5. Carillion demerged from Tarmac in 1999. Highly ambitious, it grew quickly and expanded beyond its roots in the construction sector into facilities management. Much of this growth was driven by acquisitions. By purchasing rivals such as Mowlem and Alfred McAlpine, Carillion removed competitors for major contracts. Already the second biggest construction firm in the UK,52 Carillion attempted to become the biggest in 2014 by merging with the only larger firm, Balfour Beatty.53 This move was, however, rejected after the Balfour Beatty board dismissed Carillion's claims that the merger would generate cost-savings of £175 million a year in "synergies", the benefits of working together.54
6. Given Carillion's record in achieving cost savings through mergers and acquisitions, Balfour Beatty was right to be sceptical. For example, in 2011, Carillion purchased Eaga, a supplier of heating and renewable energy services.55 Prior to the purchase, Eaga had made accumulated profits of £31 million.56 Five consecutive years of losses followed, totalling £260 million at the end of 2016.57 The disastrous purchase cost Carillion £298 million.58 This came at a time Carillion was refusing to commit further funds to addressing a pension deficit of £605 million. That problem itself was largely attributable to acquisitions: when Carillion bought Mowlem for £350 million in 2006 and Alfred McAlpine for £565 million in 2008 it also bought responsibility for their pension scheme deficits.59 It was storing up problems for the future.
7. Carillion's spending spree also enabled one of the more questionable accounting practices which featured in its eventual demise. Carillion purchased Mowlem, Alfred McAlpine and Eaga for substantially more than their tangible net assets. The difference between the net assets and the amount paid is accounted as "goodwill". Goodwill is the intangible assets of the company being purchased. These might include the skills and experience of the workforce, the company brand, and synergies with the purchasing company. The value of the goodwill recorded on Carillion's balance sheet for each of those purchases was higher than the purchase prices themselves. Carillion acquired £431 million of goodwill from Mowlem, £615 million from Alfred McAlpine and £329 million from Eaga.60 As those figures are simply the arithmetic difference between the purchase price and the net tangible assets of the company, their accuracy as an assessment of the intangible assets purchased is entirely dependent on the appropriateness of the price paid. As we consider later in this report, these large and uncertain intangible assets also continued to prop up Carillion's balance sheet for the remainder of its existence.
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52 The Construction Index, Top 100 construction companies 2014, accessed 1 May 2018
53 Carillion retained its position as the second largest UK construction firm between 2009 and 2017, behind Balfour Beatty in each year.
54 "Balfour Beatty: five reasons why the Carillion merger won't work", Daily Telegraph, 15 August 2014
55 Eaga was renamed Carillion Energy Services.
56 Carillion Energy Services Ltd, Directors' report and financial statements for the period ended 31 December 2012, p 9
57 Carillion Energy Services Ltd, Annual report and financial statements, 2011-2016
58 Carillion plc, Annual Report and Accounts 2011, p 92
59 Carillion plc, Annual Report and Accounts 2006, p 74; Carillion plc, Annual Report and Accounts 2008, p 101
60 Carillion plc, Annual Report and Accounts 2006, p 74; Carillion plc, Annual Report and Accounts 2008, p 101; Carillion plc, Annual Report and Accounts 2011, p 92