Diary

W.G. Runciman

Readers of my occasional contributions to the London Review who have consulted the Notes on Contributors will know that I earn my living as chairman of a public limited company rather than as an academic. But only those who are also readers of the Business Sections of their newspapers will know that the company in question has recently been involved in fighting off a hostile takeover. I meant, when it started, to keep a proper diary day by day. But the intention soon wilted in the Sturm und Drang of battle, and I am left only with a few internal company memos, a file of press cuttings, a set of circulars to shareholders, and some clear but no doubt imperfectly reliable recollections of particular episodes. When asked, ‘What was it like?’ I generally answer: ‘bad for the schedule but good for the adrenalin.’ But more to the point, it was one of those things like a divorce or a car crash which you think only happen to other people until the day they actually happen to you.

The outline facts are these. The company is a long-established, originally family-controlled, shipping-based mini-conglomerate which diversified some time ago into insurance and security engineering. In the late Seventies and early Eighties, when the shipping industry was being savaged by a horrendous global recession which sent many larger as well as smaller shipowners to the wall, the name of the game was survival; and diversification into engineering was little or no help at a time when UK-based low-tech manufacturing was itself grappling with a painful conjunction of domestic overcapacity, inflated costs and shrinking demand. But we survived all right, and after that the game was to move through recovery to sustained organic growth. During that period, as the share price predictably languished, just under 30 per cent of the shares were accumulated in the market by an investment trust specialising in ‘strategic’ stakes – which amounts to an open invitation to some would-be predator to have a go. This summer, such a predator duly appeared, in the form of a quoted engineering-based company of similar size which, having bought most of the investment trust’s stake, launched a hostile bid for the whole company. We at once denounced it as totally inadequate; they raised it; we denounced it again; and by the closing date they had secured acceptances from shareholders representing 12 per cent of the total equity, so that with the 28 per cent they by then held themselves they were still 10 per cent short of control.

What view you take of any such story will largely depend on the presuppositions you bring to it. Readers for whom the City is a dirty word will no doubt see it as vindicating their distaste for the evil machinations of financial capitalism, while those who think that traditionally-minded British managements need to be kept on their toes by the bracing impact of uninhibited shareholder aggression will no doubt wonder if we hadn’t deserved to be despatched to the knacker’s yard long before. From where I sit, the function of my fellow directors and myself is to play the hand we’ve been dealt in the best interests of shareholders, customers and employees as we see them, and we therefore deserved to win if, but only if, we were right to believe, as we do, that we can do more for long-term earnings per share than whoever else might have been installed in our places. But the point of telling you the story is not to solicit your plaudits or otherwise. It is to describe to you just how different the experience was from what I would have expected beforehand.

The first surprise was the extent to which takeover battles are conducted according to ritual. They run for precisely 60 days within a detailed set of laid-down constraints. Our merchant bankers at once produced their booklet written to guide the inexperienced combatant through the thicket of the rules of play according to which this jousting is conducted, and answered with avuncular patience questions to which they simply couldn’t believe we didn’t know the answers already. Would we really not be allowed to disclose any new information to our shareholders after day 39 even though the predator would then still have until day 46 to increase his bid? Would we really be expected to put out three or even more expensively-printed circulars justifying our policies and prospects to our shareholders? Could we really not tell the journalists exactly how good next year’s profits could already be predicted to be? Would we really have to get the consent of an extraordinary general meeting to do things we’d decided to do already simply because we could otherwise be falsely accused of doing them to frustrate the bid? And so on. I quickly learned that you don’t argue the toss with your financial, legal and PR advisers any more than you do with the consultant specialist called in by your GP. But it was disconcerting to realise that I was so ignorant not just of the ritual but even of the language. I suppose I should have known already that in Moneyspeak ‘ready to help’ means ‘willing to exploit’, ‘a commercial view’ means ‘short-term greed’, ‘an agreed deal’ means ‘a surrender’ and the epithet ‘gentlemanly’ is a term of unmitigated contempt. But I didn’t.

The second surprise was the extent to which – as, I suppose, in a real war – the outcome depends as much on intelligence in the military sense as on the relative size of the opposing battalions. Of course I knew that what matters is what people believe, not what’s true. And of course I wasn’t surprised to hear the rumour mills grinding away from day one: it was, I was assured, being said in one place that I had deliberately engineered the bid for my own devious ends, and in another that my family had been panting to unload their holdings for years. But after our hoots of laughter had died down, we had to consider the serious possibility that the predator might have been led to believe that the company would be worth a lot more in his hands than was actually the case. What then? If somebody offers a group of people ten one-pound coins for every five-pound note in their pockets, they are presumably well-advised to take them. But what good does it do anybody if a company which is going to be worth a lot more in a year or two’s time is prematurely hijacked at a price which doesn’t in fact yield the predator the short-term gain he thought he could extract? We had already, with such a possibility in mind, done what we could to secure our better-than-statutory redundancy terms for our employees, protect our pension fund from being raided or wound up, and guarantee the executives responsible for the company’s recovery adequate compensation in the event of dismissal; and in the event, the argument turned on future earnings potential rather than inflated estimates of asset value put about by the rumour factory. But it hadn’t seriously occurred to me that we might have to defend ourselves against criticisms based, not on the quality of our investment decisions, but on somebody else’s erroneous estimate of what those investments would fetch on a break-up, or that a predator might launch a bid entirely because of a mistaken belief that by putting us ‘into play’ (as they say in Moneyspeak) he would prompt some other bidder to jump in at a higher price and give him an instant profit for nothing.

Meanwhile, the Stock Market was pricing the company’s shares some way above the value of the cash alternative in the predator’s offer. When I asked the advisers what this meant, I was told that it meant the market thought the bid would fail. But in that case, I said, wouldn’t the price fall below the bid? Oh no, I was told, the market only thinks this bid will fail – they’ll still be hoping for another. So, I said, wouldn’t it be a good sign from our point of view if the price did fall? Oh no, I was told, that would expose us to the risk that the predator could then buy enough shares in the market to get control that way (the rule being that a predator may not buy in the market at anything above his own bid). But then, I said, what happens if the whole market takes a nose-dive and our shares and the predator’s both plunge by 30 per cent? Oh in that case, I was told, every one of your shareholders will be advised to accept the cash alternative, because the predator can’t withdraw even if he wants to and he will have to pay £3.28 for a share which is otherwise worth only £2.28 or less. It’s all obvious enough when you think about it. But again, the possibility hadn’t seriously occurred to me that another stock-market crash like the one in October of last year might give the predator a victory which he wouldn’t then want and wouldn’t otherwise have had. At that point, I began to have an uneasy feeling that we might be walking blindfold straight into Catch 22. But as it turned out, the price hovered nicely round their cash alternative; and the final distribution of the votes was almost exactly what our intelligence had led us to expect.

But votes are, of course, what it’s all about. The shareholders are the sovereign electorate, and if there was any chance that victory might not be a foregone conclusion we had to try just as hard as any party politician to gather them in. The rules allow a company to require its nominee shareholders to disclose who they really are, so unless we were up against holders hiding behind nameplate companies in foreign territories where Maggie’s writ won’t run, we knew who our electorate consisted of. But just how many floating voters might it turn out to contain? Going the rounds of our institutional shareholders, I was struck by the immediately obvious differences in their attitudes to contested bids in general. In one office, we were poured our cups of coffee by a senior director who told us they didn’t believe in hostile takeovers and wished us the best of luck, while in another we were received by a team of beady young screen-watchers who might as well have been wearing tee-shirts blazoned with ‘I ♥ short-termism.’ But we still had to be sure of getting our message across as best and wherever we could. And that brought us face to face once again with the familiar thought that what matters isn’t being right but persuading other people that you are.

The advisers were splendidly disdainful of the quality of argument, or lack of argument, in the predator’s circulars, which did indeed contain such flights of rhetoric as ‘Do you believe in fairy-tales?’ But once more, after our hoots of laughter had subsided, we had to contemplate the possibility that there might be some shareholders out there for whom this style of argument held an appeal. And we had to make sure of getting our own case across in the press. Talking to financial journalists is a funny business. They are, I found, both shrewder and fairer-minded than I had feared. But their object is to get good copy, not to uphold the higher scholarship, and I quickly learned that the risk is not that they might say something they shouldn’t, but that I might. They hope, quite rightly, to provoke an intemperate comment, an indiscreet prediction, a hasty agreement or disagreement with something somebody else has said: and you have nobody to blame but yourself if they get it. In the event, we were very fairly treated (and very well advised by our PR consultants). But it was an alarming thought that a single foolish remark (or failure to make a sensible one) might result in a newspaper item which, however unfair we might think it, could have an effect on a section of shareholder opinion which we could not then hope to undo. I remarked, in this connection, to an old friend who is a Member of the House of Commons that I now understood what it must be like to fight an election campaign, to which he replied: ‘Yes. But if I lose, I can win my seat back next time. If you lose, you won’t ever win back your company.’

Oddly enough, the one episode which rendered me speechless with irritation concerned not something said in the press, but the Takeover Panel’s attitude to our use of it. The rules are, very sensibly, strict about selective quotation. You can’t tell your shareholders that the company has been described as ‘ ... a gem ... ’, even if, as in our case, that is what the newspaper has actually said. But what you can do (or so we thought) is reproduce it in the whole of its relevant context, always provided the Board is willing to endorse whatever assertions it contains. So we duly reproduced the article in its entirety, having been advised by our merchant bankers that they had cleared it with the Panel over the telephone. No sooner, however, had it gone out on the inside cover of a circular to shareholders than the Panel decided that we had to make clear in a separate communication that in saying that we seemed to be ‘embarking on a prolonged period of profit growth’ the author of the newspaper article was expressing his own opinion, and that in quoting him we were not committing ourselves to a profit forecast as the Panel defines it. I was (and am) at a total loss to understand how anyone could possibly have supposed otherwise. But the advisers told us it could only be counterproductive not to do what the Panel said. I asked them whether in these circumstances Rupert Murdoch or Robert Maxwell or one of the other so-called ‘big hitters’ would pay any attention to the Panel whatever, and was told that they probably would not. But here I was up against Catch 22 with a vengeance. I am a member of the Securities and Investments Board, the body which is responsible for regulating the financial markets in parallel with the Takeover Panel. So if a company of which I am the Chairman were to flout a Panel directive, wouldn’t that just look great in tomorrow’s edition of the Financial Times? The merchant bankers put the Panel on notice that if the predator sought to make capital out of this ruling, they would protest in the strongest possible terms. Predictably, that is exactly what the predator later did, and so the protest was accordingly lodged. But the Panel (or rather a committee of it), having debated the issue for (literally) hours, decided – if you can believe it – to say and do precisely nothing.

Nothing else actually lost me my cool. I kept being asked by mock-solicitous acquaintances whether I was losing sleep or weight, to which the honest answer was that as long as we felt we were going to win it was rather fun. The trouble is, however, that as Yogi Berra of the New York Yankees used to say, the game isn’t over till it’s over, and by the closing week the nerves did start to wear thin, with the consequent psychological risk of lurching uneasily from complacency to paranoia and back again. Afterwards, a merchant banker friend told me that the late Lord Beeching had once told him that fighting off a hostile takeover was the most stressful episode in his whole business career. But it is, after all, one of the problems that boards of directors are paid to handle. Compared with the sort of thing that one of my fellow directors was decorated for doing in the war it has to be kindergarten stuff. What is more to the point is that from the company’s point of view, as opposed to the Board’s, it was not only expensive but distracting. Not only did it make our employees understandably worried about their personal futures: it also diverted much too much management attention from running the ship to manning the boarding netting. But the remark which I suspect may stay with me longest was made by one of the fund managers to whom we went to present our case: ‘We often find that beating off an unwanted takeover is the best thing that ever happens to a company.’

So what is the conclusion to draw? Was it all an unnecessary waste of resources typical of a market where (unlike either Germany or Japan) the pressure of short-term gain is allowed to outweigh the achievement of long-term investment objectives, and genuine wealth-creation is subordinated to the interests of parasitical financiers and their hangers-on? Or was it a heartening illustration of the workings of healthy competitive capitalism, in which survival is the only test which either can or ought to apply? Unfortunately, these questions cannot now or ever be answered objectively. The difficulty is not the passions and prejudices which they arouse (although of course they do). It is that there is no possible way of ever knowing what would have happened if the outcome had been different, and therefore no possible way of judging whether the company’s subsequent performance is better or worse for shareholders, customers, employees, or the nation at large.

I know the moral I’d like to draw: that nice guys – dare I say gentlemen? – don’t always finish last. But I suspect the more plausible moral is simply that in a market economy everything has its price. The going rate for the acquisition of a well-run plc against the wishes of its board seems currently to be somewhere around 18 times next year’s prospective earnings, at which level of price it becomes rather difficult for the directors to tell the shareholders they would be wrong to accept an offer of good negotiable paper underwritten with a cash alternative. In the case of Walter Runciman plc, such a multiple of prospective earnings would (in some kibitzers’ estimates) take the shares up to well over twice what they are trading at today. But the only certainty is that anyone who claims to be able to predict a share price twelve months ahead is either a fool or a charlatan. So don’t all start reaching for your stockbrokers at once.