The Board of Directors
Rolls-Royce Holdings PLC
62 Buckingham Gate
Dear Members of the Board of Directors:
As shareholders of Rolls-Royce my clients and I have been unhappy with the performance of the company. This poor performance can in part be explained by the softness in defense spending, but can also be explained in larger part by poor performance in the non-aerospace businesses owned by Rolls. Chances are not good the non-aerospace businesses will ever be as profitable or dominant as the company’s mainstay aerospace business. Shareholders will be much better off if Rolls follows through on its commitment to Concentration and divest the non-aerospace businesses.
Assuaging my displeasure with the performance of Rolls over the last year is the selection of Warren East as the new CEO. Tentatively, I believe Warren is a good choice. Although not immediately obvious, there are several general and important similarities between ARM (the company Warren led to such great heights) and Rolls that should hopefully allow Warren to begin a second success story.
First, despite ARM dealing with computer chips and Rolls with aircraft engines, the business models for both are quite similar. The goal of both companies is to place their technology into as many devices as possible and earn a stream of annuity-like revenues that can last up to two decades or longer. With ARM these revenues come in the form of licenses and royalties and with Rolls it comes in the form of its long-term repair and maintenance agreements (“power by the hour”).
Second, ARM and Rolls both must invest the time and money as they work for several years with their respective clients prior to having their respective technologies approved and designed into the end products. These are multi-year efforts for both companies for which I am sure Warren has great appreciation.
Finally, ARM and Rolls are both engineering companies focused on delivering the most power in the most efficient way possible to their respective end users. ARM’s focus is highly efficient computer processor and chip designs and Rolls’ focus is highly efficient aerospace engines. Investing in research and development in a targeted and efficient manner has been and will continue to be important for the success of both companies.
In addition to the above similarities, there is one important difference of which Warren needs to be mindful: whereas ARM had and has the opportunity to place its technology in hundreds of different devices and markets, Rolls does not.
Rolls should focus on what it does best and where it is dominant: its aerospace business. Everything else should be and is a distraction.
When Rolls finally Concentrates on its best business and removes all other distractions, the company as a whole will no longer be burdened by lower profitability and greater cyclicality. Thus, the market will value Rolls at a much higher premium. I look forward to Warren leading the company in this direction to greater success.
Douglas E. Ott, II