THE CHICKENS COME HOME TO ROOST
Smith New Court had speculated on whether Redland was in a financial bind following the Steetley acquisition. Certainly from inside the company, finances felt rather tight.
By the end of 1993, many of the one -off cost savings from the Steetley merger had been realised or were already discounted by the financial markets. Redland's dividend payments, which were amongst the highest in the FTSE 100, had been necessary to attract investors to support acquisitions. Cash to sustain this level of dividend was becoming extremely tight, especially as many of the economies upon which Redland was dependent were in serious recession.
The one bright spot was the German roofing market, which had received a second-stage boost as a result of the vast amount of reconstruction work the opening up of the East was generating. But of course, this meant overdependence on one market, and on an organisation not wholly controlled.
Another dilemma was beginning to emerge for top management. Free debate had been opened with operating managers who had been promised more involvement, together with what amounted to a sea change in corporate behaviour, but now the range of options available was narrowing.
In the past, the asset base had been a flexible component of the business, capable of being bought and sold at will depending on corporate management's needs for cash and dividend payments. In a sense, this device also provided a neat way of sidestepping issues connected with quality of management.
Now, having nailed the corporate colours to the mast of three core businesses, the scope for portfolio shuffling was reduced. Even more important, Redland's management had indicated that the credibility of corporate leadership depended in their eyes on a commitment to managing the business portfolio that the company had so expensively bought. Shuffling the portfolio, as in times past, would be interpreted by operating management as strong proof that nothing had changed at the top.
Another consequence for top management of the closer relationship with their operating colleagues was more exposure to the needs of managers at the sharp end. Corporate directors with business group responsibility began to feel the heat from their sub ordinates in ways that the travelling caucus of "flying doctors" had not.
One of the sources of heat was capital expenditure. Despite huge expenditure on acquisitions and on such ventures as Plasterboard, many of Redland's operations had been starved of investment, either because cash had not been available, or because insecure managers, thinking that requests for replacement or improvement capital would be rejected, had not made a clear case for it. Now, all that was changing, especially as experienced newcomers to operating management arrived and took stock of their new responsibilities. Some of the newcomers began to make a cogent case for expenditure on plant, capital equipment and systems as a precondition for performance improvement.
Redland was in a bind created by recession. A combination of too many low quality operations and expensive acquisitions had resulted in a shortage of cash to fund high dividends and meet managements needs for replacement and improvement capital.
Robert Napier turned his energies to improving the quality of operations. He was helped in this quest by having two experienced managers, Phillipson and Gerlach, as direct reports.
An opportunity for a change of face in the corporate finance function opened when Gerald Corbett resigned to take on the top finance role in one of the largest British companies. The corporate team was strengthened by the arrival of a new director responsible for Organization and Human Resource management. The departure of Kevin Abbott, responsible for Redland's roofing operations, enabled the Redland brick and non-Braas roof tile operations to be brought under one head, Peter Johnson.
The new team set about re -creating the company from the inside. Business strategies, priorities and corporate value s and were debated intensely at a second "Selsdon" conference..From these deliberations came several streams of action.
The Aggregates business started a huge programme of operational improvement and benchmarking of standards, led with great passion and energy by George Phillipson, who saw that his experience was at last being valued. Similar international benchmarking and improvement processes had already been under way in the brick businesses and these efforts were extended to roofing. The R&D and technical activities were brought together under one head and given a massive boost in support from the top.
A comprehensive programme of management improvement, education and and development was launched.
The quality and suitability of Redland's world -wide management was assessed against newly developed standards. This inevitably meant a significant numbers of departures and replacements. Much effort was put into internal appointments and pools of internal potential were identified and promoted, but many appointments had to be made from the outside as the company had not developed enough management talent. New definitions of the attributes required in managers were developed, concentrating on management and leadership qualities rather than social or educational background. These were progressively used to guide selection and development.
For middle and senior managers comprehensive programmes of training and development were started, aimed to raise skills to good international standards and improve the levels of communication and teamwork. Better methods of appraisal and coaching were developed and introduced.
New appointments were made in senior jobs in aggregates in North America and
in many brick and roofing businesses across the world.
A new corporate finance director, Paul Hewitt, was recruited. When candidates for the role were being considered, much emphasis was placed on performance management and operational analysis.
The quality of management systems and processes had never been a strong feature in Redland. This lack was addressed vigorously by the development of an electronic information and communication systems strategy, which would connect the corporate and operating elements of the enterprise.
New business strategy, planning and performance review systems were introduced in the next planning round.
It became clear that a huge amount of work would be needed to bring the quality of the organization up to an acceptable international standard. Change would take time, improvements being progressive and incremental rather than instantaneous. Most importantly however the changes had a unifying effect on the management of the company. At last, a common cause brought operating and corporate management together.
The process started in 1993 could be likened to installing communication guidance and control systems into a previously unconnected network of businesses. Business 'language' and metrics enabling people to communicate with and understand each other supplemented these systems. Driving the whole programme was the growing understanding that without such an infrastructure the management of the enterprise had very limited leverage over performance. Previously, senior managers could hire people, fire people, buy assets, sell assets and spend or restrict capital. That was it.
At the end of 1993, a second international conference reviewed progress and priorities. In his opening address Robert Napier exhorted management to introduce "a spice of revolution" into their thinking and actions.
Conference topics included culture change, new Values and Guiding Principles, mapping business processes, the use of information technology by salesmen, employee involvement, new planning and performance management systems, the identification and development of core competencies, appraisal systems, 360 degree employee feedback systems and processes for reducing working capital. A further demonstration of commitment to operating excellence was that change was management, not consultant-led - all but one of the presenters were Redland managers from across the world.
The group results for 1993, which exceeded budget by a considerable margin and with positive cash flow and dividend cover of 1.04 times added to the bullishness.
Managers could be excused for believing that, with some luck, Redland might have the time to reap the rewards of the massive change programmes that they had initiated.
Napier's Chief Executive's Report in the 1994 accounts has a confident ring to it: "Turnover in 1994 grew by 12%. The profit margin on these sales improved by one and a half percentage points to 14%. Recovery of profit margins was a key objective for the year and was achieved as a result of volume increases in some markets and an improvement in underlying operating performance independent of market.....These favourable trends were the result of management focus on radically enhancing every aspect of our operations and adding customer value".
He goes on to say: "Three key elements are critical to raise the profits earned from our market shares and our assets.
"First, capital expenditure will increase in order to protect and extend our leading positions in increasingly competitive markets, by developing new products and making processes more efficient, thereby improving underlying performance. The criteria for this spending will be for secure paybacks by improving quality and thus value for our customers and achieving sustainable cost reductions. Total spending on capital rose from £138 million in 1993 to £174 million in 1994 and an estimated £225 millions in 1995.
"Second, we are increasing investment directed at raising the performance of all our employees. This is reflected in the increase in training expenditure and in the implementation of new systems to raise standards of recruitment, appraisal and coaching. With activities in 35 countries, supported by international benchmarking, we are transferring knowledge of products and processes and increasingly also the skills of our people between our businesses........".
"Thirdly, there was, in 1994, a significant increase in revenue and capital expenditure to improve radically the use of information technology across the group...... Redland sees significant competitive advantage in being at the forefront of progress within our industry and much attention was paid in the year to raising the sights of our managers as to the opportunities provided by today's low cost flexible computer systems".
So why, despite all this progress, did Redland's share price crash to a chorus of vitriolic comments from the press and financial analysts after the 1994 results presentation?
Redland did the unforgivable - it cut the dividend!
Turnover had increased by 12% to £2,775 million, profits at £373 million by 34%.
Earnings per share rose by 26% to 33p.
Sir Colin Corness, in his Chairman's statement, said: "I recognise that against
these worthwhile improvements in performance it might seem perverse for your
board to be recommending a cut in the final dividend of a third, even allowing for
the fact that the yield on Redland shares was among the highest of the top 100
companies in the FTSE index." However, the "less than perfectly timed"
acquisition of Steetley, the burden of Advanced Corporation Tax and the massive
programme conducted by Braas to take adva ntage of the opening of markets in
East Germany were conspiring to make cash availability very tight. Sir Colin
explained that, therefore, "re-basing the dividend is in the best interests of the
business and thus our shareholders.
...the Board recognises that it has a duty to strike a better balance between distributed and retained earnings, in line with average practise among our peer companies, so as to allow sufficient retention of cash across the group to finance replacement, improvement and growth capital investment".
For Redland, this was a major move. Previously it had set a high dividend level in order to attract shareholder support for its expansion programme. The financial community understood that the dividend was guaranteed. Management would never go back on their assumed commitment to maintain the dividend.
When the cut was announced some senior analysts felt that they had been misled, and hell hath no fury like a misled analyst! Redland lost some staunch supporters, and others who had been voicing doubts about the company's prospects felt vindicated.
In one bound Redland had moved from being a 'quality act' to something approaching leper status. From this moment on, the bias of most City analysis of the company tended towards the negative.
So why had Redland taken such a drastic step? As always, the action behind the scenes is at least as interesting as the public pronouncements.
Paul Hewitt joined Redland as finance director in 1994. Hewitt had a strong orientation towards operating performance rather than financial engineering. He was a good business and financial strategist with quality analytical skills.
Hewitt's baptism into the company came soon, when the preparation of the 1995 group budget showed that, due to a lack of cash flow, the group would not be able to fund the capital expenditure that was so critical to the improvement programmes essential to move margins ahead.
At a third 'Selsdon' conference shortly after the announcement of the dividend cut Robert Napier explained the alternatives explored by the board:
- "The group could stop capital expenditure, but the capital needed to be spent....if against difficult markets with no volume growth we are going to achieve the increasing profits that everybody is expecting of us"
- "The group could buy time for the balance sheet for another year by selling something else. Although this exchange of future cash flows for a one -off inflow would not fundamentally improve the cash flow imbalance, it would buy time. The nasty decision could be shoved away for another year. But who's kidding who? It would be blindingly obvious to Redland's followers that the company was in a financial box, and over-distributing. Selling off to prop up an edifice that was fundamentally unsound would be silly."
- However, cutting the dividend could result in a share price collapse and a take-over bid. To which Napier's answer was "Yes, maybe and there is a risk whatever we do... if, we don't cut the dividend ... we could rightly be accused of being a management whic h wasn't prepared to face up to issues and take action".
- Another key issue was the gradual de-motivation of the organization. Again to quote Napier, "This was part of the argument why we had to spend this capital. If we slashed back the capital budgets, what would that do for all your efforts to try and improve your business and drive things forward? ... as management that's not the course of action we are prepared to pursue".
The more astute amongst the operating managers questioned whether the dividend cut of 33% was sufficient to solve the cash flow problem. Napier responded, "The argument raged between 25% and 40%. Our advisers were very clear in their minds that more than 33% would give a clear feeling of a company in crisis and of course we are not in crisis, it was a slow death situation and it was their very strong advice that 33% was the right level".
As the conference ended there was still a feeling that, with hard work and skill, Redland could pull through a difficult period.
But few of the management delegates realised that there was worse to come.
Paul Hewitt, the new finance director, had a serious conviction that the best measure of corporate performance was not profit, which in his view could be manipulated in too many ways, but Cash Value Added. Hewitt believed that in capital-intensive businesses like Redland's, the best way to measure performance was to assess the cash flow returns in the business in relation to its capital value. The cost of capital to the company was easy to compute and if a business was not generating sufficient cash to more than cover the total cost of capital, then it was destroying value and did not merit further investment.
This measure of performance was unfamiliar to most of Redland's management who were used to profit before tax or return on sales as the prime measure. For many years they had been content to measure the current year's profit and compare it with the previous year. If there was a positive improvement, good, if not, not so good, but it was possibly due to market conditions or the construction cycle?
The new measure attracted considerable interest in certain quarters in Redland. However, interest turned to wary watchfulness as Hewitt demonstrated that the company had under-performed against RMC, a major UK rival, against a measure of Total Shareholder Return.
This measure computed the increase in the share price over time, plus the value of dividends, assuming reinvestment. Attempts by some to prove that the underperformance was a short-term phenomenon were scuppered when Hewitt, a persistent and patient man, produced 10-year comparisons, with the same result.
Discomfort became uproar when Hewitt went on to demonstrate that the capital spent on most of Redland's acquisitions during the 1980's and early 1990's had failed to generate cash returns at any thing like the cost of capital. In effect, Hewitt was saying that Redland had taken capital from its shareholders and invested, or bought assets, at vastly inflated prices relative to the cash returns that had been generated, or had failed to manage investments and acquisitions well enough to realise good returns.
The prime culprits were the acquisitions of Genstar and Redland Worth in the US, Steetley, Plasterboard and sundry aggregates and bricks investments in the UK and acquisitions made by Monier Inc., the US roof tile company.
All in all, Hewitt calculated that Redland had destroyed some £2.4 billion of value. This was partially offset by £ 0.5 billion created by Braas, which had created value in German roofing but destroyed it in many other businesses.
Standing out from all the others was the acquisition of Steetley, the assets of which were generating returns at a level less than half the cost of the capital spent. In other words, it appeared as though Redland had paid about twice that which should have for Steetley.
At the Redland board meeting in May 1995, Sir Colin Corness retired as chairman of Redland. His successor was Rudolph Agnew, a man with a high reputation in certain quarters of the investment community, a reputation earned in part by his having led a large number of bid defences. The biggest and most famous was Consolidated Goldfields defence against a bid from Hanson. Although the predators had won in nearly all the cases, Agnew was reckoned by many investors to have realised the best deals possible.
Rudolph Agnew was handsome, could be outspoken, and the possessed a powerful and at times irreverent sense of humour. He smoked large cigars, and strong Gitanes cigarettes in between. The contrast with the sometimes austere Sir Colin Corness was remarked on by many.
On the evening of Sir Colin's last board meeting there was a magnificent
gathering to mark the occasion. The invitees included the Governor of the Bank
of England, his predecessor, Lord Kingsdown, now restored to the Redland
board; many, many investment bankers, stockbrokers, lawyers and sundry
members of the 'great and good' of industry and commerce, some of whom had
been or were, non-executive directors.
Also present were many current and past executive directors of Redland, and a retired sales manager from Redland Roof Tiles, representing the staff. Some of the latter spent some time over drinks speculating on the possible changes that this particular change of chairman might bring.
It didn't take long to find out. Agnew regarded Redland's performance as inadequate. His way of expressing this was to state that, by his rough calculations, the Redland management owed the shareholders at least one billion pounds and he intended to see that they received their just desserts! It was as well that he was not privy to the Hewitt analyses at this time or he might at least have doubled his demands!
Paul Hewitt was an intensely analytical and rational man. In his view, you sought the facts and when you had found them, you acted rationally in accordance with they told you. He was thus bemused at some of the responses to his findings.
A lot of people simply ignored his analyses, or showed mild and very luke-warm interest. Then, when it became apparent that Hewitt was going to persist, many attacked the value methodology, attempting to demolish it as superficially clever but flawed. As Redland employed clever and financially literate senior managers, the ensuing debate was complex and lengthy, and exploring all avenues of attack.
In addition to analytical intelligence, another of Hewitt's characteristics was dogged persistence. Bit by bit, he countered the arguments of his opponents, to the point that they ran out of rational "steam".
At this point, the focus of the struggle began to subtly shift. Opponents no longer attacked the rationale of Cash Value Added, instead they began to suggest that the whole concept, and with it, its originator, were "too theoretical". In some quarters Hewitt began to be labelled as clever, but out of touch with operating reality. This argument seemed to be advanced most strongly by those in Redland operations where the gap between current performance and covering the cost of capital was biggest!
Hewitt persisted, and as the debate dragged on, he began to attract supporters, in the corporate office and in some of the operations. Gradually, the size of his constituency of support increased. The value argument, in Redland, but not yet Braas, was being won.
Meanwhile, head office was conducting a review of the performance and prospects of all of Redland's businesses. By 1995 the senior corporate team were convinced that radical change in the shape of Redland's businesses and in its organizational arrangements was needed.
These general conclusions caused another bout of argument and dissent at Group Committee and for a time it seemed that all avenues of change were blocked. There was unanimous agreement that performance needed to be improved, but should it be achieved by evolution or revolution?
At this point that Robert Napier realised the situation had become too political to produce consensus. He took control. Supported by his corporate staff, he would formulate a clear view on how the group needed to change in order to survive.
After months of confidential and intensive work he concluded that:
- Redland needed to exit from the bricks business entirely. The relative competitive position, with a tiny US presence, a difficult joint venture in Benelux/Germany and a capital-hungry UK business, was not tenable. Value was being destroyed at a totally unacceptable rate.
- With the exception of Redland Granulats in France, the aggregates businesses were all in a position to improve and grow. New management in the US was of very promising quality and there were many sound opportunities to grow the business organically and by small acquisitions that would "tuck in" neatly to existing strong operations.
- The split of roofing activities in Europe was irrational and inefficient, especially as competitors were beginning to do business on both sides of the Redland/Braas divide. The logical solution would be to create an integrated European roofing business under one management. As the Braas management controlled the lion's share of the business in Europe, it seemed logical to integrate under Erich Gerlach.
For Redland the quid pro quo for integration had to be more influence over Braas and this specifically involvement in strategy formulation, the right to remove management and control over the dividend policy.
The vital question was: could this be achieved? Informal, private discussions with Gerlach and the family shareholders indicated that they too recognised the logic of the proposition, were attracted by the prospect of leading the world's largest roofing business and would be willing to cede significant control restrictions to bring the changes about. The scene was set for some very crucial decisions.
Now Robert Napier decided on a bold move, one which wo uld have been inconceivable even five years previously. He decided to work all the issues and problems through with the wider management group in public forum before it was known whether agreement could be reached with the Braas minority shareholders. Furthermore, he decided to give management a real say on whether the proposed strategy would go ahead. After all, if the bulk of management were against the proposition, it would not work, no matter what the board or corporate staff believed.
At the Schloss Fuschl, some distance from Saltzburg in Austria in December 1995 mountainous isolation was enhanced by snow, laying fresh and thick on the ground.
Napier introduced an expectant audience to his thinking and conclusions. The discussions would be commercially very sensitive, and all participants would become "insiders" as nothing had yet been disclosed to investors.
As the day wore on, it became clear that there was very strong support for the propositions and great respect for what was seen as a courageous move by Napier in exposing himself to public scrutiny from his own management. As one long serving manager observed, "Redland has travelled far in the last few years; I just hope that we have the chance to complete the journey".
Breakout and plenary sessions worked through the practical ramifications and timing of the change process, including the roles of the two new business groups and in the corporate office.
The chosen structure of business and organization was:
- European Roofing, to be called RBB.
- International Aggregates.
- New or developing markets - mainly roofing businesses in Asia, South America and Africa. Inclusion of the North American roofing business caused not a little tooth-sucking, but there is no such thing as a perfect organization!
There was a strong emotional undercurrent to the conference. Everybody knew that several of their colleagues were bound to lose their jobs as a result of the changes, and the "losers" were present at the conference. Also, this was the last throw of the dice for Redland. Failure to bring about the changes and make the reconfigured business the platform for significant performance improvement would not be tolerated by an already unsupportive financial community.
Finally the delegates retired to a well earned dinner followed by a visit to Saltzburg cathedral for an organ recital. As the music soared through the cathedral some felt that the drama of the occasion echoed that which had occurred during the week.
The agenda agreed at Salzburg was massively demanding. Management set out to negotiate a significantly different legal basis for the Braas/Redland relationship, whilst setting up a totally new European roofing organization. A new grouping had to be created to manage the developing businesses in the rest of the world and agreements had to be concluded between it and RBB, the European business, covering technology and staff transfers. In the midst of all this, much time and attention had to be paid to Redland's European management, many of whom felt that they had been betrayed and "sold to the Germans".
The aggregates group had to be established, although this work had already mainly been achieved under Phillipson. The corporate office had to be significantly reorganized and reduced in size. The disposal of Bricks had to be carried out, creating a new crop of human difficulties, and the raft of management and systems initiatives previously started had to be seen through to completion.
Most important of all, the performance improvement drive had to be carried
forward with full energy and no loss of focus.
And, last but not least, Paul Hewitt was determined that all investments, disposals, acquisitions and also performance generally, were going to be scrutinised and measured under the microscope of value creation. Although the battle to have Cash Value Added accepted as the prime measure of performance had been won in theory, there was little evidence that managers were using it for real in their day-to-day decisions.
The biggest challenge for corporate management was the renegotiation of the Redland/Braas agreement. Over the years the Braas management and minority shareholders had managed to manoeuvre themselves into a legally impregnable position, and there was no longer a War Reparations Commission to help Redland out!
Robert Napier led a small team into the negotiations with the minority shareholders. Braas management acted as a conduit between the negotiating parties. Braas management and the family shareholders had been geographically and psychologically close for decades. The Redland team perceived that its task would be difficult.
Over more than six month's of detailed, frustrating and exhausting negotiation, during which Napier and his team began to feel more at home in Frankfurt airport than in their Reigate offices, an agreement was struck. It gave Redland much more access to Braas cash for dividends and the ability to dismiss the top management (but not to appoint new ones without agreement with the minority shareholders). In return, the Redland European roofing businesses were sold to the new joint venture, of which Redland now owned an enhanced 56.5%.
Like its predecessor, the new agreement was a massive example of Teutonic thoroughness. When the notary read the agreement out in public prior to the signing, in German, it took four hours!
In negotiating terms, the Redland team had achieved as much as could be done, but it was apparent that the long established habits of independence, unchallenged for more than 30 years, were going to be a much more difficult nut to crack.
Napier and his colleagues determined to challenge strongly and immediately on any issue on which they disagreed, no matter how small. Whilst it might cause friction it was the only way for Redland to develop a more influential relationship.
Almost immediately, the new relationship began to come under strain. For some time, small but clear signs had been emerging that the German roofing market had reached its peak. Competition in the German market was becoming tougher.
Then the Redland corporate office in Reigate began to pick up rumours about extensive and unauthorised discounting by Braas salesmen. It rapidly became apparent that Braas top managers had little control over what was happening, either in their own sales force or in the market more generally.
It was clear to Redland that the German downturn had started, and also pretty plain that Braas management, whatever their beliefs, had no experience of market decline. Clouds were gathering on the horizon and they foretold o f disaster.
Meanwhile, other problems were emerging.
The French aggregates business, mainly acquired from Steetley, Redland Granulats, was proving to be a terrible headache. Such was the structure of competition in France, and given the price that Redland had paid for Granulats, it appeared that whatever management might do they could not realise satisfactory returns. Other and more drastic solutions would have to be found.
Almost exactly the same problems faced the US roofing business. The competitive structure of the market and past mistakes by the Redland management meant that nobody in the industry was making a return. Spectres from the past were closing in.
The bright spot was in the Anglo-American aggregates businesses. Under the leadership of George Phillipson, previously marginalised for being too operational, and Bill Yearsley, who had taken over North American operations, a vigorous process of operational and management improvement was beginning to bear fruit.
It was also in the aggregates businesses that Paul Hewitt's campaign to use value-based management showed its first signs of fruition.
One source of stimulus came from a short paper from Don Young, the HR director, in which he argued that value based management would remain a peripheral tool if it was simply regarded as a new set of metrics. Value creation was essentially to do with the effective use of capital. Capital was the one resource traditionally and jealously held by corporate management (supposedly on behalf of shareholders). Responsible, grown-up managers, who took full responsibility for everything else to do with their businesses, did not feel that they "owned" the critical issue of managing capital.
So, why not give operating managers a much greater degree of discretion in how they used capital? And, if they were able to increase the margin of returns over the cost of capital, then why not allow them to use this on value -creating projects in their businesses? After all, argued Young, sensible operating managers were likely to know what created value in their businesses better than remote corporate offices. Furthermore, he added indiscreetly, they were probably less likely to destroy value than corporate management advised by a bunch of investment bankers!
Yearsley took up this idea in the US. If, he asked, he disposed of valuedestroying businesses in Central America and parts of the US where Redland had only a tiny presence, could the capital be retained in the business and redeployed into value-creating opportunities?
When Napier's answer came in the affirmative, Yearsley adopted Cash Value Added as the measure of performance for the aggregates business and started an extensive programme of change aimed at devolving more responsibility for the use of capital right down to the level of the individual quarry. Quite rapidly, remarkable changes in behaviour and then performance began to show.
Yearsley's final move was to involve the Redland corporate office in developing the plans and strategies for his business group. To those who found this a rather radical idea, he briskly argued that it was better to reach agreement jointly, so that everybody was singing off the same score, than developing plans that then had to be negotiated with a corporate group who had not shared the same thinking process. It would make implementation of strategies and plans so much easier!
By the summer of 1996, the future of the company seemed to be in the balance. On the positive side of the scales was the extent and speed of management action in sorting the intractable problems of French aggregates and US roofing, and the benefits coming from the vigorous Anglo-American business improvement process in aggregates. On the negative, the portents for the European, and especially the German, roofing businesses were becoming more and more dire, and it was becoming quite clear that the old habits of Braas's independence had not gone away.
Eventually, it emerged that the uncontrolled discounting in Germany had almost maintained market share, but at an unbudgeted cost of probably more than £20 million..
Even more frightening for Redland management was the realisation that nobody knew the extent of the problem...
After investigation the discounting losses were simply reported as part of the now evident decline in German roofing profits. The "down" side of the scales was becoming rapidly heavier than the positive! So marked was the decline in German performance that, after some debate, a statement was issued to the City. Although not couched in those terms, it simply taken as a profits warning.
The investment community, having received the formation of RBB with lukewarm enthusiasm, went into negative overdrive. The share price, which had been creeping up following the formation of RBB, plunged violently. Some commentators began to call for Robert Napier's resignation. Redland was now clearly under siege.
At the beginning of 1997, it was apparent that Redland was two quite different groups, in terms of a sense of urgency and pace.
On the "Anglo-Saxon" side of the divide the pace of operational improvement in US/UK aggregates was brisk, underpinned by intelligent use of value based performance management. And, where operational measures would not bring the desired improvements, other action was being taken.
Discussions with Lafarge over joint venturing Granulats, and Boral, an Australian competitor, to joint venture US roofing, were started. Assuming likely success in all these ventures, it would not take long to redress the problems of the past and reach a position of healthy value creation.
But now the old problems were reversed. The performance of the German roofing business continued to slide, and it was becoming very clear that the skills and mind set which had worked so well in growing markets with weak and compliant competition were not going to work in competitive shrinking markets.
Redland continued to increase the pressure for more drastic action. The RBB minority shareholders and management either resisted or agreed to act at what seemed to be a snail's pace.
One explanation of the differences between the two Redlands has to be cultural. Once the Anglo/Americans had seen the green light on value-based management, they simply moved ahead and "did it", even if the process was a little untidy. The German-led European group, on the other hand, accepted value as the best measure of performance in early 1997, and then asserted their independence by proposing to spend several months selecting consultants to support them in a major study to consider the best means of measuring value, prior to starting an implementation study. The thorough, consensus-based approach that had worked so well in building the business in growth markets clearly was not going to work in a crisis. Redland managers seethed with frustration. To them, there was more than sufficient experience inside the group to "just do it".
After months of increasing angst, it was decided that confrontation was the only option. Rudolph Agnew prepared a long note for his non-executive colleagues. In it, he described what he saw to be the conservative approach of the German shareholders and management, which "denies any fast and radical action". He went on to say, "Robert cannot carry out his duties in the face of such blind opposition. We have a major crisis on our hands. The outcome may well dictate the survival of the company".
Then, after reviewing the historically good performance of the Braas management, he outlined the discounting fiasco and wrote, "The management in Reigate took the flak for the debacle. We did not disclose the prime reason for the profit warning. The decline in the performance of RBB is becoming evident to the more astute analysts. The more sensible and intelligent fund managers may not be surprised and may not be too worried provided we, myself, Robert and Erich, can assure them that serious remedial action is in hand. This we cannot do at present".
The outcome was a reasoned letter to RBB shareholders and management, requiring:
- A 20% reduction in fixed costs over two years.
- Comprehensive review and reduction in the number of production plants, especially in Germany.
- Closure or sale of historically unprofitable businesses, such as roof windows.
- Drastic simplification of the RBB organization and reduction of head office costs
- Much greater urgency and speed of action.
The initial reaction was shock and outrage. Redland had never behaved in such a manner before. Then, attitudes and responses began to change. Erich Gerlach showed signs of agreement and went so far as saying that there was little difference in principle between his and Redland's view of the priorities.
However, the cultural differences remained. When it came to pace, Gerlach and his colleagues wanted to move in a careful, measured fashion, using extensive cons ultant support. Redland needed speed and urgency, because the 1997 halfyear results presentation was fast approaching.
The story presented to the press and financial community in September 1997 was mixed. By comparison with 1996:
- Sales were down 11%
- Operating profit was down 24%
- Profit after interest and tax was broadly similar to 1996.
- Earnings per share were the same as 1996
- Operating Cash outflow had reduced from £60m to £18m.
Redland management prepared and rehearsed carefully for the meeting. Particular attention was paid to Erich Gerlach's presentation, as the cost and performance issue in German roofing would clearly be very significant. As the rehearsal progressed, a small issue began to assume large proportions.
Redland management wanted Gerlach to state a firm target for fixed cost savings of over 100 million Deutchmarks. Gerlach said he could not commit to such a target, because such a commitment was absolute and he did not know the exact amount that could be achieved in advance. In the fraught atmosphere of the rehearsals, a small, culturally determined misunderstanding became the subject of a warm exchange!
As Robert Napier rose to his feet on the morning of September 25th 1997, before a large audience of press and analysts, he knew the sentiments of most present were against him. Whilst he and his colleagues could point to some successes in aggregates and positive action in joint venturing some impossible businesses, along with a massive amount of work in progress to improve efficiency and organization, the audience was deeply interested in one thing - German roofing.
They listened with scant attention to Napier, Paul Hewitt and Bill Yearsley, but leaned forward attentively when Erich Gerlach rose to speak. With his usual fluent, articulate and confident style, he spoke of market conditions, plant efficiencies and capital intensity and stated that reductions in fixed costs were the greatest management priority.
Then it was question time. Most questioning was directed at ascertaining a definite cost reduction sum. Gerlach remonstrated, pointing out that it was not good to "squeeze the lemon until it was dry". He intimated that a measured and orderly, rather than "slash and burn" approach would be taken to cost reduction.
At this point, the body language of the audience changed. Some sat back and crossed their legs, one or two shut their notebooks with an audible slap. The audience that but a year before had lauded Gerlach to the skies, did not like what they had just heard.
The next day investors reacted with a vengeance. The share price plummeted to 222.5p from a 1997 high of 455.5p. It was obvious that they were in no mood for a managed process of change - they no longer wanted Redland to exist.
The Teather and Greenwood bulletin issued on the day of the presentation said it all: "Redland's 1997H1 results were poor, the statement discouraging and the German content of the analyst's meeting so unstructured and self indulgent as to test the patience of all present. The Chairman was sorely missed. As were his thoughts on the dividend".
A chorus of angry analysts and investors, supported by the press, demanded Robert Napier's head on a plate.
The Redland board were left with several unpalatable alternatives. Dismissal of the chief executive, known at that time as the "Pilkington Solution", was one alternative and one that might have bought some time. But, mused various directors, what would that achieve beyond a short-term cosmetic palliative? Napier knew what needed to be done, and a replacement was not going to be able to instruct the German shareholders any more than him.
The option of breaking the group up voluntarily had already been exhaustively examined and nobody could see any prospect of realising significant value. The aggregates business was likely to fare as well under Redland ownership as any other. The only likely purchasers of the 56.5% stake of RBB were the minority shareholders, who were not in a position to offer a decent price. Tax problems inherent in break-up seemed almost intractable. For the moment, the only alternative seemed to be to soldier on with the best speed possible.
Meanwhile, Rudolph Agnew undertook a series of meetings with major investors and committed himself to return to them with firm proposals for the future within a month.
He also attracted widespread attention in another way. As the City editor of the "Times" reported, under the heading "Dropping bricks": "The elegant Rudolph Agnew found a fittingly elegant way to bolster the shares of Redland this week. Letting slip that the state of the building materials company was so dire that it was increasingly vulnerable to a bid instantly increased the price that any bidder might have to pay".
It did not take long to discover what price. In early October, Paul Hewitt, who had been participating in joint venture discussions with Lafarge over the French aggregates business, commented that his French opposite number had gone ominously quiet.
On Sunday, October 12th, Don Young was at home in the evening, when the telephone rang. It was Robert Napier. He sounded calm, but a little tense. "We've had a bid from Lafarge", he said. "I'm going straight to Lazard's (Redland's investment bankers) offices with Paul(Hewitt). Could you brief the staff and take care of things".
Thus began the last six weeks of Redland's life. For most people who worked for the company, it felt like living in a vacuum chamber. For two people, it was more like a life or death struggle.
Robert Napier and Paul Hewitt moved into Lazards office in London, into what the advisers called the "War Room". Such was their rapid detachment from their staff that one Redland wag called the office the "sensory deprivation chamber".
In this City office, they sweated to find a way of realising more for the company than the 320p in cash that Lafarge had offered.
As the bid was in cash, the chances of a successful fight to retain independence were slim. So, for Napier and Hewitt, future employment depended on finding a way of increasing the value of the company.
They constructed a break-up strategy of enormous cleverness and complexity,
which the advisers called "Project Starburst".
The strategy was dependent upon lining up synchronised buyers for at least six different parts of the group and guiding the German minority shareholders on how to prepare a realistic (and rapid) bid for the majority share in RBB.
In the meantime, Rudolph Agnew, now in a familiar situation, blasted the Lafarge bid with relish and scorn as being derisory at the very least.
As the days and weeks passed, relationships between the denizens of the "War Room", especially the small army of advisers, and the Redland corporate staff became strained to the point of being poisonous. Redland staff, providing Napier and Hewitt with the information that they required to manage the defence, objected mightily to being instructed by often young and "pushy" bankers and lawyers. Those who were running the defence "game" became understandably immersed in the battle, to the point that one non-executive director was reported by an adviser to have instructed the lawyers to sue a member of the Redland staff who had refused to release personally confidential information on some of his colleagues!
In this atmosphere, Don Young's suggestion that, as Redland obviously had no independent future, contacting Lafarge and offering to accept 350p would save much time and money was greeted by stony stares, not least from the army of advisers!
All in all, the whole process was felt to be deeply unsavoury by many Redland staff. For many, the company had provided them with a sense of purpose and identity, and latterly a belief that they could go places given time.
For those on the 'inside' disillusionment was increased by the realisation that the deceptively attractively named "Project Starburst" would cause massive redundancies in many Redland operations. For m any of the staff, a Lafarge takeover seemed like the best option.
For some others, the process brought great disappointment. Bill Yearsley, whose enterprising spirit had led him to seek backing to buy out the North American aggregates businesses, found himself unceremoniously dumped by the potential backers, who concluded that they did not need him to buy and sell on a bunch of assets.
Saddest of all, many staff felt deserted by Napier and Hewitt, however unjustified this might have been. There was a sort of feeling that the pair had joined the enemy.
The division between 'insiders' and 'outsiders' was dramatically illustrated by one incident. Pat Scott, as Group Treasurer, needed to organise an Indebtedness Statement to be included in a circular to shareholders. This is a calculation of total debt and bank balances over the whole group at a given date, and involves collecting data from every subsidiary, no matter how small or remote.
Working to tight deadlines and needing replies from all over the world, she decided to arrange translation of her request letters to speed the process for non- English speaking recipients.
Redland had its own team of translators who set to with enthusiasm. They worked all day and into the evening and finally, at ten o'clock, the final e -mail request was sent to a remote subsidiary. Pat hurried to thank the translators, who waved the thanks aside. "We'd do anything needed to save this company," one remarked, flushed with satisfaction.
Pat returned to her office subdued. She hadn't the heart to tell them that the only time the figures would be used was if shareholders were asked to vote for a corporate break-up!
The 'insiders' knew, the 'outsiders' didn't..
For Young and many other senior managers, life was frantic. They needed to keep the business running, communicate with and reassure staff, and make sure that employee rights all over the world were properly secured, despite the apparent indifference of some non-executive directors and the seemingly petty obstructions of the City Takeover Panel. This process was not helped by advisers who were the only conduit to the City, but who were obviously distracted by the main task, for them, of helping in the bid "defence".
As time passed it became clear that "Starburst" was just too complex to bring off in the very limited time available. Hewitt, Napier and the corporate finance staff had worked wonders to crack some apparently impossible financing and tax problems, but orchestrating so many deals simultaneously was proving to be almost impossible.
At the end of November, the Redland board was meeting in the "War Room" when the senior Lazards director said that he had just received a message from Lafarge's advisers, who, for some reason, were just outside. He left the room and returned some time later to say that Lafarge had increased their offer to 340p.
After a very short discussion, the board instructed Robert Napier to try to raise this to 345p. If this was possible Redland would recommend acceptance of this offer to its shareholders.
With that, the executive directors went for a drink and the rest of the board simply drifted out of the building, muttering vague farewells.
Redland, which had been founded in 1919, reached its apogee after the Steetley acquisition in 1992 and plunged to extinction in November 1997, in an investment banker's office in the City of London.
So who were the winners and losers from this saga?
Customers and suppliers really never featured in the corporate affairs of Redland, unless the 'suppliers' were City advisers.
Employees in general fared likewise. Most were never 'players' in the bigger game of strategy, acquisitions and partnerships. As events unfolded, it was to become apparent that Lafarge was not a bad new owner for the staff, they honoured all of Redland's commitments in a generous spirit and were disappointed not to be able to retain more of the Redland managers. They closed the Redland corporate office, but supported an extensive and successful process of outplacement support.
The big losers were the shareholders. Redland had under-performed against industry leaders for many years. It had raised large amounts of capital and destroyed value in spectacular fashion, mainly through acquisitions and failed ventures such as plasterboard. An investor who bought Redland shares at over 500p in 1992 would have seen them climb to approximately 640p by mid 1993, and then steadily slide, with one slight blip following the formation of RBB, to 220p before bouncing to the final bid price of 345p in November 1997.
And, of course, the once-unique expertise in materials and process engineering that had originally spurred Redland's rise was lost to a French company.
The winners? The biggest were undoubtedly the many advisers who supported Redland in the programme of acquisitions and disposals through the 1980's and 1990's.
For example, fees for the short Bid defence against Lafarge.were over £15 million. Remember that, at the same time, an equivalent if not greater amount of fees was being incurred by Lafarge. Furthermore, millions of pounds would have been earned by advisers if the bid had concluded at the Lafarge bid price, that is just for being there, for achieving nothing!
Rough estimates indicate that, one way and another, Redland must have spent over £100 million on advisers in the 1970's to 1990's.
Robert Napier and Paul Hewitt's reputations were somewhat damaged by association with Redland's demise, but being able men, they both found good new roles.
On November 27, the City editor of the Times wrote: "Rudolph Agnew relishes a
takeover battle. This autumn he seemed to be almost inviting attack as he
acknowledged that the sickly Redland share price made the group vulnerable.
On Tuesday night, he was able to declare victory". The lengthy article finishes:
"As for Agnew, he must surely now feature on the very limited list of City
mercenaries who can be called upon to fight in any interesting corporate battle".
The old warrior had won again!
As an end-piece to this drama, senior members of Redland's management received two momentos of their company, both from the bankers.
The first was a note from the senior Lazards banking adviser. It read:
Lazard Brothers is holding a dinner to celebrate the Recommended Increased Cash Offer for Redland by Lafarge. We would therefore be delighted if you could join us at the Bluebird Club (350 King's Road, London SW3) on Thursday 15 January,1998 at 7.30 p.m.
We look forward to hearing if we shall have the pleasure of seeing you.
Yours Ever, etc.
One recipient, feeling that there was little to celebrate, refused the invitation. He asked another why he was going, to which the reply was "Because I, unlike you, need another job".
The second momento was an acrylic plaque, of the kind invariably produced by bankers to mark great events like Bond Issues and other 'triumphs'.
This particular plaque showed pictures of quarries and tiled roofs as they had appeared on Redland defence documents. Across these was a large red stamp. It said: "SOLD". Underneath, were the words: "Delivering greater value to shareholders".
The deal was done, time to move on to the next.