Rishton's departure fuels Rolls-Royce takeover speculation

The unexpected departure of John Rishton as chief executive of Rolls-Royce after a tumultuous period at the leading aerospace engine maker has fuelled speculation that the UK group could soon be a takeover target.

The growing market consensus is that Mr Rishton, had he stayed, would eventually have been forced to cut the company's medium-term guidance on profit margins at its dominant civil engines business, while the low oil price is inflicting severe financial pain on the marine propulsion division.

Investors would be unlikely to welcome another earnings disappointment at Rolls-Royce after the string of profit warnings last year, which could open the way for a richer US rival to make a bid, according to some analysts.

"The company is undercapitalised compared to its rivals and for its investment needs," says one analyst who declines to be named. "It is possible that these events are just the beginning of the endgame and Rolls-Royce ends up as part of something bigger."

People close to Rolls-Royce dismiss suggestions that Warren East, former boss of technology company Arm Holdings, is replacing Mr Rishton ahead of any new disappointment on margins or to defend the group from a takeover. In any case, the group's independence is protected by the British state's golden share and any bid would be likely to spark a storm of public debate.

Mr Rishton is departing Rolls-Royce in July because he has simply had enough, according to company insiders including senior management and board members.

"He told me that there comes a time when you want to take a break," says one Rolls-Royce executive.

"He just wants to change his lifestyle," says one person close to the board. "The board has confidence in him. He has done a good job."

Several people familiar with the company say Mr Rishton made it clear to the board after announcing a radical restructuring and 2,600 job cuts in November that he was ready to go. Yet the timing still came as a surprise. One former colleague says that Mr Rishton, who became chief executive in 2011, has always given the impression he would serve for five years - although no more.

In his four years as chief executive Mr Rishton has tried to shake up the culture of Rolls-Royce, which under his predecessor Sir John Rose had become so focused on engineering prowess that it ignored many ordinary disciplines such as cost control and delivering on time to customers.

While sales were skyrocketing - along with the share price - customers were increasingly frustrated. According to one former manager, not a single programme had been delivered on time for a decade when Mr Rishton joined.

Trade unions worry that Mr Rishton's departure could undo some of the progress made so far. "It is the right decision for him and his family," says Simon Hemmings, Unite's senior union representative for Derby, the historical heart of Rolls-Royce's manufacturing operations. "But for the company, it is a year too early. The changes he is trying to make are not embedded yet and my worry is we will go back to the bad old days."

It has been an obvious source of irritation to Mr Rishton that despite his successes - such as finally delivering engines to customers on time over a sustained period and a record order book of £73.7bn this year - the market has remained stubbornly sceptical about his efforts, and in particular about his commitment to expanding the marine business.

Sequoia Fund, the secretive US investor, this year accused Rolls-Royce of being "willing to destroy shareholder value in the name of diversification". Mr Rishton, the fund said, had "shown minimal awareness of the returns on capital his acquisitions have generated".

Many investors criticised Mr Rishton's decision last year to spend €2.4bn on buying Daimler out of a diesel engine joint venture to bolster Rolls-Royce's marine business, and his attempt to bid for Finnish rival Wartsila, which could have cost billions more.

But Mr Rishton, and Ian Davis, Rolls-Royce's chairman, remain convinced that expanding the marine business is the answer to balancing the cyclical nature of the aerospace division, which accounts for up to 50 per cent of turnover and a greater share of profit.

"I do not consider this diversification," says Mr Davis. "This is a core part of what we do."

Mr East may have a different view when he finally gets the keys to the chief executive's office in July. But for the time being, the former Arm boss is keeping his powder dry, saying it would be inappropriate to comment on strategy while the existing chief executive is in place.

Whatever route is chosen, he is realistic about the scale of the task he faces. Rolls-Royce, which last year recorded its first profit decline in more than a decade, has to return to growth. "Of course there are challenges," he says. But, he insists, "we will get on with them".

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