Andy Hales partner KMPG Corporate Finance
Relative new boys on the block, we are anxious to dispel some traditional myths about how best to grow an engineering business, particularly in the post-bull market.
Our main target is the accepted wisdom of fellow investment bankers that public ownership, for example a Stock Exchange quotation, is the best way to enhance growth.
Our research reveals that the majority of engineering successes in the UK emerged from private enterprise – sole traders, family companies and venture capital-backed entities. In truth, institutional investors have remained unwilling to proffer risk capital for the unproven engineered invention or for the emerging enterprise.
Evidence from our research at car manufacturer TVR and equipment manufacturer JCB are examples of private engineering companies that have excelled without City funding.
It is sobering to reflect that over 15 years TVR has increased output from 150 to 1,700 vehicles per annum. More sobering, perhaps, is to note that in the same period TVR outperformed Porsche, Ferrari and the other sports car manufacturers.
Peter Wheeler has been instrumental in TVR’s success. There are no shareholders, no board, no middle management. You can view the company as one with a `benevolent dictator’ at the helm. TVR is certainly radical and has eschewed the quoted company philosophy of concentrating on mission statement, marketing strategy and a committee on styling. But the results speak for themselves.
So, why do private companies seem to foster engineering success? There is a persuasive reason. Public companies are accountable first and foremost to their institutional shareholder base. Rightly, those institutions expect a regular and growing dividend stream and consistent annual profits growth. It follows that engineers developing a new product or growing a new business probably cannot deliver what the City wants by way of return on investment.
Instead, the benevolent dictator must ensure that the precious resource of cash is continuously fed into the ever-hungry enterprise – be it in product development, R&D, capital equipment or people.
The experience of JCB, established more than 50 years ago by Joe Bamford and influenced more recently under the management of Sir Anthony Bamford, reinforces this message. Turnover in 1995 exceeded £700m and profit before tax was just over £100m; return on capital employed was 40% and sales per employee in excess of £230,000.
Without the pressure from outside shareholders, JCB has stuck to its guns throughout the cycle, maintaining R&D at 4% of turnover and continuing to pursue export opportunities despite the inevitable start-up losses – JCB took 13 years to return a profit on its crucial expansion into the US.
But success in engineering is not about the cult of the individual. Engineers are typically down-to-earth and low profile – albeit absolutely committed to their chosen product or enterprise. Yes, you could argue that the benevolent dictator rules, but the reality is more to do with harnessing proprietor returns and available cash to the perceived new investment opportunity. Bluntly, true success seems to flow from any meaningful form of investment in knowledge.
So are public companies missing a trick? In fairness, it has always been the case that entrepreneurs, families and venture capitalists provide the seedcorn capital for our engineering success. The challenge for our quoted engineering and electronics companies, as we approach the millennium, may be to ensure that they spot and truly foster the occasional nugget within their organisation.
Stephen Barrett and Andy Hales are partners within KPMG Corporate Finance, the investment banking division of KPMG, and together run the firm’s engineering team: an advisory centre for the UK’s engineering and electronics industry. The research on the public versus private ownership debate was used for a paper given by Andy Hales at KPMG’s Engineering Industry conference.