Diagonal management quit after failed MBO

Diagonal parted company with its chief executive and finance director yesterday over failed buyout talks at the IT group that were never disclosed to the market.

The company announced that it had "terminated discussions with a management team led by Graham Creswick [the chief executive] and Steve Fleming [the finance director] in respect of a proposed MBO of parts of the group". However, Diagonal had never told investors the discussions were going on. The company did not say which part of the business Mr Creswick and Mr Fleming wanted to buy.

Simon Strong, an analyst at WestLB, said: "It is irregular not to have put an MBO approach statement out when discussions commenced. The statement leaves a lot to the imagination."

Mr Creswick and Mr Fleming resigned with immediate effect and Colin Burnside, a recently appointed executive director, was made chief executive. There was speculation of a boardroom falling-out over the MBO approach.

Diagonal is made up of two businesses - Secure Networks, which provides computer security services, such as "firewalls", to protect systems from viruses and unauthorised access. The other part of the company is the leading UK installer of SAP business software. It is thought the buyout proposal was for the Secure Networks division.

Diagonal said: "It remains the board's intention to secure the disposal of Secure Networks Division at an appropriate price and time. This decision is consistent with the board's strategy of focusing the company's operations around its core SAP Consulting business, which will enable a significant and immediate reduction in central management, property and associated costs."

Mr Strong said Diagonal was unlikely to be able to raise much money for Secure Networks and that its disposal would lead to a large goodwill write-off. It is thought that profitability at the division has deteriorated. Secure Networks is a business with poor earnings visibility and fixed costs.

Diagonal will report first-half results tomorrow. A spokesman for Diagonal declined to elaborate further on the company's statement.