Page 101 - Five Forces of Americanisation Richard Hooke 04072025 final post SDR1

The UK Defence Industry in the 21 Century
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The Five Forces of Americanisation

These factors, combined with poorer than expected results in 2016***, ultimately resulted in the
major goodwill impairment we have taken, as well as a loss of talent and capability***.…

The Group has many issues which require attention to reverse the current negative performance
trajectory*** and this is the relentless focus for every employee, starting with me. During 2016,
there have been a succession of performance issues in a number of Cobham businesses. These
have stemmed from weaknesses in management and financial controls**; contractual and
commercial failures and, in a few businesses, more challenging market conditions. Change
projects and initiatives driven from the centre have diverted focus from improving critical
production, operational and contract performance. These change programmes have consumed
significant financial resources and management energy* over a number of years with
disappointing outcomes
“The Group’s reporting structures, including its internal processes and the allocation of
responsibilities have become overly complex and unclear*. In a number of instances, this has led
to duplication, reduced accountability and slow decision making***, which has contributed to the
period of sustained operational and financial challenges. This situation has ultimately impacted
employee motivation and morale, evidenced by Cobham’s high voluntary staff turnover**.
Furthermore, with hindsight, the Group may have misread the cycles within its markets and within
its businesses, making poorly timed acquisitions or integrating them poorly**. These acquisitions
appear to have amplified internal weaknesses, rather than compensated for them”

Corporations often expect their advisers to provide guidance and, whilst Cobham’s “Excellence in
Delivery” project was delivered by experience management consultants for six years, the company
also had plenty of support and input from brokers, equity analysts and bankers.
Cobham active use of bank lending (up to 40% of its total debt) to finance the business had reflected
the Board’s confidence in continuing revenue growth as well as its support for continuing M&A
activity. However, with operating cash flow falling from 2013 onwards and the huge task of bringing
Aeroflex into the group revealing gaps in the management lineup, a revision of the Company’s financial
policy appeared well overdue and made the board look equally in need of strengthening. Financial
policy provides one of a company’s most basic foundations, informing management and shareholders
alike of the company’s prudence and its attitude to risk. At a time of significant management turmoil,
without a finance director for several months and a part time CEO in office, it ultimately required two
Rights Issues inside two years (June 2016, April 2017) to repair the balance sheet.

Notes
1. Lenders and investors generally like stability and the ability to take a reliable, preferably long-term view.
Ironically, investment bankers like change. Change that provides opportunities for financing or re-financing,
Changes like mergers, acquisitions, spin-offs and disposals, even bankruptcies. These events provide the
opportunity for “event-driven financing”, often accompanied by specialist advisory work. Both tend to offer
premium pricing.
When momentum has been developed relating to a possible merger or takeover, the potential for event-
driven advisory and financing fees makes it difficult to stop. Accordingly, Rule 2.6 of the UK Takeover Code
prescribes that a potential offeror, after being publicly identified, must either announce a firm intention to
make an offer to acquire the target company in question within 28 days, or publicly withdraw its interest.
This is quaintly referred to as a “PUSU”: Put Up or Shut up.
This is the kind of language of which John Hamre (“big hat; no cattle”) would no doubt approve.
2. Global Private Equity Report: March 11, 2024 (see The Five Forces of Americanisation: 5. Financial Markets)
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