The Grand Illusion
All too many years ago, I was a Navy pilot who flew helicopters both for odd utility missions and then for search and rescue off a carrier. Back in those ancient days, the first “big” helicopter I flew was the Sikorski H-34, the last front-line helicopter to use an internal combustion engine – the nine-cylinder Wright 1820 Radial. For those of you for whom this conjures no image, the H-34 is the bird that attempts to retrieve Gus Grissom’s waterlogged capsule in the movie The Right Stuff.
The other Sikorski I flew was the H-3, a twin turboshaft powered helicopter originally used for anti-submarine warfare, but many were converted to search and rescue birds during the Vietnam era because the Navy’s principal SAR helicopter – the Kaman H-2 – was originally only a single turboshaft helicopter that lacked the power to do heavy lifting in the high density altitudes of Southeast Asia. I flew the H-2 for a short time as well before transitioning to the H-3.
Like most helo drivers of that time, I loved the Sikorskis. They were strong, durable, and reliable. And they definitely didn’t have all the glitches of the H-2s , about which I wrote a SF story, in a way [“Iron Man, Plastic Ships”].
So… I was rather shocked to learn that United Technologies (UTC), the parent company of Sikorski, is looking at “strategic alternatives” for Sikorski, including spinning off the company as an independent entity. Why? Because its projected annual growth rate is only 3-5%, and its profit margin is only 10% – on annual revenues of $7-8 billion, compared to 15% for Pratt & Whitney, the other principal division of UTC . Although Sikorski has an order backlog of $49 billion, more than any other military helicopter manufacturer in the world, and firm orders and deliveries scheduled into the late 2020s, this apparently isn’t profitable enough for the suits at UTC, despite the fact that Sikorski just landed over a billion dollar order from the Indian navy.
One of the oldest helicopter manufacturers in the world, with solid profit margins, and lots of future sales, isn’t making enough money. And Sikorski builds really good helicopters. But apparently, making solid profits and producing an outstanding product isn’t enough for corporate America.
And that’s more than sad.
UTC acquired Sikorsky in 2004, so perhaps it has less to do with profits, and more to do with “unlocking shareholder value,” aka Sikorsky is just having its turn in the Wall Street M&A cycle and the bankers and management are looking for cash-out rewards. (I guess there is also an argument that Sikorsky is in for a few tough years if the oil bust continues; it’s sales are pretty heavily tied to oil exploration and development and the equipment-heavy side of the War on Terror has slowed way down. Perhaps now is a good time to exit before that backlog shrinks? But I am getting out of my core competency here…)
Warren Buffet:
“Investment bankers, being paid as they are for action, constantly urge acquirers to pay 20% to 50% premiums over market price for publicly-held businesses. The bankers tell the buyer that the premium is justified for “control value” and for the wonderful things that are going to happen once the acquirer’s CEO takes charge. (What acquisition-hungry manager will challenge that assertion?)
“A few years later, bankers – bearing straight faces – again appear and just as earnestly urge spinning off the earlier acquisition in order to “unlock shareholder value.” Spin-offs, of course, strip the owning company of its purported “control value” without any compensating payment. The bankers explain that the spun-off company will flourish because its management will be more entrepreneurial, having been freed from the smothering bureaucracy of the parent company. (So much for that talented CEO we met earlier.)” http://blogs.wsj.com/moneybeat/2015/03/02/quotes-quips-from-buffetts-2014-shareholder-letter/
I hate to nitpick, but UTC acquired Sikorski in July of 1929.
Arrgh. This is what I get for allowing myself 10 minutes of procrastination to jump in on this (and then misreading wikipedia on the corporate history). That said, the cynical Wall Street ‘unlocking shareholder value’ theory still works, and reenforces my prejudices, so I’m sticking with it.
Given that some helicopters had a reputation as little better than death traps, _if_ one manufacturer’s products indeed are consistently better that the overall average, one might hope some effort would be made to ensure their survival…little as I like such interventions.
This story is both sad and ridiculous. An indictment of the times we live in.
Now hang on, everyone. The story LEM reports only says that UTC is investigating spinning off Sikorsky, not shutting it down. I actually think it unlikely that Sikorsky was getting much additional market leverage by dint of being a part of UTC since it has a solid reputation as an entity on its own, and furthermore it may be that Sikorsky would find itself more flexible and responsive to customers without being burdened with the bureaucratic overhead of UTC. I’m not saying that is the case here, only that it could be, so while one can shake their heads at the idea that a firm generating “only” 10% gross margin being unacceptable as part of a corporation, the fact is, a corporation is perfectly entitled to determine for itself what the target growth and GM should be for each of its divisions and to dispose of ones that don’t meet its targets. Whether that is a sound business decision by UTC, only time will tell.
There is a business fad underway now for corporations to spin off business units as independent corporations, and yes, it’s often couched in terms of “unlocking shareholder value”, but what they really mean is that “we couldn’t realize any synergies or economies of scale from the acquisition in the first place, so we think the spun off firm will do better in the market without our overhead.” As I said, it’s a current fad and we’ll likely see the pendulum swing back the other way towards mergers and consolidations in order to “reduce operating costs and increase shareholder value” in another decade or so. These things come and go in cycles.
As long as Sikorsky, with its venerable name recognition and reputation for producing a quality product, can continue to thrive stand-alone, I say more power to it.
P.S. I served with a number of helicopter pilots in the U.S. Coast Guard, and they all insisted there were only two kinds of chopper pilots: those who have crashed and those who will crash.
I will point out that spinning off can be amazing for a smaller company ready to stand on its own.
The bank I work for was owned by a larger business up until 2007. We spun off on our own and became a publically traded company instead of a private subsidiary. We’ve since grown immensely, expanded our reach to literally everywhere in the financial world and weathered the economic mess a few years back by actually buying more and growing instead of losing money.
I don’t know the inner politics of this situation with Sikorsky, but it could be for the better of themselves regardless of how some shareholders see it.