Whiff of Eighties in shoot-out for Northern
Saturday 21 December 1996
With the bidders still short by a whisker of the necessary 50 per cent, the primary allegation was that of "boxing in". That means accelerated settlement of share transactions for those sympathetic to the defence cause, and slow settlement for those hostile to it - generally arbitrageurs. Acceptance by some US arbs had been turned away as too late, it was alleged. Naturally, both allegations are denied.
But what really caught my eye was something that occurred earlier in the week. What Schroders and BZW did was to buy a chunk of Northern Electric with the intention of voting the shares against the bid. Since the exercise was likely to cost the advisers quite a sum of money in the event of their achieving their purpose (frustration of the bid), they had some explaining to do. The Takeover Panel considered the move well into the night and eventually ruled that the advisers were within their rights. It is impossible to tell whether it did the cause any good, but from what I hear it was probably counter-productive, irritating some Northern Electric shareholders so much that it finally tipped the balance and made them vote in favour of the bid. The techniques of the 1980s may be back, but it seems to be that much more difficult to make them work in favour of the client.
Let me explain why. In the bad old days of the City - pre-Guinness - it was par for the course to try to manipulate the market in favour of bidder or defender. Not everyone did it but those who expected to succeed generally dabbled in the black arts to some degree.
So called "fan clubs" would be organised, buying or selling shares in a co-ordinated fashion designed to benefit those they supported. Since in many instances these share purchases would result in a loss, there had to be a quid pro quo. Typically, supporters would be those with a commercial interest in the outcome - suppliers, advisers, contractors. The pay-off would be a strengthening of the relationship (ie more contracts), a dollop of pension fund money to manage, or perhaps a slug of non-existent consultancy work.
These essentially corrupt practices reached their logical end game in the Guinness affair, which both in terms of size and sophistication surpassed anything that had gone before. The niceties of "you scratch my back and I'll scratch yours" were dispensed with in favour of no-nonsense indemnities against loss and straight cash payments for services rendered.
The point about market manipulation, however, is that it doesn't work unless it is conducted in secret. If everyone knows what is going on, if it is disclosed and transparent, then it is also highly likely to be counter-productive.
That is what probably happened in the Northern Electric case. The defenders won control of another 2.3 per cent, but this could easily have been counter- balanced by the number of shareholders they irritated in the process. Neither Schroders nor BZW made any attempt to hide what they were doing, nor given the rules, would they have thought of doing so. All that died with Guinness. About the best they could do in the circumstances was to say they were buying for genuine long-term investment purposes.
In fact they never tried to claim even this, publicly at least, for it is not an easy case to sustain. Everyone was left to draw their own conclusions. Since the advisers so obviously had a commercial interest in the bid failing, the effect was to alienate other shareholders from their cause. Schroders and BZW can afford to take the loss on these share purchases because they will be recompensed in other ways. For a start, they've got a success fee riding on Northern coming out of it with its independence intact. And, of course, their "relationship" with the client will be strengthened. That means more lucrative fees to come. Other shareholders were not in this happy position.
Something similar happened during Enterprise Oil's bid for Lasmo two years ago, although this was not a case of market manipulation as such. In the closing stages of the bid, Enterprise's advisers tried to boost their position by offering preferential terms to a select group of large shareholders. It so infuriated other Lasmo investors that they turned on Enterprise and the bid was lost.
The lesson, then, is that nobody gets any credit for playing silly games. Shareholders want bid battles to be fought on their merits, not on clever little manoeuvres by those with a commercial interest in the outcome.
The Guinness affair never seems to go away, does it? In part that's because Ernest Saunders, the former Guinness chairman, is so determined to keep it in the headlines. His continuing "fight" to clear his name ensures it is never far from the front pages. So what are we to make of this week's judgment from the European Court of Human Rights?
Nobody's going to quarrel too much with the court's ruling that in criminal cases, suspects should not be deprived of their basic right of silence. It is plainly wrong that a murderer or rapist gets better protection under the law than a financial swindler. The trouble is that everyone knows that there was widespread crookery during the Guinness bid for Distillers and that Ernest was one of the ring-leaders.
To be able to say you were unfairly tried is one thing. But it doesn't clear your name. Most people continue to be appalled at the prospect of Mr Saunders' conviction being quashed. As for compensation, there would be rioting at the doors of Westminster if it were ever paid.
Mr Saunders is right to claim he was treated in an oppressive manner but I suspect that an opinion poll on the matter would confirm that most people think he thoroughly deserved it.
Which brings us back to the question of whether it is possible for the authorities to get convictions in cases like this if defendants cannot be required to give evidence against themselves. Lord Roskill, the judge whose recommendations led to the formation of the Serious Fraud Office, believed this to be the only way of dealing with the complex and sometimes impenetrable nature of financial crime. He's probably right. So do we just give up and make these things a purely civil matter? I think not, for that would only encourage the view that there is one law for the rich and an altogether different one for the poor.
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