Diary

W.G. Runciman

Back in the summer of 1988, I wrote a Diary describing what it had been like as the chairman of a public limited company to fight off an unwanted takeover bid. I ended the piece by saying that although in the opinion of some stockmarket buffs the company’s shares might in due course be valued at double the price of the unsuccessful offer, I did not think that my readers would necessarily be wise to reach for their stockbrokers at once. But they would have been. In April of this year, anyone who had bought the shares at the unsuccessful cash offer price of £3.28 would have received a circular letter from me saying that the Board recommended shareholders to accept a cash offer from a Swedish company which worked out, if you include the grossed-up dividend retained by the offerees, at £7.03.

What had happened was this. The Swedish company bought the 28.5 per cent stake still held by the failed predator of 1988 at a price of £4.25 and launched a bid for the rest at £5.20 – the price in the market at that time being £4.47. We immediately pushed out a circular to shareholders dismissing the offer as laughably inadequate. But our advisers, whose kindest word for the tactics of the failed predator of 1988 had been ‘childish’, took an altogether more serious view of the Swedes. They had a big bank behind them; they had first-class London advisers; and they had good reason to pay a hefty premium for a foothold in the EC in advance of 1992. We knew that £5.20 would only be a sighting shot, and that however vigorous our defence we might have to consider seriously the level of price at which it would be our duty to our shareholders to accept. The ritual exchange of arguments in successive circulars followed its course as laid down in the rules in a spirit which was combative but clean. The financial press gave us a fair hearing, and our advisers skilfully timed our release of material information to maximum advantage. But we knew that the company’s fate would in the end be decided by the attitude of one Scottish investment institution which held a now critical 8.5 per cent stake, and which would, however happy with our performance, have a price in their minds at which they would be bound to say yes. In an atmosphere of eerie calm, therefore, we waited to see what the Swedes’ real offer would be and how the Scottish institution would respond to it.

Normally, an institution in this position asks the chairman of the target company to come and talk to them before they make up their mind, and I was accordingly standing by with my well-honed arguments in my head and my shuttle ticket to Glasgow in my pocket. But it didn’t work out like that. The Swedes fired their second shot at £6.25, which was enough to make us sit up and pay attention but not enough to make us feel that our shareholders should be recommended to accept. But suppose this wasn’t their final offer? £6.25 or even £6.50 might not be enough. But at £7.50, say, we would have to be hanging out the bunting and composing hymns of gratitude on our shareholders’ behalf. My prospective interview with the Scottish institution was starting to take on a different hue.

But the interview never took place. Instead, the head of the Swedish company descended on the Scottish institution himself, leaving our stockbrokers to seek the assurance – which they were given, or so they believed – that I would be spoken to by telephone before any decision was taken. So my advisers and I duly assembled round my desk at the appointed hour and waited ... and waited ... and waited ... for the Scottish fund manager (to whom I will give the pseudonym of ‘Robbie McCanny’) to call. When he did, it was well over half an hour after the time agreed, which was not what you could call a promising sign. I had never met Robbie McCanny, and was wondering what sort of Scottish voice to expect – one of those guttural, rumbustious Glaswegian accents or one of those light, refined, writer-to-the-signet ones. It turned out to be the latter, and what it turned out to be saying, once the call finally came through, was ‘We’ve sold the shares.’ It was one of those moments when you hear yourself speaking before you’ve thought what you’re going to say, and I heard my own dislikable Etonand-Trinity voice saying in a tone of icy rage: ‘Mr McCanny, you take my breath away – you dispose of the crucial stake in a substantial public company without giving its chairman the chance ... etc.’ Meanwhile the advisers, from the opposite side of my desk, were mouthing at me the word ‘wet!’, which at first I couldn’t understand. Wet? Me? Why? But what they meant, as I quickly realised, was that McCanny, who was at this point intoning a line to the effect that ‘we were under a great deal of pressure,’ should have refused to sell, whatever pressure was put on him, without coming to me and agreeing with me a higher price at which he would sell and I would agree to recommend the offer to the general body of shareholders. The advisers were now mouthing ‘What price?’, but when I asked McCanny he refused to tell me. At that, I was left with no option but to say to him that there was clearly no point in continuing the conversation and to slam down the receiver. And that effectively was that – except that if he’d told me what price he had in fact accepted I would have been nothing like as angry as I was. The advisers made a spirited attempt over the next few days to see if another bidder could be brought in at a higher price at the very last minute, but the flurry of faxes, plane trips and late-night meetings came predictably to nothing.

Now comes the comical bit. I did what the advisers told me to do in terms of the rituals and procedures of conceding defeat, circulating shareholders, approving a press release and so on. But they then said, to my surprise, that I should make sure that all my own files were out of the office and my own pictures off the walls before the moment at which control of the company would legally pass to the Swedes. I had fleeting visions of being frog-marched out of my office by hired security men and told to come back for my jacket later (I know it sounds grotesque, but if you read books like Liar’s Poker that’s the way they really do appear to behave on Wall Street). Black plastic bags were stuffed with any papers other than the company’s, my personal paraphernalia were swept off my desk, the daybook was winnowed of any correspondence of a private kind, and with the help of my family the pictures were taken down after office hours and ferried back to my garage. But what happens then? Far from bringing in a posse of lawyers armed with photocopiers and padlocks, the head of the Swedish company rings up in a perfectly polite and straightforward way and arranges to come and see me by himself at the first convenient occasion. So how can I receive him in an office in which all the pictures have been taken off the walls? Do I want it to look to him as if I thought he was the kind of person who would seriously try to prevent me from taking my own pictures with me when I left? Back overnight from the garage they came, up on the walls they went once more, and by the time of my meeting with my now controlling shareholder, it was as if nothing had been disturbed.

The next stage was the phoney war, or perhaps I should say the phoney peace. I knew that the Swedes had been from the outset more keen to get their hands on some parts of the company than others, and I accordingly made them an offer to buy back 50 per cent of its two core businesses on the basis that they could do what they pleased with the rest and I and my colleagues would give them and the new shareholders connected with myself continuity of senior management. The trouble with this kind of offer, however, is that there is no way of preventing it from being used as a stalking-horse by the other side. If I, who know more about these businesses than anyone else, am prepared to buy half of them back for £x, then this can all too easily be used to persuade somebody else to offer £x + 1; and if much of the value is in assets of a kind which can always be turned into cash if they have to be, there is to that extent less dependence on the retention of the previous senior management. We were accordingly left to carry on running the business while the Swedes – as they fairly and frankly told us – looked around for a deal which would suit them better. Not to my surprise, they announced some weeks later that two established Swedish shipowners would be coming in for 52 per cent of the equity of the whole company, the composition of the Board would be changed, their own nominee would be installed as managing director, and if anyone wasn’t happy at the prospect that was just too bad. At the time of writing, therefore, I am consulting my lawyers on how best to pursue my case under my service agreement for compensation for constructive dismissal.

So: is it a Bad Thing? And if it is, who exactly is it a Bad Thing for? Readers already persuaded of the short-sightedness of institutional shareholders, the unfairness of bid-proof foreign companies being allowed to bid for British ones, the wastefulness of the fees paid to merchant bankers, stockbrokers and commercial law firms, and the wickedness of the City of London in general, will no doubt see in my story confirmation of everything they believe. But what harm has been done to UK Inc? Companies are changing hands all the time in all sorts of different contexts in the competitive world of international capitalism, and if somebody wants one of somebody else’s badly enough, a reluctant seller’s right course is simply to go on dismissing whatever price is offered as much too low. Perhaps if Robbie McCanny and I had got our act together, we could have squeezed it up to £7.25. But when anything over £7 is paid by a foreign bidder for a British company whose shares had been trading somewhere between £2 and £2.50 only two years before, it must be at least arguable that UK Inc is getting the best of the bargain. What matters is how well the funds released by the takeover are redeployed, and there is never any way of knowing how one rather than another alternative scenario would in fact have worked out. But I was only too well aware that this bid had occurred at a time when my colleagues and I believed that the markets in which we operated were past their peak, when the dollar/sterling exchange rate was moving significantly against us, when economic activity in the UK was declining, and when we could see no way in which our high and steady rate of earnings growth over the period from 1985 to 1990 could be sustained through 1991. Have you ever had the experience of feeling two contradictory emotions of equal force at exactly the same time? Some say it isn’t psychologically possible. But I can only tell you that when I heard that the Swedes had declined my offer to buy back 50 per cent of the two core businesses, my sense of acute regret at not being able to keep my team together was exactly counterbalanced by a sense of relief at being taken out at a premium price when a global recession was detectable right around the corner.

In fact, the people on whom this sort of thing is most unfair are the top executive directors. They may benefit from stock options, but they are not as a rule major shareholders. Their careers are likely to suffer whether they stay or leave, since if they stay they risk finding themselves taking orders from people they neither like nor, more importantly, respect, and if they leave they will find it harder than before to move into a comparably responsible job elsewhere. No doubt it varies from case to case, but in our case the achievement of 30 per cent compound growth in earnings per share over a five-year period had been very much a team effort, and as one of my colleagues said: ‘So this is the reward we get?’ The textbook answer is that a redeployment of managerial, as of financial, resources ought to be turned to the advantage of UK Inc, since these people should now be taking their proven talents into fresh fields and pastures new. But it doesn’t always work like that, and it isn’t just sentimentalism when I say that this is the part of it all that I dislike the most.

From a purely selfish point of view, however, I have nothing to complain about. Admittedly, I hated the feeling of losing the battle. But that’s because under our adversarial way of doing these things, it is a battle. If I was going to see the company sold at somewhere north of £7 a share, I would much rather have done it at my own initiative, in my own time, and to the buyer of my own choice. But then I would never have been able to get the price up to £7. In the event, I have not only got out from under some fairly formidable unsolved problems (including a problem of succession) but have put together a new, private company in which my family and charitable trusts can invest a judicious proportion of their share of the loot with the prospect of exploiting the opportunities which the coming recession will undoubtedly throw up for those fortunate enough to be sitting on a minimountain of cash and shrewd enough to get their timing right. Meanwhile, unless I am much mistaken, the company’s new owners are encumbered with a pile of debt which they are not going to find it easy to service and its new management is going to make rather less of a success – if not more of a failure – of it than we would have done.

Then am I claiming to have pulled off a superscam (a scam so successful that the victims don’t even realise that they’ve been scammed)? No, I am not. Not only was everything we said in resisting the bid demonstrably true, but we really were seriously resisting it; and nervous as I may have been about the immediate future, I’m not pretending for a moment that I foresaw the Iraqi invasion of Kuwait, the collapse of the Tokyo Stock Market, or even the extent of the cockup which Nigel Lawson et al turn out to have been making of the British economy. Just after the takeover had happened, I ran into Bob Gavron, the self-styled Thatcherite Socialist who heads the very successful St Ives printing group. He asked me what had really happened. When I told him, his comment was ‘I give you eighteen months before you’ll have convinced yourself that you planned it all.’ But I shan’t, and I didn’t.