Hard road back from despair

THE INDEPENDENT
Hard road back from despair: Last February the workers at Leyland Trucks appeared to be headed for the scrap heap. In June they raised a toast to the team that lifted the firm from receivership. David Bowen traces a brave escape from the breaker's yard
DAVID BOWEN

THE MAN from the Nat West was in tears. The workforce was giving the chief executive a standing ovation, waving their cans of McEwans in the air. 'I had this speech to read,' he says. 'They wouldn't stop. They kept stamping and cheering.' June 11, 1993, was not a typical day in industrial Lancashire.

John Gilchrist, a hard-smoking engineer from Edinburgh, was telling the 650 workers at the Leyland truck assembly plant near Preston that after four months of desperate uncertainty - during which they had seen 450 colleagues leave - their jobs at least were safe. In February, the biggest industrial collapse in Britain since Rolls-Royce had pushed Leyland DAF into receivership. The chances of rescue in a grim truck market had looked bleak. This Friday morning, the workforce was celebrating a remarkable resurrection.

Leyland Motors was one of the British industrial success stories of the Fifties and Sixties. Thanks largely to its energetic sales director, Donald Stokes, its rugged products were famous throughout the world. In the Fifties it moved into cars by buying Standard and Triumph, and was so successful that in 1968 Harold Wilson persuaded Mr Stokes to rescue the larger but ailing British Motor Corporation.

In possibly the worst business decision of all time, Mr Stokes agreed. He struggled with a group that was hopelessly overmanned and underinspired; in 1975, the Government had to save British Leyland from the knacker's yard.

Meanwhile BL's truck operations were allowed to drift, and it was not until Michael Edwardes arrived in 1977 that anyone noticed that they, too, were being overhauled by more efficient foreign rivals. Armed with sacks of government gold, Mr Edwardes, later Sir Michael, ordered the construction of a vast new truck factory at Leyland. It opened in October 1980 - amid a deep recession - and it was equipped with the latest computerised manufacturing systems.

The first few years were rocky, as first the British then the vital Nigerian markets vanished. But by 1987, when the Government sold 60 per cent of the operation to DAF of the Netherlands, UK sales were picking up fast. Output rose steadily to reach 14,000 by 1989. Leyland was given the task of producing all the lighter trucks in the DAF group and launched an exceptionally successful 7.5-tonner, the 45. Meanwhile, Mr Gilchrist, who ran the factory, was upgrading efficiency and quality by introducing the latest Japanese techniques. In 1991, the Dutch asked him to move to Eindhoven to oversee manufacturing for the group.

By then, however, the British market had again collapsed; in 1989, 70,000 lorries were sold in Britain; in 1991, 31,000. The UK was Leyland DAF's biggest market. The company cut capacity and shed 3,500 jobs, but it was not enough. 'We had plans for a 25 per cent drop in revenue,' Mr Gilchrist says. 'This was a 50 per cent cut.'

DAF was still spending heavily on new models, and in 1992 the management tried to form an alliance with Mercedes-Benz. As the Continental recession closed in, Mercedes pulled out, however, and by the end of the year DAF's debt was more than pounds 1bn. 'We were were having to be very careful,' Mr Gilchrist says. 'We were down to daily cash balances.'

Even so, he had no real worries, because DAF's board was in detailed talks with its bankers over a financial restructuring. 'I was fairly convinced it would succeed,' he says. (It later emerged that had it done so, most of the British workforce - along with the van, axle and parts operations - would have been cut.)

At 1am on Tuesday, 2 February, Martin Hayes, Leyland DAF's UK public relations manager, rang Mr Gilchrist at his hotel in Eindhoven to tell him the restructuring plan had failed, and that DAF was about to apply for protection from its creditors.

At 9am, Cor Baan, the DAF chairman, confirmed what Mr Gilchrist already knew. 'We didn't know what had happened,' he says. 'Some people blamed the Belgian banks, some the British.' Ironically, the Flemish government's attempts to bail out DAF's factory at Westerlo might have hastened the collapse, because it added yet another element to the refinancing attempt. 'It was a very complicated structure,' Mr Gilchrist says. 'I think it just ran out of time.'

'The place for you is in your country,' Mr Baan told Mr Gilchrist, who was still joint managing director of the British operation. He flew back to Lancashire feeling 'like I had had a bereavement'.

Early that afternoon another Scot, Murdoch McKillop, was told that he and his colleague at Arthur Andersen, John Talbot, were to be joint administrative receivers of the UK end of Leyland DAF. The company had 5,322 employees - 1,100 in the truck arm, most of the rest at the van operation at Birmingham and the Albion axle plant in Glasgow. About 10,000 jobs in component suppliers also depended on the group.

At the truck factory, Stewart Pierce, the personnel director, awaited the arrival of the receivers with trepidation. 'The worst thing was the fear and uncertainty,' he says. 'We sat there waiting to be escorted from the office.' When they arrived, he says 'they were like an army, trained to the last degree'.

As part of its efforts to drive up efficiency, Leyland DAF was operating a full just-in-time delivery system: rather than holding large stocks, parts were delivered directly to the lineside in small batches. It forced efficiency on the factory but also removed any cushion should supplies be interrupted. Component companies stopped delivering when they heard the DAF announcement; within a day, every factory in the group had ground to a halt.

Mr McKillop arrived at the Leyland plant on the Wednesday evening, and was amazed by its size. 'We can't let a business like this go down,' he told Mr Gilchrist. 'But it's going to take some time.' His confidence was based on a simple premise. 'If a business has a large market share, it should be able to get the financial equation right,' he said.

His first job was to get the factory up and running, because 'if you don't have it trading on some sort of basis, you just lose everything'. He contacted the company's big customers - the Ministry of Defence and fleet buyers such as the Post Office - and was relieved to find they wanted to help.

Their attitude was undoubtedly influenced by cajoling from Michael Heseltine at the Department of Trade and Industry. Pressure was already building from the Opposition and unions for direct government intervention, as seemed to be happening in the Netherlands and Belgium. Mr Heseltine could not deliver this, but he did ensure that government departments and state-owned companies were as helpful as possible.

Most suppliers agreed to restart deliveries. About 40 did not, though, demanding full payment for parts sent before receivership. Mr McKillop and Mr Talbot rang them all, and in most cases came to a compromise. In a dozen cases, they had to look for alternatives.

Before production could restart, Mr McKillop decided that a third problem had to be tackled. 'The company was significantly overmanned, but hadn't been able to do anything about it because it couldn't afford the redundancy costs,' he says. Managers reckoned there were at least 1,300 too many workers.

On Monday 8 February, he wrote to the workforce telling them redundancies were inevitable. There was uproar as workers demanded to know how the collapse could have happened. Why had the Dutch let the British down? Why would the British Government not intervene, as the Dutch were (plans for a state-backed DAF Trucks had already been announced)? A series of mass meetings was held, and the unions announced ballots on the Thursday to get authorisation for strike action. That morning the workers received another letter from Mr McKillop. 'Let me be clear,' he wrote, 'if there is strike action then all jobs will most likely be lost.'

He was not bluffing. 'It was very, very hairy,' he says. 'We almost hit meltdown around then. Suppliers weren't supplying, the employees were threatening to go on strike, and the orders we needed to fulfil looked huge. At one point, we were looking very seriously at saying it is too difficult.'

By the end of Thursday, he knew there would not be a strike, and on Friday 1,630 people - 31 per cent of the workforce - were told they were out of a job. In the Leyland truck factory, 450 workers were handed their cards.

'There were lots of tears around the plant,' says Mr Pierce, 'mostly from the people who were staying. The people going just wanted to go home or to the pub.' Pete Gibson, a cab fitter, was told he was being kept on, but must now do storekeeping as well. He realised he had no choice. 'February 12 changed my outlook,' he says. 'It had got to work. There was nowt left at Leyland if it didn't'

From then on, uncertainty ruled. 'I kept on thinking, how many days do I have?' says John Dwyer, the operations director. Others cleared out their lockers, expecting to be told to leave without notice.

As the company was insolvent, statutory redundancy payments had to come from the Department of Employment. Usually it would take months to process the paperwork, but in this case the money was paid within a month - another sign of DTI intervention. 'That took some of the tension out of a very difficult situation,' Mr McKillop says. (The issue did not die, however, and in October an employment tribunal ruled that the company should have allowed a 90-day consultation period before making the redundancies; it also criticised Andersen, which Mr McKillop finds 'unfortunate'.)

On 22 February, production restarted at Leyland. The same day, Mr Gilchrist announced that he and three colleagues - John Oliver, head of operations, Sandy Morris, the finance director, and Mr Pierce - intended to buy the factory from the receivers.

Mr Gilchrist first suggested a management buyout to his colleagues within days of the receivership. It was not the first time he had done so: in 1986, he had asked BL if he could lead an MBO and had been rebuffed. He was encouraged by a friend at Coopers& Lybrand, and within a week the team had the first of many midnight meetings with the Coopers people, led by Jonathon Wackett. 'They told us about the hell we would go through, and how many buyouts led to divorces,' Mr Pierce says. 'We looked at each other and said, 'We're manufacturers, we've been through hard times.' '

They quickly decided that it would be pointless trying to build Leyland Trucks up into an all-singing, all-dancing truck maker - in competition with DAF as well as everybody else. 'We felt there was no place for an eighth truck maker in Europe,' Mr Gilchrist says.

Instead, they looked at such companies as Amstrad, which had decoupled manufacturing from sales, and decided the factory's best chance was as a contract manufacturer, ideally selling through the DAF network, but also to anyone else who was interested. The logic was bolstered by the decision of the new DAF in the Netherlands to buy back its UK marketing operation.

The receiver's job was to raise the largest amount possible from whole group. Arthur Andersen could not show any favouritism to Mr Gilchrist's team; furthermore, Mr McKillop had his own agenda, which would involve further complexity for potential purchasers. He had decided that the most valuable part of the group should be the parts operation at Chorley, near Leyland. But its value was dependent on having contracts with the various manufacturing operations: while individual buyout teams or purchasers were concentrating on their own problems, his aim was to build a web of contracts leading into Chorley.

The management team installed itself in offices in Lancaster House, the group headquarters building that was already redundant. Mr Gilchrist and his colleagues had a phenomenally complex task. They had to come to an agreement with the new DAF. They had to persuade their direct customers, notably the MoD, to work with them. They had to raise the money - to draw up the MBO agreement and to tie up all loose ends, on property for example. In all, they had to negotiate 30 separate contracts.

They were at least lucky on the financing. Barclays Development Capital and NatWest agreed to back the buyout early on and stayed the course. The price paid has never been disclosed, but press reports put it at pounds 35m.

Coopers' warning on the chaos of MBOs was more than justified. The agreement with the new DAF took more than 10 weeks of hard bargaining. Bankers and other potential backers wanted ever more information. MPs had to be kept informed. So did the MoD. And the team did its best to keep some contact with the workforce.

'The four of us were working flat out,' Mr Gilchrist says. 'It was like the guy with spinning plates in a circus, sprinting backwards and forward to keep them going just as they are about to fall off.'

Every morning they would meet to parcel out jobs, then would start at least 14 hours of non-stop meetings and phone calls. 'In 18 weeks, we only took one day off, Easter Monday, because we couldn't find anyone to talk to. But I spent the day on the phone anyway,' Mr Gilchrist says. 'Whatever time we got home, there were always half a dozen phone messages.'

They commuted to and from the Netherlands, boosting the cash flow of Harry Ramsden's fish and chip shop in Heathrow's Terminal One. On one flight, Mr Gilchrist sketched out the basis of the final deal in the back of his airline ticket; he now has it framed at home.

The pace was relentless. 'We had to have a medical, because we needed key-man insurance, but we couldn't find time to get to a doctor,' Mr Gilchrist says. 'Eventually our backers flew a doctor up here, and each of us left the meeting in turn to strip naked in the office next door.'

They had to develop split personalities. As the factory's managers, they had to give information impartially to other potential purchasers. 'We always said that if a big trade player came along, we would not be able to compete,' Mr Gilchrist says. 'One of the receiver's favourite tricks was to tell us after a week's hard negotiating that an interested party was coming in on Monday.'

There was a steady trickle of potential buyers. The biggest threat came from Volvo, which came close to clinching a deal. There was a clutch of individuals too, including Ian McKinnon, who had bought out, then sold Leyland Bus in the late 1980s. He publicly declared he wanted to do a buyout within days of the receivership. Another was Dan Wright, who was attempting a buyout of his own company, Albion, as well as a buy-in of the truck factory. 'Sometimes your thoughts strayed to what other people were doing,' Mr Pierce says. 'But Jon Wackett said just keep your head down and go for the tape.'

At one point, three sets of due diligence investigations (to check the companies' credentials) were being carried out simultaneously. The office was crawling with accountants working for the various groups. 'Sometimes it was difficult to know who was who,' Mr Gilchrist says. 'It was like watching a match where both teams had the same jerseys.'

As a result of all this attention, the plant, already tidy, became immaculate. 'The lads on the shop floor were trying to show it in the best light when visitors came round,' says Mr Dwyer, who had to run the factory as best he could, despite having only a vague idea of how his bosses were doing. 'We were trying to keep the place alive so they could complete their negotiations,' he says. In fact he did rather better than keep it alive. 'We already had an agreement to give us more flexibility in working practices, but it wasn't invoked until the receivership.' But Mr Dwyer resisted the temptation to force through even more changes. 'We had the opportunity to be as brutal as anyone has ever been. But the fear receivership brings doesn't last. What would we have replaced it with?'

There were times when it seemed a deal was impossible. 'We reached an impasse with DAF at the end of March,' Mr Gilchrist says. 'I got into my head that they didn't want to do it, so we packed our bags and were about to leave, when they asked us to stay.'

A month later he again packed its bags - this time in Arthur Andersen's London office. The receivers asked for an adjournment, and came back with a possible solution to the problem. 'That meeting started at 3pm and ended at 3am. One of the receivers fell asleep in the middle of it.'

Meanwhile, Mr McKillop's jigsaw was coming together. The van buyout was completed at the end of April, and he could see the other parts moving towards new ownership, mostly in MBOs. But he also had crises to deal with; Automotive Products, one of the main brake suppliers, decided to stop deliveries, bringing the factories to a halt once again. Mr McKillop had to negotiate hard to resolve the problem.

By the beginning of June, virtually all the negotiations were complete. 'There was a marked change in the last week when the accountants disappeared and the lawyers moved in,' Mr Pierce says.

At 9am on Thursday 10 June, the final meeting to tie up loose ends began. It finished 25 hours later. 'That was a funny night,' Mr Gilchrist says. 'People were wandering around in the half-light in Lancaster House.' At 5am, he suggested going out to get some ham and eggs. 'That's the first good idea you've had in 18 weeks,' Mr Wackett told him. Mr Hayes was dragged off to give his view on the meaning of a document. 'When I said what I thought, half the people said 'Yes]', the other half said, 'Who is this man?' '

At 10am on Friday, the 30 contracts were signed. 'It felt like signing a peace treaty after an 18- week war,' Mr Gilchrist says. The team, who had been up for two days, went home, changed, and came back to tell the workforce. The standing ovation began.

The truck market is still in a desperate state, and few of the people who have lost their jobs are likely to be rehired for some time yet, but the future of the former Leyland DAF companies looks reasonably secure. Consultants DRI/McGraw-Hill say the company 'appears set to recover the greater part of its former market share in Europe'. Leyland Trucks is making a profit; with fewer workers and more flexible working practices, it is more efficient than ever. 'We believe we're the lowest-cost truck factory in Europe,' Mr Pierce says. 'And on quality, no one can beat us.' UK market share is 19 per cent, not too far off the 26 per cent peak. Perhaps most important, the company has revived its development programme, and has rehired 12 engineers.

Mr McKillop achieved his aim, selling the parts business for more than any division. 'At the end of the day,' he says, 'it worked out extremely well.'