ºÃÉ«ÏÈÉúTV

Skanska boss Keith ClarkE may be forgiven for feeling just a little bit smug when he considers the plight of Amey. In March 2001, he launched an attack on construction firms that had reinvented themselves as "support services" companies. He accused them of pandering to City analysts and predicted that outfits such as Amey, Jarvis and Interserve would gain no long-term advantage from ditching contracting and relisting in the stock exchange's support services sector. "It's a mistake to structure your business around analysts' expectations," he warned.

In Amey's case, Clarke's analysis has come spectacularly true. After a series of embarrassing announcements and the loss of two finance directors in five weeks, the firm's share price has collapsed from 435p last year to 30p this week. Now the vultures are circling, and at least one has landed heavily on the ground. Meditor Capital Management, a firm that specialises in taking stakes in struggling companies, has bought about 15% of Amey, and last Thursday called for it to break up or sell up.

The question management planners will have to answer is simple: was the move to support services inherently flawed or did Amey just go about it in the wrong way? Amey itself no longer returns ºÃÉ«ÏÈÉúTV's calls, and the evidence is mixed. On the one hand, the shares of the firms that followed its example have underperformed in recent months, and the City is wondering whether those 30-year facilities management contracts are really worth the pain involved in winning them. On the other hand, it could be argued that investors' losses on Amey have led them to take a prejudiced view of the whole sector. What it therefore comes down to is the extent that Amey's tumble is attributable to the management's tactics.

Amey's rise …
At the time Clarke made his comments, some in the City dismissed them as the maunderings of a crusty old traditionalist. After all, firms such as Amey and Jarvis were on the up. Their share prices were rising rapidly along with their order books, thanks to the long-term services contracts they were chasing – whereas the likes of Laing, Allen and Carillion were losing millions.

Amey's transformation from contractor to services firm began in 1999 – a move that was combined with the decision to chase trophy PFI deals and the creation of the group's technology division to cash in on the dotcom boom. The diversification knew no bounds – Amey last year bought a 51% stake in a public relations firm.

At a time when many others were also adding services divisions, chief executive Brian Staples was taking the revolution to the extreme.

Everything went right for the first couple of years. Amey won large PFI projects, its order book bulged and profits and turnover soared. The group was held up as an example to other firms of the benefit of switching to support services, and Staples was hailed as a master strategist.

But by the beginning of this year the first cracks in his business model started to appear.

They were hoovering up profits on deals way ahead of the cash coming through

Construction industry source

… and fall
The strongest part of the Amey business was, and still is, the maintenance of roads and rail; industry sources believe it was the group's move into technology and the PFI that did the damage.

"They were so busy chasing these huge outsourcing deals that they took their eye off what their real and profitable business was," says one construction analyst. "Instead of looking after what they did well, they veered off their path."

This was around the time that people began wondering just how Amey was winning so much work. Rivals claimed Amey was "buying work" – that is, taking on contracts at unrealistically low prices just to get the workload and, eventually, the lucrative FM deals.

Compounding this problem was the fact that Amey was spending a lot of money bidding for these contracts, including immense jobs such as the part-privatisation of London Underground. To prevent these costs showing up in the bottom line, managers did not write them into the books until Amey became preferred bidder, when they would be deferred or capitalised.

A second accounting tactic was to write in fee income before it was paid. One chief executive puts it graphically: "They were hoovering up profits on deals way ahead of the cash coming through." A City source agrees: "When do you take the profit on a three-year project? Some will take some of it halfway through, once they know how the contract is going, and then the rest as they finish it. The suspicion is that Amey was taking them all very early on, which means there may not have been much more left in the pot. This becomes even more important when the orders start to dry up and you start making losses on projects you've already taken a profit on."

By the time the firm switched to a more conservative accounting policy, it was too late. The decision to count the costs when they were incurred, and to recognise fee income only when the project was delivered, blew a £70m hole in the firm. A pre-tax profit of £55m for 2001 became a £18m loss. The City took a dim view.

If all this was not bad enough, by early this year there were doubts about the value of Amey's investments in projects such as the Croydon Tramlink. This was one of the stakes that it had taken in schemes after they failed to pay what they owed – effectively turning a trade debtor into an investment.

One day Amey’s worth £1bn, the next £60m. You have to question this. The City sets itself up

Construction chief executive

This cumulative uncertainty has meant that nobody is sure what the company is worth. Michael Kayser, the latest finance director to depart, is thought to have argued that Amey should knock £90m off its assets, including £60m on the Croydon Tramlink alone – far higher than Staples would countenance. The City believes that there is unlikely to be a definite figure until March next year.

The outcome is that, even though Amey is expected to make a profit of £45m on the full year, the group is in such a bad way that its own broker thinks it may breach its banking covenants – an assertion that the company itself strenuously denies.

Can it be turned around?
One rival chief executive admits to being stunned at what happened to Amey. "We all thought it was in good shape. This was a shock, and it's created real uncertainty." He also questions the way that Kayser's departure was handled. "When he got there he wanted to leave. Why the hell did they let him stay five weeks?"

Preceding Kayser through the door marked out was David Miller – who told a press conference that his task was as appetising as "a little cup of sick" – Robert Osborne, the PFI head, and Simon Hipperson, who was in charge of programme management. All were either pushed by Staples as part of his continuing restructuring, or left as the work dried up.

Now the challenge is for Staples to turn things around. In essence, this depends on whether Amey can get enough money from selling its PFI stakes to maintain cash flow. Others in the sector doubt whether this will be enough to save it – or Staples. "I'm not sure that's the lifeline they think it is," says another contractor. "We value our equity long term, not for a quick sale."

The other option is, if anything, less appealing. As an industry source puts it: "They will have to sell performing parts of their business – rail and roads – because nothing else they have is worth much. Their order book has also dried up," And, it might be added, what is the logic of selling the good bits of a business to keep the bad bits afloat?

A final point: can all the blame be laid at Amey's door? Another chief executive thinks that the reputation of the City has taken a knock. "Some people in the City have been found out. One day Amey's worth £1bn, the next £60m. You have to question that. The City sets itself up for this. It beggars belief."