Sugar makes an exit, but what's Psion's game?
Wednesday 26 June 1996
Mr Sugar is probably right to want to get out. He lacks the necessary skills to compete in today's ever more hi-tech and complex markets. Amstrad makes no money from the consumer electronics Mr Sugar understands, and Psion's erudite but commercial David Potter is much more likely to make a good fist of the mobile phone and computer operations that would be Amstrad's only future.
So this is a good deal for Alan Sugar. Amstrad's other shareholders who cold-shouldered the 150p a share Mr Sugar offered four years ago have been vindicated to an extent but it is a close-run thing. Factor in a bit of inflation and most shareholders would have been better off taking the money in 1992 and reinvesting it.
Even less clear-cut is what sort of a deal Psion is striking. One of the market's biggest success stories over the past four years, the shares rose 20-fold between their 23p low in 1992 and their peak last month of 468p. Their 25p fall yesterday to 350p underlined investors' worries that this is a massive deal for a relatively small company, even if part of it is simply a disguised rights issue to use Psion's highly rated paper to get hold of Amstrad's pounds 85m of cash.
Psion has been successful because it has focused on technology it understands and because it grew organically, expanding fast but nurturing its staff within its own research-based culture. It is by no means given that the phone and PC shifters from Brentwood will fit in to this rather highbrow world.
David Potter is not a man to shy away from taking risks when he has to, however, and you can bet your life he has weighed up the pros and cons with scientific precision. It was no nerdy boffin who made a killing on shares in the 1970s to provide the seedcorn for Psion. Backing Psion if it acquires Amstrad becomes a bet on Mr Potter's vision of the future where computing and telecommunications fuse in a technological revolution that will have the Luddites shuddering. All of us wired up, on the move and frantically communicating in a welter of e-mail, downloading databases and wireless fax transmissions. Well, maybe. With a pounds 230m share issue to get past shareholders, this is by no means a done deal.
Some DIY questions are answered
Until their profits warning earlier this year, Wickes and its handsomely paid chairman, Henry Sweetbaum, were the DIY partnership that could do no wrong, darlings of the City in a largely unloved and difficult business. Every now and then, of course, the question would re-emerge; if nobody else can make money out of DIY, how on earth does Mr Sweetbaum manage it? Each time the question was asked, it was explained away. Wickes is not really DIY at all, you understand. It is more of a builder's merchant, where the margins are thicker. And, anyway, the business uses state of the art stock control and IT systems, Mr Sweetbaum insisted. That's how we make money where others fail, he would claim.
Shame to say, most of us bought it. Now it transpires that there was a bit more to it than that. When a company refers to "serious accounting problems" it generally means something a touch more worrying than a spot of the creative stuff. Profits for 1995 and in prior years were overstated, that much is certain. By how much we do not yet know. The accountants are still trying to work that out. It is hard to see how Mr Sweetbaum, one of that exclusive club of executives earning more than pounds 1m a year, can avoid falling on his sword.
More than half his salary last year was bonus. He believes in incentivising his employees with performance-related pay too, and thought this part of the Wickes success story. The problem is that bonus-related pay also provides a powerful motive for cooking the books.
How the board and the auditors, Arthur Andersen, could have allowed this go unnoticed is anyone's guess. What appears to have been going on is a relatively common little scam. There's even been an instance of it in DIY before. It happened at Texas too. So much for all the Cadbury rules and structures put in place to halt the creative accounting practices of the past. They don't seem to have done much good in this case.
Nor did they stop an undignified scramble for the exit among City professionals as they caught wind of the problems. A very substantial quantity of stock was sold before Wickes made its announcement and the shares were suspended. As usual, the big boys got out, leaving the little fellow to face the worse, trapped in the stock and unable to sell. A shabby little episode all round.
Tunnel sweetener must be worth considering
The idea might seem rather hard to take on board right now but in 57 years time when Eurotunnel's concession to operate the Channel Tunnel runs out, British and French taxpayers will inherit a licence to print money, not just by the bucketful but by the trainload. By 2052, Eurotunnel's pounds 8bn debt nightmare will be a very dim memory, the loans will have long been repaid and the tunnel will be the closest thing you will see to a pure profit machine.
In those circumstances, what government in its right mind would short- change the taxpayers of tomorrow by granting Eurotunnel shareholders of today a 30-40 year extension to their concession? France's would because right now it is more alarmed at the prospect of 500,000 enraged investors rampaging through the streets of Paris in protest than the wrath of future taxpayers. Britain, on the other hand, seems determined to defend the next generation's cash cow to the last.
The Government's motives are obviously reasonable enough. But if an extension to the concession is the sweetener that secures the debt refinancing Eurotunnel needs to survive, it seems a price worth considering. For it is government which is in part to blame for Eurotunnel's present pickle by inflating the cost of the tunnel, failing to build supporting rail infrastructure on time and giving the ferries a duty-free extension. If an appeal to its sense of moral duty fails, the British Government might care to reflect on what sort of advertisement it would be for its much- vaunted Private Finance Initiative if Eurotunnel is ultimately buried at sea.
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