Pidgley was a 20-year-old demolition contractor when he sold his business to Crest in 1969 for pounds 1m and was immediately put in charge of its housing division. But when a new chairman took over some years later, he and Pidgley fell out over differences in management style.Ten years ago, Crest was a substantial company with many fans. Profits had risen for 14 straight years to reach pounds 38m, with further growth foreseen. It had extracted itself from the electronics and optical supplies business into which it had diversified early in the 1980s; the money that became available as a result was redeployed into commercial property development and contracting.
Crest's proposed new 10,000-house suburb for Swindon, in Berkshire, was applauded. And while fans of Chelsea football club were not impressed by its plans to turn their ground into another housing estate, the company still looked good to investors as London property prices continued to rise fast.
Even as recession began to bite, early in the1990s, Crest was widely touted as one of the more reliable house-builders. It had only a small land bank and did not capitalise interest on its commercial developments.
Perhaps it should have kept those electronics and optical businesses. The late 1980s were absolutely the wrong time to focus exclusively on property, however lean the land bank and virtuous the accounting. By the time Crest had completed work on those developments, it had broken its banking covenants and its share price had crumbled - from pounds 2 to 20p.
The developments turned out to be worth pounds 11m less than the cost of building them, not counting interest. The small land bank needed a pounds 27m provision. The chief executive walked the plank and a few months later the chairman also left. Losses in 1991 were pounds 59m.
Assisted by that provision and an improving market, the new boss, John Callcutt - promoted from managing director to chief executive - looked to be running a model recovery. In February 1994, theshareholders stumped up pounds 19m for a further rights issue. Yet as soon as the money was in, the fizz promptly went out of the housing market again. Crest shares have few followers, and fewer friends, these days.
Berkeley arrived on the stock market in 1984 with profits of pounds 1.5m. These had leapt to pounds 22m by 1988 -- assisted (again) by two rights issues. Berkeley was not keen on committing resources to a land bank -- so, when house prices crashed, the stocks it did have may well have been the most expensive in the industry, having been acquired relatively recently. But they were also the smallest and Berkeley's pain was over quickly - the more so, according to Pidgley, because he immediately slashed prices and liquidated stocks of land and houses when he detected the teetering. Berkeley's profits evaporated, but it kept out of the red.
Serious Money:
Be wary of bid fever
Bids are one of the stock market's favourite tonics. This week, for example, bids actual and possible were saidto be the main reason the UK stock market touched new peaks, according to a report in The Financial Times.
Fair enough. Shareholders of the companies at the receiving end of bids are at present revelling in generous offers, particularly when an auction develops. Take Energy Group, which was the target of an agreed offer of just 690p in the summer. This week optimists were predicting new offers of closer to 800p, and Energy Group's shareholders were belatedly blessing Trade and Industry minister Margaret Beckett for her unexpected intervention in the original bid.
Many takeovers put cash into fund managers' pockets, which they then put back into the market, thus further stoking up share prices. But not all bids are good news for all concerned. Too often surprisingly little attention is paid to the effect of a bid on the company making it. Yet if the bid is generous to shareholders in the target company, it can only be equally advantageous to those of the predator, if 2 plus 2 is likely to equal5.
Often, of course, the sums are not quite that simple. Consider a situation where an expansion-minded company sees its perfect partner in danger of being bought by a third party. Does it make a shut-out bid, even though that means paying more than can be immediately justified in terms of conventional yardsticks, such as earnings per share? Or does it stand on the sidelines knowing that its perfect partner may soon be its most dangerous competitor?
Last year institutional shareholders in UK telecoms giant BT did much to scupper its audacious bid for MCI, a US operator. This bid was the central plank of BT's international strategy, but its shareholders were so rattled by a profits warning from MCI that BT decided to haggle over the terms of the deal, which allowed a cheeky American rival to snatch its prize. Result: BT's grand strategy is in now tatters - at least for the time being.
Some commentators argue that excessive shareholder caution has endangered BT's long-term prospects. But it is too earlyfor anyone to be sure whether MCI would have proved worth the original price in the long term, or whether it would have been the classic "bid too far".
The stock market is littered with companies whose managers' eyes were bigger than their stomachs, and which have been suffering ever since from indigestion. Sometimes the company simply paid too much, sometimes the bid took it into a new market it did not understand. The US is the traditional Death Valley for British innocents abroad. In the 1980s companies such as Imperial Group, Blue Arrow and Midland Bank were all left counting the cost of their Transatlantic ambitions.
The message that making bids could damage a company's wealth began to get through. By the end of the decade some shareholders in Boots were so worried that the company's managers intended to pay over the odds for Ward White that thy voted against the deal - a highly unusual move in those days. But the bid got through and Boots shareholders duly suffered, though the managersresponsible have kept their heads.
Two years ago shareholders tried even harder to stop electronic components distributor Farnell buying Premier Industrial, an American electronics parts group twice its size. They failed, as Farnell's management argued vehemently that the industrial "fit" between the two companies was so good it justified a short-term check to earnings. And then? Premier Farnell's shares have done 70 per cent worse than the market over the past couple of years, as profits failed to live up to the managers' expectations.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
