The collapse of Carillion

On the 15^th January 2018 one of the largest UK construction companies; Carillion, was placed into compulsory liquidation, but what was the cause of their eventual demise? To put it simply, phoney profits and ever mounting debts.

As a company Carillion issued ordinary shares through the use of the London stock Exchange, which benefitted them as it meant that the capital did not have to be repaid. However, when it came to financing their projects they heavily relied on debt finance, and with the government choosing to outsource work to private companies with the lowest bids, Carillion chose to hide their financial troubles, opting to use calculations that made their projects look profitable.

As Carillion started to drown due to their ever-mounting levels of debt, the best idea for them in my opinion would have been to lower dividends to shareholders to help them to stay afloat, as in order for a company to have growth prospects, the amount of returns paid to their investors must be lower than that of the funds made. However, this is the exact opposite of what they did, choosing to lavish shareholders with rising dividend payments year on year, to effectively create an impression that their company was financially stable, but cash doesn’t lie and in the words of hedge fund manager, Tim Steer; “Cash is fact and everything else is a matter of opinion”.

But why increase dividends even though there is no increase in profits? One explanation for this would be signalling, in which a company can make it look as if they are doing well in terms of performance, to draw in new investors, as to shareholders, high dividends are a good sign and low dividends are a bad sign. The reason Carillion are able to do this is due to investors not having access to their internal information, for example, one of their internal reports showed that the company was on course to lose millions on their hospital project in Liverpool, however, due to outsiders being unable to view these reports, Carillion’s management was able to publicly claim that they were on course to make millions, therefore justifying increased dividend pay-outs. In my opinion, this is simply unacceptable, it is one thing to maintain dividends to attract and keep their shareholders, but to set down over £15 million worth of revenue on their company accounts, with knowledge that they were on course to make a loss is just unethical and unfair on shareholders.

From the constant increase in debt, the question really is; how did Carillion last so long? According to financial analyst Stephen Rawlinson, Carillion’s finance director Richard Adam would tell employees to redo any numbers that weren’t up to his satisfaction, until the numbers portrayed to the outside world that Carillion’s finances were healthy. However, they couldn’t keep this up forever and as time went on hedge fund managers started to become suspicious and chose to bet that Carillion’s shares would take a dive, as Carillion’s debt levels were much higher than what they had reported on their balance sheet and they were never generating any cash. To me this would have been a major red flag, however the government chose to completely ignore this, opting to offer them even more contracts paid straight from the general publics bank accounts, which is just plain and simply unfair considering Richard Adam and Richard Howson took home bonuses of nearly £400k in the year prior. Surely this money could have been used a lot more effectively, for example could it not have been used to invest back into the business in an effort to prevent even more debt occurring? Highly doubtful.

The main question asked by everyone would probably be, who was ultimately to blame for the collapse of Carillion? But there isn’t just one person that can be blamed because even though the problems stemmed from the board of directors, matters weren’t helped by a number of other parties such as the government, the auditors of the company’s financial documents and even the pension regulators who didn’t put enough pressure on Carillion after they ran up an extreme shortfall in pensions due to their increasing dividends. To simplify things the whole situation was just an absolute shamble and I think politicians hit the nail on the head when they said that downfall of Carillion was a “story of recklessness, hubris and greed”.