“It’s hard to do, but you must have that discipline, or you’ll end up paying too much. And that’s something you determine before you go into the transaction.”
Provided it ticks all the boxes, Little says a major benefit of merger and acquisition activity is faster growth than the organic option. An acquisition can bring plant, equipment and staff, so “you can hit the ground running”.
“But acquisitions aren’t all plain sailing,” he says. “The cheaper companies, in terms of what you have to pay for them, are cheaper for a reason. That is poor equipment, poor people, poor marketing strategy and execution – all resulting in poor P&L (profit and loss).”
Integration generates efficiencies by removing waste and impediments. “I think integration is the way of the future,” he says. “It enables clients to see the whole process – electronically. Removing the middle man, or middle men, is what we aspire to do – both when I was running the logistics business, and now in the property area.”
Gearing
Little says managing risk makes a successful business. “I will always be risk-averse,” he says. “But where I believe I can use my experience, knowledge and the people around me, I’m prepared to take on calculated risk.”
It’s at this point in the interview thatLittle talks about Fortescue Metals Group and its debt of more than $9 billion that had recently forced the company into a trading halt and a debt restructure as a result of plunging iron ore prices.
It’s not that long ago that highly-geared companies across the world went out of business or merged in response to the credit crunch and ensuing global financial crisis.
According to analyst Michael Heffernan, of stockbroking firm Lonsec, Fortescue Metals’ net debt-to-equity ratio was 156% at June 30, 2012. Simply, Heffernan, says: “That would be a red flag to any investor.” In contrast, Heffernan says BHP Billiton’s net debt-to-equity ratio was 35.8% in mid-2012.
Little politely says a debt/equity ratio such as Fortescue’s may not have been tolerated in too many other companies.
“In a bull market, Fortescue’s debt/equity ratio may have been more manageable,” he says. “But the iron ore price fell from $US180 a tonne to $US90 a tonne – that’s the problem. It’s much harder to manage debt when your income levels can halve relatively quickly.
“In any business you run, whether it be the corner milk bar or a publicly-listed company, you must have conservative debt levels. The businesses I see get into trouble usually have high debt levels. I’ve always felt that you can ramp up short-term debt if the prospects of repaying it quickly are good.
“Long-term debt is a bit scary.
“Too much debt kills companies. That’s why the gearing ratio is terribly important in public companies. I’ve been accused of having a ‘lazy balance sheet’, but today you would swap it for almost anything.”
Global
Little encourages businesses to think global. Take advantage of the internet to grow in and beyond Australia. “The use of technology is vital for global growth,” he says. “The speed, accuracy and amount of information will assist in managing businesses more effectively, efficiently and open new global markets.
“I keep talking about global markets because we live in a global marketplace. Business leaders must be aware of the opportunities and threats from countries outside Australia. We can’t just look at Australia as a separate marketplace anymore.”
Little sees Asia, due to its population and proximity to Australia, as an opportunity. “Clearly, you can’t offer a global service if you’re not in Asia,” he says, but, as always, expansion needs a plan due to cultural differences in the way business is done. “In Asia, you need to be patient and selective about how and where you grow.”
It’s an important point, given Toll’s troubled Footwork Express business in Japan. As Little is no longer on the Toll board, he declined to comment about the Footwork Express performance that resulted in a $168 million writedown and contributed to a 76% fall in net profit after tax to $70.9 million (after non-recurring items) for the 2011/2012 financial year.
Leadership and strategy
“It’s fair to say, if there’s one thing that separates chief executives from the rest is their ability to have a vision and the courage to pursue it,” Little says. “The vision isn’t for a month or the next reporting period – it’s for five years from now. Consider where you want a business to go and what it will look like in future? How can your service offering be different to you competitors?
“Good leaders surround themselves with the best possible people. I know that sounds obvious, but it’s terribly important. Senior employees working closely with the chief executive are generally ambitious, but also team players.
“At Toll, I encouraged senior people to take on responsibility, accountability and the destiny of their part of the business. I didn’t want to interfere.
“The corporate office would set parameters, be they treasury, budgetary or legal, and the rest was up to the individual. Employees should be adequately rewarded for taking on a slice of the business, managing the risk and growing profits. It’s difficult to get the best people and to incentivise them without paying them adequately.”
A good leader is confident and persuasive about strategy. “At Toll, the audience I had to be persuasive to was essentially shareholders,” he says. “There has to be a level of believability about your strategy. You need to exude confidence about executing it, because a strategy is long term and shareholders are impatient.
“It’s a balancing act that public companies often struggle with today. And articulating a strategy is terribly important because an inability to do so can bring additional pressures that wouldn’t otherwise emerge.”
Patrick acquisition
Even the best-laid plans can go astray. The bitter battle with the competition regulator for stevedoring company Patrick in 2005/2006 took a toll on Little. “The deal became all-consuming,” Little recalls. “We had a war office inside Toll, and for about a year, I was good as cut off from the outside world. I lost a year.”
Little says Toll was keen to acquire Patrick’s port activities to complement its land-based services. “For us to achieve our ambition of being a global logistics operator, you couldn’t do it effectively, at that point, without some sort of stevedoring capability,” he says.
But Little says Toll’s original acquisition plans for Patrick eventually met stringent opposition from Graeme Samuel, Australian Competition & Consumer Commission chairman between 2003 and 2011. “The regulator thought differently and stopped our original proposal from happening,” Little says.
To meet conditions of the deal, Toll restructured, spinning out Pacific National (rail) and Patrick’s port divisions that would become listed company, Asciano. “We went ahead on that basis, but some of the cream was lost on the cake,” he says. “There’s no doubt about it.
“The mistake we made was misreading what the regulator was going to allow us to do. Prior to the final decision, we thought the regulator was accepting of our strategy that we were trying to articulate and put in place.”
To this day, Little says he and Samuel disagree about the outcome. “I still bump into Graeme and we have an OK relationship,” he says. “The disagreement wasn’t personal then and it isn’t now.”
Little by Little
Q: What is your favourite source of leadership inspiration and ideas?
A: Mostly biographies and autobiographies of inspirational and successful people.
Q: What is the one thing a leader should never do or say?
A: A leader should never be untruthful or inconsistent.
Q: What two elements are critical to achieving change?
A: clear direction and ownership of the process.
Q: What was the worst moment of your career, and what did you learn?
A: A phone call while at Toll from the competition regulator advising his change of direction relating to the Patrick acquisition approval.
Q: What important qualities do you look for in your direct reports?
A: Loyalty, accountability, experience, drive and competitiveness.
Q: What makes a workforce productive or more productive?
A: Job security, job satisfaction, clear individual and group targets and feedback on performance.
