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05 Apr 10. Leo Quinn has been at the helm of Qinetiq for less than six months but he has already put his employees on notice that the status quo is no longer an option. Change – painful change – is on the way. In an e-mail to UK staff last week he wrote: “I don’t believe any one of you will be surprised when I say Qinetiq is facing the toughest economic and business environment in its history. “Independent third-party forecasts in the run-up to the general election are already talking about healthcare and education budgets being maintained and consequently other public sector budgets, including defence, being potentially reduced by 20 per cent.” The reduced spending, coupled with growing competitive pressures on the defence industry, highlighted the need to remain competitive. “Qinetiq could not be left standing,” he added. The e-mail is emblematic of Mr Quinn’s hands-on approach, which sets him apart from Graham Love, his predecessor who oversaw the flotation of Qinetiq in 2006 and controversially made a fortune in the process. One shareholder said: “Quinn seemed incredibly straightforward, hard-nosed and unemotional”. Ruane, Cunniff & Goldfarb, a US investment group which also owns a small stake in De La Rue, is certainly backing him; since his appointment was announced the fund has become Qinetiq’s largest shareholder, holding just over 10 per cent. But at Qinetiq Mr Quinn faces some tough choices. He takes on a company that has been at the cutting edge of defence technology since the second world war but which has never come close to fulfilling the promise set out at flotation: to commercialise its intellectual property heritage. Dera, Qinetiq’s government-owned predecessor, invented liquid crystal displays, carbon fibre and flat- panel loudspeakers, to name a few innovations. Qinetiq is being squeezed on all fronts. It issued a second profit warning in as many months in January, saying it would not experience the traditional boost to second-half sales this year. The immediate problems are twofold. In the UK, the Ministry of Defence, from which it was spun off, remains its biggest single customer. But the ministry is grappling with its own budgetary constraints, leading to delays in handing out consultancy projects that Qinetiq has usually picked up. In the US, which accounts for about half of sales, Qinetiq’s military products division has been squeezed by changes in policy towards Afghanistan. The company had previously won lucrative orders for its bomb disposal robots and protective armour for frontline troops. Cutting costs is imperative but Qinetiq’s cost structure makes this prohibitively expensive. Analysts at UBS said last month the historic cost-to-saving ratio has been 3-to-1. They warned the cost of redundancies was likely to push Qinetiq close to its debt covenant levels, leaving no cash to pay a dividend. With trading unlikely to improve and a gross pension liability of £700m to consider, a fundraising cannot be discounted, UBS said at the time. The analysts, downgrading the stock to a “sell”, said: “Were Qinetiq to decide
to raise equity, given a market capitalisation of circa £1bn, it would [be] likely [to] create material dilution for current shareholders”.
The news sent the shares down 4.5 per cent to 135p. On Thursday they closed at 136p – a far cry from their float price of 200p in February 2006. A rights issue, however, would not be welcomed by all shareholders. One top 10 shareholder said: “It would be better if we did not have to see any dilution”, adding that “sometimes new management, with better working practices, can get better returns”. Mr Quinn will present his turnround strategy at Qinetiq’s full-year results on May 27 and the City expects significant redundancies as well as potential impairment charges on recent acquisitions. Mr Quinn could also decide to sell some parts of the business. One radical option would be a break-up, separating the US business, which is seen as having better growt

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