Lax corporate cost controls trigger hostile takeover alert

Tim Jones, a partner in KPMG’s advisory arm, said: ‘Executives admit that the
more successful a company becomes, the more likely it is to lose control of
costs.

‘Increased profits and revenues are masking a bloated cost base that could
leave a company at risk of hostile takeover.’

Data compiled by the Economist Intelligence Unit – which polled 427 senior
executives in a cross-section of industries and large, mid-size and smaller
organisations – revealed that nearly half of all the companies contacted did not
know what drove costs and profitability at a business unit level.

The findings suggested that businesses could increase their profits by at
least 10% a year (assuming a current profit on sales level of 10% for the
average company) if they shifted non-core activities to shared services centres.

Reflecting on attempts by companies to cut their costs, Jones said: ‘Company
executives flying economy instead of business class is simply not enough.

‘To achieve a true cost advantage a company needs to look at lowering costs
across its whole business model and be prepared to make significant changes to
the organisation or its supply chain.’

KPMG suggested that despite the pressure to reduce costs and increase
shareholder value, senior executives were unclear as to who was responsible for
cost reduction. Only 39% of respondents thought that managers were responsible
for containing and cutting costs.

‘Reducing costs that are built into a company’s business model requires
changing embedded culture and practices,’ said Jones.

‘This isn’t something that can be achieved overnight. It requires clear
leadership and communication from the board to change practices that will
deliver long-term benefits.’

KPMG cited a lack of ambition as another factor in cost-cutting efforts being
so disappointing.

Further research found that almost two-thirds of companies were setting
themselves cost reduction targets of no more than 3% per year, and that only 8%
of respondents actually reached or exceeded their targets.

‘Although it is hard to excite people about cost management, if approached
properly it can fuel innovation that reduces expenses and increases profits,’
Jones said.

COMPANY REPORTS

Blackstone in biggest ever leveraged buy-out

Private equity group Blackstone has pulled off the largest ever leveraged
buy-out with a successful $38.9bn (£19.7bn) bid for Equity Office Properties,
the biggest commercial property business in the US.

The deal, sealed after rival bidder Vornado Realty Trust dropped out of the
race, outstripped the previous $33bn record set by the consortium that bought US
hospital chain HCA, according to reports.

The deal is a landmark for the private equity industry, which is exerting
ever more power over the world economy.

Vornado said it had pulled out of the deal because the Blackstone price tag
was simply too high to justify to Vornado shareholders.

Nortel CFOsteps down

Peter Currie, CFO and executive vice-president at Nortel Networks, has
announced he is leaving the company after two years in the job. Currie helped
the company recover from an accounting scandal and years of poor results. He
will leave on 30 April to take on ‘unspecified new challenges’.

Currie spent much of his career at Nortel, including as CFO from 1994 to
1997. He returned in February 2005 following the 2004 accounting scandal that
led to financial restatements and the firing of CEO Frank Dunn.

Baby oligarch wants second go at TVR

Russian magnate Nikolai Smolenski has made a surprise bid to buy back British
sports car business TVR from administrators.

The 26-year-old rouble billionaire took over TVR in 2004 and was at the helm
when it slipped into administration. He split up the company and the manufactu
ring arm of the business, Blackpool Automotive, before putting the company into
administration before Christmas. Smolenski was then forced to give up the TVR
name and intellectual property. Sources have said that administrator PKF had
received 30 expressions of interest for the TVR business ­ including an offer
from Smolenski.

Last week, Smolenski’s personal assistant and solicitor did not return calls
for comment.

Tax break threat for takeover merchants

The general secretary of the GMB trade union has called for tax relief on
loan interest payments for venture capitalists to be revoked in a bid to
safeguard members’ jobs.

As private equity groups announced their interest in Sainsbury’s as a
takeover target, the GMB’s Paul Kenny led the push for change by personally
writing to 100 government ministers including Jack Straw and Alistair Darling.

Kenny said that withdrawing relief was a key part of reining in a sector that
is affecting ‘companies’ jobs, pensions and the British economy’.

Leaders of the Transport & General Workers Union, the mouthpiece for
25,000 Sainsbury’s workers, are preparing to weigh into the argument by writing
to the Department of Trade and Industry detailing its members’ concerns about
the potential £10bn takeover.