Buying Japan Drake Beam Morin for earnings in the trough (2004)

The trough could not be filled by adding businesses

At the heart of this decision was an attempt to underwrite a promise about employment with the design of the business. To carry unplaced engineers across the trough of a cycle, you need a trade that earns precisely in the trough — the logic holds, and outplacement is a natural candidate for the inverse correlation. But for that inversion to work, the acquired business has to stay independently profitable. What Japan DBM booked in its career-support segment was an operating loss, and in the boom years that loss came off the core business’s profit. The asset bought to prepare for the trough behaved, in normal times, like a liability.

In the end Meitec’s resilience to the cycle was rebuilt inside the core business rather than beside it. Even when unplaced engineers swelled to 2,300 after the Lehman shock, headcount reduction was not chosen; what accumulated afterwards as protection was the management of utilization and pricing, and a thick cash position. The five years from acquisition to disposal show that solving the problem by buying another business did not last — at least not at this company. When the thing to be protected is employment, is it protected by increasing the number of businesses, or by the pricing of the core business and the depth of the balance sheet? The question recurs in Meitec’s decisions, right through to the later policy of returning 100% of profit.