Carillion and NCC have fallen into textbook traps of expansion
Both will be case studies of how missteps can turn big companies into small ones
Companies such as Carillion and NCC should abandon their high-flown references to tomorrow in their mission statements.
Carillion promises to “make tomorrow a better place” but the Wolverhampton-based construction group is struggling to make it through today. Cyber security specialist NCC talks of “securing tomorrow, today” but last week laid bare the chasm at its foundations.
The two businesses are in very different markets. Carillion manages hospitals and ministry of defence military bases, and has just won a contract to help build the High Speed 2 rail link to Birmingham. NCC advises companies, many of them FTSE 100 and Fortune 500 groups, on defence against the dark arts of malware and ransomware.
The group, formerly known as the government’s National Computer Centre, calculates that 90 per cent of businesses will experience cyber security threats. It is big in a market that couldn’t be more cutting edge. The construction industry is just cut-throat.
But both NCC and Carillion have fallen into textbook traps of expansion by acquisition, over-optimism at the top and accounting practices that have allowed them to borrow from tomorrow by booking revenues early. Both will end up as case studies of how management missteps can turn big companies into small ones.
This month Carillion, which uses thousands of sub-contractors, has written off nearly £850m in assets, scrapped its dividend, and waved goodbye to its chief executive. Its shares have fallen two-thirds, valuing the group at about £300m, or approximately half its net debt. A year or so ago, the group was worth more than £1.2bn.
Carillion, the builder of Tate Modern gallery, has been caught in a vice of mis-priced contracts, late payments and rising costs compounded by heavy borrowings against an asset-light balance sheet. Onlookers now fret that debt could rise to £900m in a year and wonder how they missed the signs. There are questions whether Carillion booked revenues on long-term contracts too soon and over its use of supply-chain finance to put off paying creditors. The group has called in bankers and accountants to review options. The market is braced for fire sales, rights issues and possibly a debt-for-equity swap.
Meanwhile, NCC’s new chairman Chris Stone, whisked in this spring to sort out the Manchester group after profit warnings and the abrupt departure of the previous top brass, last week announced nearly £70m in exceptionals and writedowns, and £55m in pre-tax losses in the year to May.
Shares in NCC have nearly halved in a year valuing it at £500m. In early 2016, it was a FTSE 250 company worth more than £1bn.
Mr Stone also listed a litany of accounting goofs that would make a trainee bean counter blush.
In their rush to turn the small Manchester company into a big one, NCC’s former bosses paid too much for acquisitions that they failed to integrate. They took on too many new staff before knowing there was enough work to keep them busy, and moved into swanky offices. They alienated key customers, including the Dutch government, and lost contracts they assumed were in the bag. The company also booked revenues early, didn’t account for holiday pay properly and bungled the paper work so that dividends were paid unnecessarily out of non-distributable reserves.
Mr Stone and Brian Tenner, interim chief executive, have now corrected the “schoolboy errors” and plan to straighten out NCC’s “spaghetti-like” organisation. They talk of imposing new disciplines on employees, encouraging them to bill their hours properly and cross-sell services more efficiently.
NCC’s biggest fault, Mr Stone concludes, was in failing to put structures in place that could cope with the group’s expansion. “The exciting stuff is winning new clients and making acquisitions,” he says. “But you have to invest in all the dull stuff that makes everything work.
“Where we are different is that change has not been forced upon us by mounting losses, a stretched balance sheet, technological obsolescence or a sudden shrinking in our markets.”
NCC is generating cash and its net debt at £44m — slightly more than 1.5 times earnings before exceptionals and other nasties — is manageable. It needs to double profit margins to justify shares trading at a whopping 25 times forecast earnings. But the dividend should be safe.
That is not true of Carillion whose pension deficit and net debt are together about four times the group’s equity. Carillion’s tomorrow looks altogether less assured.