Getting Into the European Market
When Kean took over from Neal, Boral had small operations in the United Kingdom that it had acquired in the takeover of BMI. Neal had been to assess them in 1982-83. He found two parallel types of operations - Pozzolanic and Lytag, both flyash operations. Flyash is a by-product of coal-burning power stations which is used as an alternative to cement in the manufacture of pre-mixed concrete. BMI also had flyash operations in Australia and the United States.
There was also an ironworks, a single quarry and a cable manufacturing business. The foundry had operated from the same site for 160 years. Boral promptly sold the quarry and later the foundry and the cable manufacturing business and concentrated on improving the management of both Pozzolanic and Lytag. The ironworks were sold at a handsome profit in 1986 and this money was then used to purchase Edenhall Concrete Products. This company was owned by a larger UK company that was anxious to quit the building products industry. Neal comments, 'There were about fifteen concrete products plants ranging from Cumbria in the north, down to London. It wasn't making any money but we recognised that it was the sort of business that Boral understood, in that it was similar to our Australian concrete product operations.' Once Edenhall was bought, Neal sent over a team of Australians to manage and streamline the operations. This proved very successful and the business was operating at a profit within a year.
The Boral board had decided by this time that its United Kingdom operations were small, but provided a good base to embark into the European market. When Kean took over in 1987, Boral had no success in trying to buy more businesses in the United Kingdom. It became apparent that British companies could acquire targets at much higher prices because accounting rules allowed them to immediately write off goodwill against shareholders' funds. Boral, in accordance with Australian accounting rules, was required to amortise the goodwill over twenty years.
The solution was to move directly into the European market. Kean first made a clay brick acquisition in the Netherlands and put in a Dutch-German management team rather than send out an Australian one. He found a German manager in Boral's brick operations in the United States who wanted to return to Europe. He also had a Dutch accountant in Australia who was keen to work in Europe. Kean recalls, 'These weren't senior managers but very experienced technocrats.' Boral set up an office in Dusseldorf and made some further brick, tile and quarry acquisitions in Germany. Kean comments, 'Many observers asked, "Why Germany?" but Boral had done a lot of research into the European market. At the time everybody was excited about Spain, Barcelona was hosting the 1992 Olympics, the Columbus Festival was coming up - Spain was flavour of the month. Germany, on the other hand, had zero population growth, prescriptive rules and recognised cartels. Businesses were highly regulated and the country's accounting rules were very complex. It came down to a choice between high-risk, high profits in Spain, or a low return for low risk in Germany.'
Boral opted for the low-risk option. Kean would like to have thought he had the foresight to know that the Berlin wall would come down in the twelve months following Boral's move into Germany and that the European market was really going to open up, but in actual fact this was a classic case of being in the right place at the right time.
After the Crash, on the Home Front and in the United States
Kean developed strategies based on Boral's original financial control concept. Line managers were accountable and very tight controls were kept on them. The problem the company then had was to bring together the disparate parts that Boral had come from, the odds and ends accumulated by means of acquisitions like Cyclone, BMI and Johns Perry. Boral had never been ruthless about getting rid of companies that didn't fit tightly to a pattern. Rather, management tried to encourage the entrepreneurial spirit of a family of small businesses. It became more apparent as Boral progressed through the late 1980s and early 1990s that these companies were no longer easy to manage in the enlarged company and the business climate had changed considerably. The ability to manage and control a conglomerate like Boral was no longer respected by the market analysts. In particular, they did not understand Boral's manufacturing activities in the non-building sector. There were also problems overseas. After the 1987 crash the US suffered a two-thirds reduction in new building activity, the worst that economy had ever experienced. The Australian share market did not care about the problems in the American market place - analysts simply felt that Boral had too much capital invested there.
The 1990 St Peters Fire
One of the most potentially disastrous events in Boral's history was the LPG fuel tank explosion at St Peters in Sydney on the night of 1 April 1990. The fire began at about nine o'clock that evening and burnt for more than nine hours. A 100-tonne LPG cylinder and many smaller tanks exploded. The 100-tonne tank was propelled from its mounting, bounced along the ground and landed in Alexandria Canal which adjoin the site. Fortunately there were no casualties, but residents were evacuated by police in about a two-kilometre radius - about three thousand people in total. Sydney's Kingsford Smith airport was also closed just before ten o'clock and the passenger terminals were evacuated - aircraft virtually pass over the Boral site when using the north-south runway.
Under public pressure, New South Wales Premier Nick Greiner expanded the scope of an existing government inquiry into the handling and storage of dangerous goods. The cause of the Boral fire was never accurately identified, although the inquiry found that no act or omission on Boral's part had caused it.
Board Management Changes in the Early 1990s
In December 1991 Jim Leslie, who made his career with Mobil, succeeded Sir Peter Finley as chairman. Leslie implemented a three-year planning cycle for Boral when he took over this role. While the company's senior executives had run Boral very effectively, it was clear to Leslie that the company was entering a new era that called for different controls and longer-term planning. The recession that affected most Western economies in the early 1990s was hurting Boral's building materials businesses. After twenty years of successive profit growth, profits fell 34 per cent from $322 million to $211 million in 1991 and a further 28 per cent to $152 million in 1992. Some new approaches were required.
To ensure that the company had a clear longer term strategy, Leslie required that an annual five-year plan be prepared. The board would review this plan over three days of discussions with senior management. Directions for expansion and consolidation were set in these annual reviews. As part of this strategy, the timber interests were expanded. Pacific Dunlop had taken over Petersville Sleigh, principally to get hold of its food business, and then sold the timber division to Boral in 1992. With this purchase, Boral became Australia's major hardwood timber producer, expanding its operations in New South Wales and adding timber processing and woodchip businesses in Tasmania.
Kean then started to address the concerns about the diverse manufacturing activities and the volatility in earnings caused by the building cycles. While Boral had been in the energy business since its inception, it was now a minor contributor. Nevertheless, this sector had increasing attractions and a more stable earnings profile. Kean said, 'It came down to a situation of whether to persevere with the manufacturing and what to do with the energy. Everything else in the company had grown except gas.' When Boral first got into gas it had been half the business, but over time this had dwindled to around 10 per cent.
The Australian gas distribution industry had been a virtual monopoly which could only grow at little more than the population rate. Kean said, `Fundamentally, if the economy was growing at 3 per cent - with a mature and highly regulated industry like gas - returns could not get much better than that.' He saw, however, that in the future one of the industries that would have dynamism was, in fact, energy. Quite apart from this, it also had a stabilising effect on the cyclical nature of the building industry.
As part of Boral's emphasis on energy in the early 1990s, Kean was instrumental in the decision to upgrade Brisbane's gas distribution system and the conversion to natural gas, which started in 1992.
The Boral board approved a plan that involved floating the manufacturing side of Boral and using the funds gained from the float to double the gas side of the business. Boral floated Azon (essentially many of the businesses acquired through Johns Perry, Norman J. Hurll and Cyclone) in 1993. Vern Bowles, who had been the managing director of Johns Perry and was responsible for the businesses that comprised Azon with Boral, became managing director of the new group. The float was fully subscribed in a short time. Boral simultaneously launched its bid for Sagasco Holdings Limited which was the largest takeover in Australia that year at a cost of $800 million. Leslie's change of emphasis was beginning to take effect.
Up to the 1990s usage of natural gas in Australia had reached less than half its full potential, due to fragmented, state-by-state management, over-regulation and an unattractive price to consumers. State gas utilities had profitable monopolies, and with no competition there was no incentive for them to upset the status quo, review pricing policies or expand their customer base. But in the early 1990s, this situation started to change dramatically. The grid of pipelines that cover Australia extended and interlocked. A truly national gas market was developing and along with it, a frenzy of competition and market expansion. In the future, major trunk lines would operate on a common-user basis, allowing gas suppliers direct access to industrial consumers.
The new consumers would mostly be industries that were switching away from other energy sources, and they would want firm guarantees of supply on top of lower energy costs to make the conversion worthwhile. Until the Sagasco acquisition Boral was not well positioned for these developments. Its energy business, with sales of $330 million, lacked gas reserves and marketing clout. Boral had the financial resources, but without the other two elements, it was never going to be in the race. The only major gas company with untapped reserves and an unstable share register was South Australia's Sagasco Holdings - this company became the obvious target.
Sagasco was formed in 1978 by a merger of the South Australian Gas Company and the government-owned South Australian Oil and Gas Corporation, a moribund and protected gas reticulation monopoly, and an overstaffed government oil and gas business. In September 1988, former Delhi Petroleum executive Fraser Ainsworth was appointed managing director. Ainsworth set about implementing a five-year plan to reduce debt and staff numbers to sensible levels. The clean-up took three years. Ainsworth then turned Sagasco into the most successful developer of new gas markets on the Australian scene, carefully patching together the company's existing modest, surplus gas reserves with large industrial users such as Alcoa in Western Australia.
Ainsworth was aware of the potential for industrial gas usage to double in Australia over the next two decades and consequently concentrated on takeovers, acquiring smaller companies with large but mostly unused gas reserves. He had used Sagasco's newly pristine balance sheet to build up an arsenal of gas reserves aimed at new mining and industrial consumers in almost every corner of Australia. Sagasco made nine acquisitions from 1990-93 and was in the process of bidding for US-based Magellan Petroleum Corp., which controlled the gas-rich Palm Valley fields in central Australia, when Boral decided to move on the company.
The South Australian government's stake in the company had been on the market for more than a year. Adelaide-based oil producer Santos Ltd had made a bid for Sagasco in 1992, but was bogged down in legal action with the Trade Practices Commission (TPC). The TPC had feared that a Santos¬Sagasco combination would dominate the eastern states' gas markets and hold back the competition process. The share register was tight, with 77 per cent of the shares in the hands of three players. Boral purchased 19.9 per cent of Sagasco from the South Australian government which then held 51.7 per cent. Santos held 19.9 per cent and NRMA funds management held about 6 per cent. Boral gained control of Sagasco through the South Australian government's acceptance of its takeover offer. The acquisition established Boral as one of the major players in Australia's gas industry.
The Story of Sagasco
Sagasco was formed in 1861 only twenty-five years after the foundation of South Australia. By that stage Adelaide had more than 18,000 residents and was developing into a prosperous town. There was, however, no adequate street lighting. The city council and several public houses owned the few oil lamps that provided the only night-time illumination available at the time. After dark, people travelled the streets at their own peril, social activities were generally restricted to daylight hours.
Regular gas services began in 1863, one of the first customers being the state government. Consequently Parliament House, the post office and Adelaide police station were among the first utilities to enjoy the superior illumination gas provided. However, because of protracted negotiations and opposition from the City Council, in 1866 the streets were still not lit by gas, and the Adelaide Express of 23 July complained that, 'Adelaide is still a dark city; and we fear it will be the favourite abode of footpads, and the scene of many an act of lawlessness and violence so long as the gloom of night is unrelieved by any attempt to light up the place'.
Gas manufactured from coal contained a lot of moisture. This moisture was picked up by the gas during manufacture and would pass along the pipes with it to be burnt away. However, the water would often separate from the gas in the pipes, and build up to such an extent that it would impede the gas flow, as well as rusting the pipes. In the very early days a hand pump was used to clear such blockages. Then came the days of mechanisation, and pumps mounted on motor vehicles were used to blow the water and rust out of the pipes (often all over a householder's washing!).
Just after World War II, a combination vacuum pump and air compressor unit was designed to suck impurities from the pipes, safely collecting them in the unit for proper disposal. Gasfitters called this unit a 'blower' and Sagasco had a fleet of these units in the 1950s.
The most overwhelming change in Sagasco's history was associated with the conversion to natural gas in 1969-70. Sagasco had contracted to purchase natural gas on 4 November 1966. This was the first natural gas contract to be signed in Australia. Previously the company had always been a gas manufacturer and distributor; gas was produced either by carbonising coal, from a water gas plant, or reforming refinery gas. Under the new contract it became simply a distributor of natural gas.
Since World War II gas manufacture had become less labour-intensive thanks to technological advances. This had meant a gradual scaling-down of Sagasco's blue-collar workforce. With the conversion to natural gas, plant workers became redundant.
The Third Changing of the Guard
One of the assets Boral had always gained from its acquisitions was people. The company culture was constantly evolving and developing through natural attrition and the promotion of young blood from within. However, at the beginning of the 1990s, at the senior executive level, most of the managers were around the same age. The Boral board took the view that they needed to look outside for someone to replace Kean, who was due to retire. Enter Tony Berg.
Berg joined Boral in October 1993, after twenty-one years in the investment banking industry. After three months of reviewing Boral's operations, Berg became managing director, taking over from Kean in January 1994. He was selected to take charge of Boral because of his extensive experience in management at the chief executive officer level, strategic planning skills and finance expertise. In November 1994 Leslie, having reached the compulsory retirement age of 72, also resigned as chairman. He was succeeded by Peter Cottrell who had joined the Boral board as a non-executive director in 1992.
Berg had enjoyed a high profile at Macquarie Bank and many observers were somewhat surprised by his move into the industrial environment of Boral. The style and culture of investment banking was very different to the basic industries in which Boral operated.
One of his first tasks on joining Boral was to send a message that he was against rigid hierarchies. One of the symbols of this hierarchy was that the senior management were all called Mr 'this' or Mr 'that'. Berg went around saying to everyone, 'Call me Tony.' People found this difficult. There was one secretary who, whenever she called, would always say 'Mr Berg', and he kept saying, 'Call me Tony', but she wouldn't. One day in exasperation, he said 'Margaret, for God's sake call me Tony.' She replied, 'When you start calling me Rosemary, I will call you Tony.'
Berg said in a speech at the time: 'There is a fine balance in transforming a company and developing a new culture. It is important to keep a number of Boral's traditional values like being lean and action-oriented and being able to find low-cost solutions to problems. Boral has an appealing decentralised structure and its ability to grow by strategic acquisition is without parallel.'
Berg established a management committee comprising the top eight executives of the company to help resolve policy issues and decide on strategy. The committee's first task was to redefine Boral's vision, or as it became called, Boral's Purpose. He felt that the company needed to sharpen its focus by concentrating on businesses in Australia and overseas where it could outperform the competition. Boral also needed to invest in human resources, emphasise innovation and be more customer-oriented.
The committee decided that Boral's purpose was to be a world leader in building and construction materials and a major force in energy in Australia and the Pacific, particularly in the sourcing and distribution of gas. Its aim is to provide shareholders with higher returns than comparable companies by: pursuing focused strategies to create and build competitive advantage; providing customers with better value and service than its competitors; investing in people; encouraging and implementing innovation to improve its processes, products and services.
Berg then started to implement the board's aim of refocusing the company by rationalising non-core businesses. He also began extensive programs for turning around, selling or closing poorly performing businesses. He appointed some new senior managers to carry out these plans while working with Boral managers who had many years of industry-specific experience. Senior management succession planning was also introduced and Berg vowed to the board at the time of his appointment that his successor would be an internal appointment. A performance appraisal system was implemented, with improved incentive programs. Training became a central focus of Boral's human resource initiatives and for the first time Boral developed a formal program to recruit graduates at universities.
In September 1994 Boral's Magna Carta initiative was launched to transform the company into a world leader through substantial business process improvements. This initiative was not a cost-slashing exercise; it was designed to make Boral's business processes more customer-focused, efficient and effective.
Challenges in Australia and Overseas
The challenge that Berg faced was to re-focus the strategy of the company. The Boral board brought Berg in to address this issue first and foremost. Even after the divestiture of Azon, Boral retained a number of businesses that weren't relevant to its core business. These included tyres, engineering and elevators and the challenge in Australia was to re-focus on building materials and energy areas. As a result the elevators division was divested to Otis in late 1995.
Since the late 1980s Boral had not been very successful overseas; Berg felt that this was largely due to the fact that the company didn't have strong market positions in most of its businesses outside Australia. He decided to divest some of the businesses where the company could not command a competitive advantage and to build stronger positions where possible. Berg said, 'A clear example was in the United States where Boral sold out of the quarry and asphalt business in California and acquired the Bickerstaff and Isenhour brick operations. This made Boral the market leader in bricks in the United States, with a specific focus in the south-east. It also built on the acquisitions made by Neal and developed further by Bruce Kean.'
Bickerstaff Clay Products Company History
In 1832 the United States government signed a treaty with the Creek Indians whose headquarters were on the land now occupied by Bickerstaff's brick plant in Phenix City, Alabama. As part of the agreement the Indians were moved west, and land was granted to prominent citizens of the area. Anderson and Charles Abercrombie bought the land to start a cotton plantation, and build a small country-style brickworks at the southern end of the plantation.
In 1885 James Bickerstaff and his brother William bought the property from the Abercrombies, but soon became more interested in the brickworks, which took over from the plantation as their main venture. The Bickerstaff family were born, lived and worked on the property for two generations. During the Great Depression when work was scarce they lived off the land.
The original brick plant had wood-fuelled up-draught kilns, which the Bickerstaffs later converted to coal. The original kilns were eventually replaced by down-draught kilns, and in 1927 these were converted to natural gas.
In 1952 a subsidiary company was established and the Bickerstaffs developed a forklift truck attachment for handling bricks without pallets. These attachments were manufactured and sold throughout the world, and some are still used in Australia. Bickerstaff was family-owned and operated until Boral bought the business in 1995.
Isenhour Brick and Tile Company History
In 1896 the Isenhour Brick and Tile Company was established at its present location in East Spencer, North Carolina by George Isenhour. Its primary purpose was to produce bricks for the booming southern railway workshops and the fast growing town. of Spencer. Around the turn of the century George's four sons joined him in the business and in 1909 a second Isenhour plant was built at New London, North Carolina. In 1912 Isenhour was the first company in the United States to operate coal-fuelled round down-draught kilns. In 1937 John Isenhour Senior built the first continuous production tunnel kiln in the southern United States and in 1964 the company designed and built a single location brick plant, said to be the largest and most efficient in the country. This operation is now housed in eight acres of buildings which include the world's longest tunnel kiln. The plant produces 100 million bricks a year. After one hundred years of family operation, Isenhour Brick and Tile Company became part of Boral Limited in 1995.
Boral Expands in Asia
In the mid-1990s Boral also focused its attention on Australia's South-East Asian neighbours. The company decided to invest mainly in Indonesia and Malaysia (where businesses had already been established), and also in China, principally in concrete and plasterboard. Boral commissioned Indonesia's first plasterboard production facility in early 1994 and purchased Malaysia's only plasterboard producer - Wembley Gypsum Producers Sdn Bhd - the same year. Boral also committed to build the first plasterboard plant in Shanghai, China. Plasterboard is regarded as a new building material in China.
1994 - The Turning Point
Berg had come onto the scene bringing a substantial program of change. The new Boral Purpose involved a significant re-focus for the company and in some respects a change of culture: taking the best qualities of the company and building on them.
|Total Sales Revenue||$4,695,272,000|
|Net Profit before abnormal items, tax & depreciation||$548,746,000|
|Net Profit after tax & depreciation but before abnormal items||$177,922,000|
|Number of Shareholders||152,800|
The 1996 results were severely affected by the cyclical nature of the building and construction industry, and these forces are accepted as a fact of business life. Of the three major building and construction materials companies, the effect of the current downturn on Boral reflects its proportionately bigger commitment to the Australian building and construction markets.
Strategies are being developed to counteract adverse trends; deregulation is presenting new opportunities to grow the energy business; overseas operations will be expanded, and a range of improvements to internal administration will help to streamline the complex areas of management and accounting.
One of Boral's directors had said that the problem with the company in the early 1990s was that it 'lacked a destiny'. Critical to Boral's new-found purpose is the notion of being a world leader in building and construction materials and building a strong core business in energy. Berg believes a company cannot lead unless it is also an innovator in the markets in which it operates, not only a leader in terms of new products, but also in developing new processes, new ways of making existing products, and introducing new methods for delivery and service.
Boral - Fifty Years On
Boral today is still Australian-based and owned, and operates in more than twenty countries throughout the world. It employs 22,000 people, has around 150,000 shareholders and annual sales approaching $5 billion. The company's core businesses are in building products, construction materials and energy - a far cry from its roots as Australia's first bitumen and oil refiner which waited seven years for government approval.
As Boral enters its second half-century, the only certainty is ongoing change - a feature of both Boral and the businesses it has owned over the past fifty years. The emphasis is on consolidation in some areas and growth in others; on reflecting on the experience of its subsidiaries and building on its many successes. The company continues to affirm its aim to succeed for its customers and suppliers the world over, and for its employees and shareholders. The next fifty years will no doubt be as interesting as the first.