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A Cautionary Tale of Company Collapse

Last week’s shock news of the collapse of construction and services giant Carillion has sent shockwaves across the whole UK business ecosphere.  Carillion  which has its headquarters in Wolverhampton, is the second largest supplier of construction services to Network Rail, the publicly owned company that’s responsible for the rail infrastructure here in the UK.  As a private company, Carillion is commissioned to do work on signalling, laying new track and other infrastructure projects and last year won the contract to build tunnels in the Chilterns for the High Speed 2 (HS2) rail project that will connect Birmingham with London in a bid to decrease the impact of the North-South Divide. 

Carillion is also a major provider of services to schools in the UK, repairing and maintaining buildings and even providing school dinners via its catering arm.  The NHS relies heavily on the company as a provider of facilities management services to the health service with responsibilities ranging from finding and fixing faults in hospital buildings, through providing meals for patients to providing cleaning services in hospitals.  Carillion provides similar services in the UK’s prisons and maintains around 50% of them.

The company is blaming the collapse on unexpected labour and raw materials costs which has led to its contracts being less profitable than originally expected.  This has resulted in share prices reducing around 90% and slashed the company’s market value from around £850 million to just £70 million by the end of last year.  With around 20,000 employees here in the UK and a further 23,000 around the world, the collapse of Carillion has placed a lot of jobs at risk.  

The company has entered liquidation, rather than administration, which means that there’s no chance that another company will buy its assets, not great news for its employees.  However, with the government pledging to injecting the necessary funding to keep the public services provided by Carillion running, all employees are being advised to show up for work as usual.  Employees of Carillion who are still in work will be transferred to the state’s Pension Protection Fund for collapsed companies, which will result in an instant 10% cut to their future retirement entitlements.  Carillion employees who have already retired will continue to receive their full pension entitlements but annual increases may be lower than previously promised.

One of the questions being asked is why Carillion has entered liquidation rather than administration which would still enable the company to operate as administrators look for a buyer for viable sections of the business.  With liquidation, a company ceases trading completely and the liquidator attempts to realise any remaining assets and distribute them to creditors.  Liquidation indicates that Carillion was already at the point where there was no viable business to sell. 

Those who wonder why the company carried on bidding for low margin work, it is because Carillion needed the new contracts to provide the cash it lacked to pay staff, suppliers and lenders, using new revenues to cover pressing demands for payment, in effect a Ponzi scheme.  The incentive remained for senior managers to keep bidding as most in the industry are paid bonuses based on revenue growth, not capital efficiency.  However, this strategy was unsustainable and questions are being asked on why the government allowed the company to win bids on disastrous financial terms.  By allowing Carillion to win so many irresponsibly low margin contracts in the past, awarding the HS2 contract to the company, rather than being a rescue package, was a fast track to collapse.