Lendlease’s Costly Global Ventures Highlight the Perils of Di-worse-ification

Lendlease’s Costly Global Ventures Highlight the Perils of Di-worse-ification

5 Jun, 2024 | Stock Insight

The appeal of global addressable markets and sheer size of growth has drawn many ASX listed companies into di-worse-ification overseas.

Australian companies have faced significant challenges in their attempts to expand globally, including underestimating local market differences, intense competition from established players, and a lack of brand recognition and robust e-commerce strategies. Despite their domestic success, many Australian firms have struggled to adapt their business models and offerings to the unique preferences and competitive landscapes of foreign markets, leading to strategic missteps, financial losses, and writedowns that have hindered their international ambitions.

NAB’s (ASX: NAB) expansion into the UK market through the acquisition of Clydesdale Bank faced significant challenges, including underestimating local market conditions, financial losses, and intense competition.

Wesfarmers (ASX: WES) struggled to expand Bunnings into the UK market due to underestimating local consumer preferences, intense competition from established players, and a lack of e-commerce strategy. This despite dominating the Australian home improvement market.

Lendlease Group (ASX:LLC) is the latest in a string of companies pulling away from the international market.

What has happened to Lendlease?

Lendlease has announced a strategic shift aimed at simplifying its organisational structure, optimising costs, and focusing on its core strengths.

Following activist investor pressure, Chief Executive Tony Lombardo has put a plan in place to shift the company’s focus from expensive international construction projects to its core Australian market. This strategic realignment, which includes shedding thousands of jobs, will result in up to $1.48 billion in impairments associated with unprofitable overseas ventures. Lombardo’s vision is to simplify and refocus Lendlease, emphasising its strengths and potential in the Australian market.

The strategy aims to recycle approximately $4.5 billion in capital, with $2.8 billion targeted by June 2025. This initiative has been well received by key shareholders and investment funds who have previously criticised the company over its capital allocation. Key measures of the change include achieving $125 million in annual pre-tax savings, releasing approximately $3.42 per security of net tangible assets, reducing gearing to 5%-15% by FY26, and initiating a $500 million buy-back.

The company aims to lower its risk profile, improve earnings, and prioritise debt reduction and capital returns through a disciplined capital allocation framework.

Despite impairments and charges expected between $1.150-$1.475 billion pre-tax in FY24, Lendlease has maintained its FY24 guidance of a 7% return on Group equity, equating to approximately $450 million in operating earnings after tax, with modestly above midpoint gearing in the 10-20% target range. This strategic refocus aims to deliver sustainable value, leveraging Lendlease’s integrated capabilities and project pipeline in Australia and its investment platform’s growth potential internationally.

Expansion that leads to “Di-worse-ification”

Lendlease’s long time international foray has led to expensive distractions and sub-optimal returns on investment which could be considered di-worse-ification.

Diworseification is a term coined by the renowned investor Peter Lynch. It refers to a situation where a company diversifies into new businesses or markets in such a way that it actually detracts from the company’s overall value and performance. Essentially, rather than enhancing the company’s core business, these diversifications dilute management focus, drain resources, and often result in underperformance.

The ASX is littered with examples of companies who have looked to new investment and tarnished the quality of their overall business.

AMP Limited (ASX: AMP) has had a history of problematic acquisitions. One notable example is its acquisition of AXA Asia Pacific Holdings’ Australian and New Zealand businesses in 2011. This acquisition was intended to strengthen AMP’s market position, but it faced numerous challenges. The integration of AXA’s operations proved to be more complex and costly than anticipated. This led to significant disruptions and inefficiencies within AMP. The acquisition did not align well with AMP’s core business strategies, leading to difficulties in realising expected synergies. Furthermore, it did not deliver the expected financial benefits and, over time, contributed to AMP’s struggles with profitability and shareholder value.

Law firm Slater & Gordon made a highly ambitious and ultimately disastrous acquisition of Quindell’s Professional Services Division (PSD) in the UK in 2015.

The acquisition was marred by inadequate due diligence. Quindell’s accounts were later found to be problematic, and the financial health of the acquired business was far worse than initially thought. To finance the acquisition, Slater & Gordon took on significant debt. When the expected revenues and cost synergies failed to materialise, this debt burden became unsustainable. The poor performance of the acquired business led to massive write-downs and ultimately drove Slater & Gordon into severe financial distress, leading to a dramatic fall in its share price and a subsequent debt restructuring.

It’s Not All Bad!

There are some success stories with CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH), two ASX winners in global markets.

CSL has expanded its global footprint through strategic acquisitions, such as the purchase of Novartis’ influenza vaccine business. Acquisitions have allowed CSL to diversify its product offerings and enter new markets. The company has heavily invested in research and development, enabling the business to create a robust pipeline of innovative products. This commitment to innovation has helped CSL stay ahead in the highly competitive biopharmaceutical industry. CSL has established a comprehensive global manufacturing and distribution network, ensuring that it can efficiently produce and deliver its products worldwide. This network includes state-of-the-art facilities in key markets, allowing for local production and quicker distribution.

Cochlear has a well-established presence in over 180 countries, supported by a network of service centres and clinics.

Cochlear is renowned for its cochlear implant technology, which has significantly improved the quality of life for individuals with severe hearing loss. Continuous innovation in their product offerings has kept Cochlear at the forefront of the hearing solutions market. Cochlear has built a strong brand reputation as a leader in hearing solutions. The company has also formed strategic partnerships with medical professionals, research institutions, and healthcare providers to enhance its market presence and credibility.

The TAMIM Takeaway

Lendlease’s decision to retreat from its international construction and development operations exemplifies the challenges many Australian companies face when attempting global expansion.

Overextending into unfamiliar markets, underestimating local nuances, and intense competition from established players led to significant financial losses for Lendlease. The company’s strategic realignment to focus on its core Australian business and strengths highlights the importance of disciplined capital allocation, adaptability to local markets and a clear competitive advantage when venturing abroad.

Lendlease’s experience is not the first and is unlikely to be the last tale of an ASX-listed business pursuing aggressive global growth, emphasising the need for rigorous due diligence, localised strategies, and a firm grasp of their core competencies to avoid the pitfalls of diworseification.

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Disclaimer: Lendlease Group (ASX: LLC), NAB’s (ASX: NAB) and Wesfarmers (ASX: WES) are currently held in TAMIM Portfolios.

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