Small can be just as profitable

Despite the current parlous state of Invensys, a certain gallows humour could still be found among the company's beleagured ranks last month. Logging on to a downloadable section of the group's corporate website, you would be given the user name 'FOR', followed by the password 'SALE'. Which, for at least two thirds of the conglomerate, was probably fair comment.

The Production Management Division has just replaced Baan's 'For Sale' sign with a 'Sold, subject to contract' one, while APV Baker is still up for grabs and the rest of the international process automation industry keeps a watchful eye on what happens at Foxboro, Triconex, Eurotherm and whatever else remains of the process systems group.

There is little doubt that the acquisition of the business-level software company Baan was at the root of many of Invensys's ills - or at least the stock market's perception of its ills. For, as the company's press release on its latest results says, 'excluding Baan, the Production Management Division achieved strong underlying improvements, with a rise in operating profits from £28m to £53m and in operating margin from 2.1 to 4.2 per cent.' That has to be put into perspective, of course. The £53m profit was generated on sales of £1261m, which were still some 6 per cent down on the 2002 results.

Baan, on the other hand, could show no such evidence of even beginning to get its own house in order. Its sales, at £188m, were 22 per cent down on the previous year, resulting in an operating loss of £25m, compared with a marginal profit of £5m last year.

Again, in the company's own words, 'Baan's performance had a significant impact on the performance of Production Management as a whole, reducing operating margin from 4.2 to 1.9 per cent.' And on top of that, to comply with reporting standards, Invensys had to take a £585m 'goodwill impairment' charge on the value of Baan - bought just three years ago for £470m and now to be sold for a little over £83m.

However, Invensys has now bitten the Baan bullet and its decision, announced in April, to refocus the group into just two main areas - Production Management and Rail Systems - gives some breathing space to what's left of the company.

Created by the 1998 merger of BTR and Siebe - themselves the progenies of earlier mergers and acquisitions across the UK engineering sector - Invensys has always struggled to find a focus for its seemingly ever-expanding enterprise.

Contrast this quest for growth by acquisition with what was on show in Germany at the Achema exhibition only a week before Invensys presented its dismal results. Yes, all the multinationals were there out in force (even Invensys, in the shape of Foxboro), but so too were a myriad of German engineering companies. For every Siemens or Krupp, there are scores of small, often privately owned operations (many still family-run concerns), successfully serving either their own niche markets, or just enough of the main markets to keep themselves, and their customers, more than satisfied.