnings per share since 1984. During that period Tomkins has averaged a 25.6 per cent compound rise in eps, compared with an average of only 9 per cent for UK companies.
Investment Column, page 16