While shareholders struggle to wring a profit from their investments, there are some in the City who are turning the bleak economy to good account, says George Pitcher
Nothing short of regime change will do. Britain’s boards of directors aren’t quite facing Saddam Hussein’s fate, but there’s no doubt that volatile world equity markets, to which the crisis in Iraq has contributed, has meant that not a few business bosses are being driven into exile.
The post-Enron atmosphere of virulent corporate governance is playing its part in corporate regime change too. There is a new confidence in the way that shareholders challenge the boards of the companies in which they’re invested these days.
The challenge by the National Association of Pension Funds (NAPF) to the proposed merger of media giants Carlton and Granada is evidence of that. The NAPF has taken a sort of “class action” on behalf of major shareholders, resisting Charles Allen’s re-appointment as chief executive of Granada and advising shareholders in Carlton to vote down remuneration packages, which it claims are insufficiently transparent.
Meanwhile, the chairman of Dresdner Bank, Bernd Fahrholz, is planning to step down to restore investor confidence after insurance group Allianz was dragged into deep losses by its banking unit. Symbolically, too, the sad story of Marconi reaches its conclusion this week, when the debt-burdened combine hands control to creditors through a &£4bn debt-for-equity swap.
It’s not a good time to be a top executive. How distant are the times when not a day seemed to pass without a story of corporate “fat cats”. It all appeared so easy – until the markets broke early in the new millennium – to make a great deal of money without breaking much of a sweat.
We’re into a new era now. On th
e one hand, there is not much money to be made on performance-related remuneration packages, when share prices keep finding new lows and are about half their peak valuations in 2000. On the other, institutional shareholders are now prepared to do a whole lot more than just whinge about executive pay and performance – they are holding executives to account on both issues.
Yet there are some people who are still coining it in these troubled markets. One might say that there are people who are especially coining it at this time, because their prosperity is directly related to the market slump. I can identify three specific categories of moneymaker in this climate.
The first are the lawyers. It was Shakespeare who wrote optimistically in Henry VI Part 2: “The first thing we do, let’s kill all the lawyers”. But, as ever, it’s the lawyers who are making the killing in the corporate downturn.
The financial restructuring at Marconi has cost its beleaguered shareholders, who will be diluted to less than one per cent of the equity in the new scheme, some &£75m in fees to advisers. More than half of this total goes to the law firms, with Allen & Overy, which represented Marconi, billing about &£25m.
There have been financial institutions at the Marconi trough too, such as Lazards, but they must need all the action they can get. With lucrative takeover work all but dried up, merchant bankers are struggling to keep themselves in the manner to which they’re addicted.
Market-makers and stockbrokers are not, as common perception might have it, suffering in quite the same way as their banking cousins. Not if they’re smart and ruthless, anyway, as my accountant pointed out to me last week.
He had just come from discussing with a client how they had been successfully “shorting” the market. Selling short is common practice in these markets and involves selling lines of stock that you don’t own, pushing the price down in doing so and then buying the stock at the depressed price to service the bargain.
It’s a widespread practice, if something of a nuisance for companies trying to earn an honest living while the sharks are shorting their shares. There was a certain amount of bemusement last week, when the FTSE-100 index collapsed by nearly 200 points and then recovered it all and more the following day – a so-called “dead cat bounce”.
Some commentators professed not to know why this should happen. Others ascribed it to war nerves. It’s nothing of the sort – the markets were being massively shorted. A lot of City types made a great deal of money last week.
My third category of moneymaker in these slack markets is represented by the venture capitalists, private-equity managers and buy-out experts. These people aren’t into quite the same degree of short-term turn as those shorting shares. The buy-out specialists look to the relatively long term – the end of the month at least.
Perhaps that’s a little unfair. They would argue that they’re identifying value for entrepreneurial shareholders. There are a lot of undervalued companies out there, now that the bears have driven down share prices to historic lows. And that presents a raft of opportunities for companies to be de-listed from the Stock Exchange and taken private by new shareholders.
The latest to consider this move is Hamleys, the iconic London toy-shop, whose management is considering a buy-out that values it at little more than &£30m, which could look like a snip in a recovering post-war retail market.
There are others making money at the moment too – defence manufacturers spring to mind – but the real action is in the City, despite protestations of poverty. You just have to know where to look.
George Pitcher is a partner at communications