Rolls struggles with its past
MANAGING Rolls-Royce has been turbulent for Warren East since he took the controls in 2015. The legacy of his long-term predecessor, Sir John Rose, was the company’s restored reputation for great engineering, taking on the America aero-engine maker and becoming manufacturer of preference for Boeing.
It was also a period when corruption ruled in aerospace and agents dished out fat commissions to win orders.
Rolls’ accounting also needed cleaning up, the group had become too bureaucratic and it was thinly spread, having expanded into marine turbines.
East has spent the past three years trying to sort this out. He has brought in new financial skills, rid the company of marine and simplified a command and control structure involving 60 different panels.
He is now going to the core of the bureaucracy by eliminating 4,600 middle-management jobs, moving decision-making closer to the customer and saving £400m of costs by 2020. The plan is partly based on the work of consultants Alvarez & Marsal who have been sitting at East’s side as he worked through the inherited challenges.
In deciding that middle managers, ranging from finance specialists to HR experts, are no longer necessary, East is following a fashionable manual.
Tesla recently did the same. BT is axing 13,000 middle management posts and a key reform pledged by Melrose for GKN is the return of decision-making from the centre to operating units.
It all sounds wonderful, and will be a winwin for investors if underwhelming profit margins can be tickled-up.
But there is an alternative school of thought which says that cutting away middle management removes connecting tissue which protects senior executives from making stupid mistakes.
At Rolls-Royce the complacency of middle management may have trumped efficiency, giving rise to what East describes as an ‘abysmal’ financial performance. Indeed, current faults on the compressors used on the Trent engines, requiring extra tests and a fix, suggests middle managers did not inoculate against inadequate technology.
East has set the company the ambitious target of hitting £1bn of free cash flow by 2020, up from the £450m it is expected to make this year. Rolls needs the cash to support large- scale investment needs. Some £11bn has been ploughed into civilian aircraft engines since 2010. It paid off, in that Rolls has amassed orders for more than 2,700 engines.
The chief executive has gone bold in his execution and investors are impressed.
Now he must ramp up production, margins and earnings.
Double Dutch
UNIlEvER is making a grave error in seeking to move its main share quotation from london to Rotterdam.
Other UK-based global companies have switched headquarters for a variety of reasons, including British Airways-owner IAG and most relevantly Shell. But they kept the primary share listing in london.
As comfortable as the Netherlands may be for publicly quoted firms, with its stakeholder democracy, it lacks the heft of the City. The latter provides a one-stop shop for fundraising, M&A and analysis, as when Shell bought BG. Unilever’s curious claim is that its share register is dominated by Dutch institutions, so it is better to be based there. As a global player in the highly competitive, fast-moving consumer goods sector, it will have far more exposure to international investors in london than Rotterdam.
A forceful defence from chief executive Paul Polman saw off an unwanted bid from Kraft Heinz last year. Executives will doubtless feel safer in Holland.
The reality is that free market capitalism did its work. Unilever looked at itself, discarded its spread business, modernised IT platforms across the globe and set itself more challenging targets.
As a ‘premium’ listed stock in london outside the FTSE-Russell indexes it may escape scrutiny and hostilities, but the shares will be less attractive to investors – as the latest price tumble shows.
Paying a price
AS COMMERCE shifts to online giants and telecoms platforms, the power in finance switches from banks to payments processors.
Euronext launched Dutch payment firm Adyen into orbit this week, with the share price doubling on the first day of trading, valuing the processor for Netflix and Facebook (among others) at £10.8bn. Makes one think that America’s vantiv snared the UK’s fintech champion Worldpay too cheaply.
Nothing new there then...