Outlook: Diageo's howler

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The Independent Online
WONDERFUL THINGS, large companies. With their top drawer executives, suitably incentivised by share options and bonus enhanced pay, their highly paid advisers and plush head offices, they appear so tuned in, switched on, professional and in control in their approach. But all is not always as it seems.

When it comes to clangers in strategy and operational management, they are most of the time no better than their smaller counterparts. One thing they are better at, however, is hiding the effects. The larger the company, the more possible it is to disguise management failure in the general profit mix.

Thus did Diageo, the drinks combine formed out of the merger of Grand Metropolitan and Guinness, yesterday proclaim that its disposal of four brands, including the household name of Cinzano, was "not material in relation to the group's assets".

Less well trumpeted was the fact that these disposals would involve an exceptional loss of pounds 240m. But don't get too worked up about it, insisted Diageo. This is just the mumbo jumbo of accountancy, and it doesn't make any difference to the cash position of the company.

Sadly, there is a cruder way of looking at it, and it is this. In a volte face in strategy, the group has sold four brands acquired as recently as the early 1990s for about half what it paid for them. That decision may be justified by present circumstances, but there is no point in pretending the original acquisition of these brands was any less of a misjudgement than that of Cruz Campo.

Even in a large company, pounds 240m is a destruction of shareholder value of almost heroic proportions. In a smaller enterprise, the chief executive would be kicked out the door faster than Joan Collins - who once upon a time used to advertised Cinzano - could say "no thankyou, I've just had one".

At Diageo, the executives responsible have presumably long since gone, their share options exercised, their pensions paid up and a handsome golden goodbye to send them on their way for a job well done. The consequences of overpaying were never, in any case, going to damage them by very much. In those days it was possible for executives to take the whole cost of the acquisition onto the balance sheet, goodwill and all, so that these inflated valuations would have no effect on corporate earnings and executive bonus schemes.

It is not the present management's fault, but how many other overvalued brands does Diageo have floating around on its books? And how many similar acts of management recklessness have yet to come home to roost. It hardly bears thinking about.