I know from my own conversations with company General Counsels (GCs) that once a listed company gets into trouble, the investment banks have it over a barrel. Every step the board takes is required to be vetted by brokers, lawyers, accounting firms and investment bankers.
In some cases that can create a self fulfilling prophecy: a listed company announces it is in trouble; the advisors are called in and charge so much in fees that the company enters a downward spiral from which it cannot escape.
So I was interested to read this FT (28 Feb: Interserve investor rejects ‘obscene’ rescue deal) report on Interserve, the troubled outsourcing company which handles privatised public services. Interserve is fighting for its life after unwise diversification into areas about which it had little experience such as the probation service. It has just agreed on a rescue package which would mean that existing shareholders would be left with only 5% of the value of their shares in return for the sacrifice made by non-shareholder creditors in foregoing some of what was owed to them.
People associated with the largest shareholder, Coltrane, accused the lenders of putting a noose around the company’s neck and putting it into insolvency.
And, they were angry that Interserve directors were putting none of their own money into buying the new shares that would refinance the company. Meanwhile the company has spent £76m on advice relating to its restructuring in 12 months, a figure that represents three times the company’s stock market value.
‘Advisors fees have yet again strangled the company, and so instead of using (the money) on much needed capital expenditure, the same advisors which presided over Carillion are again sapping the company of cash,’ an anonymous source complained.
This story is shocking. Advisors brought in to help rescue a company call themselves professionals. They should not be permitted either by their own consciences or their professional disciplinary bodies to extract enormous fees up front which jeopardise a company’s survival. They should be paid minimal fees at the time and get the bulk of the rewards in shares, thus benefiting if their work proves successful.
My GC sources tell me that in the days before ‘Big Bang’ these advisors felt a sense of duty to their clients born of many years working relationship.
By the way, it would be interesting know how much money went into the pockets of these same advisors when they were helping Interserve to diversify so disastrously in the first place?
Tomorrow’s Company warned about these issues in its 2004 report Restoring Trust: Investment in the twenty-first century. I even suggested that every year investment banks should publish an updated review of all the mergers and takeovers they had been party to, showing which of these had been value-adding and which had been value-destroying over subsequent years.
And, in the immediate aftermath of the Global Financial Crisis I remember Tomorrow’s Company was involved in something called The City Values Forum. And the admirable Charles Bowman, the last Lord Mayor, made ‘Trust in the City’ his mayoral theme.
Until the City’s advisor community demonstrate a commitment to tackling this culture of exploiting corporate vulnerability for short term gain, it won’t have earned trust.
PS we need a new breed of company, smaller, more regionally loyal, and not driven by quarterly earnings targets to operate the public sector contracts of the future. See my recent blog on the Trust Test.