Chubb, PLC

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Chubb, PLC

Chubb House
Stains Road West
Sunbury-on-Thames
Middelesex TW16-7AR
United Kingdom
Telephone: (44) 1932-785588
Fax: (44) 1932-779481
Web site:http://www.chubbplc.com

Public Company
Incorporated: 2000
Employees: 52,000 (2001)
Sales: £1.5 billion (2001)
Stock Exchanges: London
Ticker Symbol: CHB
NAIC: 541330 Engineering Services; 922160 Fire Protection; 561621 Security System Services (except Locksmiths)

Chubb, PLC is among the world’s five largest providers of security services to businesses and governments. The company is active in electronic security systems, including the design, installation, and monitoring of intrusion detection and alarm systems, of access control systems, and of closed circuit TV systems and appropriate alarms. It designs fire protection and suppression systems, trains firefighting personnel, services fire protection installations, advises on compliance with fire safety laws and regulations, and helps to maintain mandatory fire systems service records. It also provides security personnel to serve as guards, patrol and response agents, and security officers for major events and similar functions. Chubb has offices in 20 nations on five continents.

Chubb has been a name associated with security since 1818 when the Chubb business, a lock and safes manufacturer, was founded in the United Kingdom. Today’s Chubb, PLC, however, is the direct product of the 2000 spin off of it and Kidde, PLC, as independent companies from Williams, PLC. At the same time Williams, which had changed its name from Williams Holdings in 1998, dissolved itself. Nigel Rudd and Brian McGowan founded Williams Holdings in 1982 with a total capital of £400,000.

1982-90: Williams Holdings Grows Rapidly

Williams Holdings acquired diverse businesses—engineering concerns, foundries, manufacturers of household fixtures and building materials, makers of fire protection equipment, virtually any low-tech concern that had a large market share and showed signs of inefficient management. Williams’ managers then examined the newly purchased company closely, eliminated redundant or wasteful assets, invested in new equipment and made the subsidiary the lowest cost producer among its competitors. They then had the choice of selling the enterprise at a profit or keeping it as a contributor to Williams Holdings’ revenues.

In the early 1980s, several British companies had adopted similar business models. It was relatively easy for a small and unknown company to find, acquire, and improve poorly managed companies, and Williams was quite successful at it. Rudd identified takeover targets. McGowan handled relations with the City (London’s Wall Street) and company administration. A third associate, Roger Carr, headed the teams that performed the hands-on restructuring of each newly acquired company.

Williams Holdings made its first acquisition of Ley’s, a successful, but less than optimally efficient, foundry in 1982. From this start, it required only two years for the company to establish a reputation for acquiring troubled businesses and making them profitable. Nevertheless, by 1984, the company was in financial difficulty, having assets of £10 million and debts of £11 million. At that time, Rudd discovered a depressed forging, metals, and plastics company, J and HB Jackson. It was cash rich, with £26 million in assets and £11 million in cash. In 1985, Williams bought the firm for £30 million financed by a stock sale. Immediately, the £11 million in cash extinguished Williams Holdings’ debt, and the company became debt free with assets of about £30 million.

With that transaction, Williams’ stock rose, providing it with a means of financing new acquisitions without taking on major debt. By 1991, the company had acquired another dozen companies, turned their businesses around and accumulated assets worth about £1 billion.

The 1990s: A New Strategy

Although this takeover strategy had been successful during the 1980s, by the 1990s it had become problematic. A decade of takeovers, not only by Williams but also by conglomerates such as Hanson, BTR, and Tomkins, reduced the population of inefficient companies. Williams Holdings itself had grown large and famous enough that it was harder for the company to target an acquisition without attracting the attention of potential competitors.

By the early 1990s, too, the market had lost confidence in Williams. In 1991, a £764 million bid for the defense electronics, communications equipment, and security firm Racal failed. Moreover, the Economist magazine, probably reflecting City opinion, questioned the benefit of the proposed acquisition for Williams. At about the same time, analysts expressed their discomfort with the complexity, even the opacity, of the company’s financial statements. Consequently, the company’s stock price fell and it remained out of favor for a time.

The early 1990s also saw the kind of disenchantment with conglomerates composed of unrelated companies that had afflicted Wall Street a decade earlier come to the City. A number of British conglomerates produced poor financial results at the time. The City’s response was to lower the premium accorded their shares and to adopt the view that it was not possible for a management to run a number of unrelated businesses effectively.

To confront these problems, Williams altered its strategy. It maintained its focus on growth through acquisition, but decided to concentrate on fire protection, security, and building products. As Carr described the decision in a 1997 interview, “We looked at where growth was greatest, where barriers to entry were higher, and where our brands were strongest, where the businesses were international and had products that wouldn’t go out of fashion. Fire and security fitted that bill very well.” He added that home improvement products seemed too good to sell.

To implement this strategy, the company began to divest holdings that did not fit those categories, often by helping current managers to acquire the businesses through management buyouts. With the cash produced by these sales, Williams acquired companies that fit the new criteria. By 1994, these changes and a general economic recovery had revived Williams’ fortunes. Financially its profits, cash flow, earnings per share and dividend had increased noticeably from the previous year’s less than satisfactory results. Organizationally, it owned a variety of well-respected brands. Its share price again rose.

Even before its strategy shift, Williams had made significant acquisitions in both the fire protection and security businesses. In 1988, it bought Pilgrim House Group, an acquisition that included Kidde, a major fire protection business. The purchase of Yale and Valor, PLC in 1991 brought with it the Yale lock brand, one of Williams’ first major security related businesses. Between 1991 and its dissolution in 2000, Williams acquired about 130 businesses, most of them in the fire control and security businesses. It also disposed of all businesses that did not contribute to Williams’ strengths in these areas.

Particularly important to the development of Williams’ strength in security systems was the company’s purchase of Chubb Security, PLC, in 1997 for about £1.2 billion. Until 1992, Chubb had been Racal-Chubb Security, the security arm of the same Racal Electronics, PLC that Williams had attempted and failed to buy in 1991. When Williams made its bid, Racal had just spun off its enormously successful cellular phone unit as Vodafone. The expectation was that without Vodafone, Racal’s strengths in defense, communications equipment, and security would be more visible and command a better share price.

Some observers questioned this logic. They noted that without the contribution of Vodafone, Racal’s financial performance left much to be desired. Moreover, the Racal-Chubb security group bankrolled the rest of the company, accounting for about a third of sales and most of the company’s profits. These analysts suggested that Racal, which had postponed plans to spin off Chubb soon after the divestiture of Vodafone, had to keep the profitable security business until it had either sold or revived its other businesses. Moreover, the spin off of Vodafone greatly reduced Racal’s capitalization, making it quite susceptible to a hostile takeover attempt, at least until the company strengthened its weak segments.

This takeover attempt happened much sooner than anyone expected. The day after Vodafone’s official spinoff, Williams Holdings made an unexpected hostile bid for the remainder of Racal. Williams’ motivation for this bid was unclear. Williams’ chairman, Nigel Rudd, told at least one interviewer that the company wanted Racal’s security business. The company’s financial advisors and Britain’s Monopolies and Mergers Commission, on the other hand, indicated that Williams would have to sell the security business to avoid U.K. antitrust restrictions. Moreover, there was little to suggest that Williams had any experience in the operation of high-tech companies like Racal’s nonsecurity subsidiaries, which included defense electronics, telecommunications and data communications equipment, and specialized software.

To induce shareholders not to commit their shares to Williams, Racal promised to divest the profitable Chubb subsidiary and distribute its shares to Racal shareholders. This commitment and doubts about Williams’ plans for and ability to run the company gave Racal the advantage in this struggle. After a three-month clash, Williams’ takeover bid failed. Williams owned or had valid acceptances for only 35.8 percent of Racal.

Company Perspectives:

Chubb is a leading worldwide security services provider, differentiated from its international competitors by the breadth of its security services offering and its ability to integrate these services for the benefit of customers.

In September 1992, Chubb Security PLC was spun off to Racal shareholders as an independent company. The new company provided security products, primarily hardware, such as locks and safes, but also some electronic products. Observers recognized that independence made the smaller company more susceptible to a takeover by another company. This possibility became reality in February 1997, when Williams purchased Chubb for about £1.3 billion.

Analysts saw the deal as a logical one: Chubb and Williams were engaged in similar security businesses, but they were each active in different geographic areas. Williams was strong in the Americas and continental Europe; Chubb had a presence in the United Kingdom and the Asian-Pacific region. Thus, the buyout created a global subsidiary. Williams’ CEO, Roger Carr, suggested that the deal would also produce financial savings resulting from the consolidation of purchasing, distribution, and production plants. Some analysts, though, thought Williams had paid too much for the company.

Despite this cavil, the Chubb deal was a further step in Williams’ long-term strategy to convert itself from a conglomerate of unrelated businesses to an enterprise focused on security and fire protection products and services. It united major world security brands, including Yale, Kidde, and Chubb, into a company with total (including its building products subsidiaries) annual sales of about £2.7 billion in 1997.

Even after the completion of this deal, Williams continued to restructure. Of the approximately 130 acquisitions the company made between 1991 and its dissolution in 2000, about 90 of them were made after the Chubb acquisition, and these were exclusively of security and fire protection businesses. At the same time, the company disposed of its building products businesses.

The costs of this restructuring hurt Williams’ financial performance. Its share price languished. In response to this weakness, Williams began a series of on-and-off negotiations with the Bermuda-based, U.S.-managed conglomerate Tyco International, Ltd.. Tyco had been very active in making acquisitions and was interested in Williams’ security and fire protection businesses. Both would be a good fit for Tyco’s fire and security unit, which had 1998 sales of $4.7 billion because it would add to its meager European presence. In 1999, these negotiations failed, mostly because the companies could not agree to an appropriate price for Williams.

These negotiations did not slow Williams’ independent restructuring efforts, however. Among other major dispositions, it sold its home improvement unit, a major component of its building products business to Britain’s Imperial Chemical Industries, PLC in 1998. The company continued its active program of acquisitions.

Despite these efforts, however, the company could not re-ignite its business. In 1999, the company’s pretax profit declined 49 percent despite a 17 percent increase in sales. This decline resulted from “exceptional charges” related to the company’s ongoing restructuring activities. Williams’ executives decided to take decisive action to try to improve shareholder value.

A New Company Faces a New Century

In March 2000, Williams announced plans to split into two separate businesses: Chubb, focused on security products and services and on those aspects of fire protection most directly related to security, and Kidde, focused on the remainder of Williams’ fire protection activities, much of it aviation related. At the same time, the company announced the sale of its hardware-based Yale lock unit to Sweden’s Assay Abloy for £825 million. Soon thereafter it sold the last of its building products units, its North American paints units, to Masco Corporation.

When Chubb debuted on the London Stock Exchange in November 2000, it was a fully developed business, with six-month pro forma revenues of £672.4 million, current assets of £1,751.7 million, liabilities of £1,423 million, and 44,223 employees throughout the world. (The cited figures are pro forma and unaudited because they reflect the results of the business units that would be combined into Chubb when they were still part of Williams. It is not possible to produce financial statements comparable in every way for the units’ results as part of Williams and their results as part of Chubb.)

Chubb’s stated growth strategy consisted of five prongs: increasing its international presence through internal growth and through acquisitions; consolidating the highly fragmented industry by acquisition and by expanding existing operations; targeting specific sectors that had rapidly growing and specific security needs; introducing innovative products and services to the market; and consolidating its worldwide service under the Chubb brand so that it could become increasingly recognized.

In conformance with these goals, Chubb made significant acquisitions after becoming independent. The company spent £27.6 million on acquisitions in 2000. These strengthened its position in Germany, the Netherlands, Spain, Canada, and Australia. The £203.6 million it devoted to acquisitions in 2001 was focused on South Africa, Taiwan, the United States, and Korea.

Key Dates:

1818:: Chubb founded as a lock and safes company.
1982:: Williams Holdings founded and acquires Ley’s foundry.
1985:: Williams Holdings acquires J and HB Jackson.
1988:: Williams Holdings acquires Pilgrim House and its Kidde unit.
1991:: Williams Holdings acquires Yale and Valor PLC, attains assets of £1 billion, and makes an unsuccessful attempt to acquire Racal PLC.
1992:: Chubb Security PLC spins off from Racal and becomes an independent company.
1997:: Williams Holdings acquires Chubb Security PLC.
1998:: Williams Holdings changes its name to Williams PLC.
1999:: Negotiations with Tyco International to take over Williams fail.
2000:: Chubb PLC spins off as an independent company; Williams PLC dissolves.
2001:: Chubb’s first full year as an independent company.

When the new company reported on 2001, its first full year of independent operations, it was too soon to make a judgment about its prospects for success. On one hand, Chubb reported a nine percent increase in sales, profit growth of nine percent and dividend growth of seven percent. On the other hand, these results were comparisons to the pro forma results of 2000. Chubb’s share price had declined from about 255p at its debut to a range of about 130p to 190p between December 2000 and April 2002. (It must be noted, however, that stock markets throughout the Western world were undergoing significant corrections at this time.) And the company was still coping with substantial restructuring costs. At the beginning of the 21st century, it was, therefore, too soon to speculate about the eventual success of Chubb in its new incarnation.

Principal Subsidiaries

ATSE; Chubb China Holdings Ltd.; Chubb Electronic Security Ltd.; Chubb Fire Limited; Chubb Ireland Ltd.; Chubb New Zealand Ltd.; Chubb Security Australia Pty Ltd.; Chubb Guarding Services Ltd.; Compagnie Centrale Sicli; CSG Security Inc.; FFE Building Services Ltd.; Firm Security Ltd.; General Incendie SA; Guardforce Ltd.