Guinness brew-haha in the City lapping at Thatcher government
Its slogan was ``Guinness is good for you.'' But in Britain's financial community these days, the mere name of the company, famous for its dark brown alcohol called stout, only spells trouble. In the wake of stunning allegations of illegal share dealings, the international brewing giant is at the center of the worst financial scandal here in years. As heads continue to roll in the City, London's Wall Street, the scandal has created serious political problems for Prime Minister Margaret Thatcher's government, well known for its support for big business.
``It's the biggest scandal that has ever happened in the City,'' says Philip Healey, publisher of Acquisitions Monthly. ``It's the first time that the Bank of England has asked so many top people to leave.''
The whole affair - which centers on attempts by Guinness to prop up its share price during a 2.5 billion takeover battle for Distillers Company, a whiskey concern - is being investigated by the Department of Trade and Industry.
The DTI inquiry comes after the uncovering of illegal payments by Guinness to Ivan Boesky, the disgraced arbitrageur involved in the United States insider-trading scandal. Mr. Boesky told the US Securities and Exchange Commission that Guinness placed about $100 million in his investment partnership. The SEC reported this to the DTI under an information sharing agreement signed last fall.
Boesky also reportedly told the SEC about a share-support operation by Guinness to buy 25 million (about $38 million) of its own shares during the takeover battle for distillers.
The attempt to boost Guinness shares helped make the company's offer price more attractive to Distillers shareholders, enabling Guinness to defeat a rival bid by Argyll Foods PLC, a supermarket chain.
Guinness has launched its own investigation into these payments and has acknowledged that 11 parties - including British, Austrian, Indian, Swiss, American, and offshore companies - were involved in what is believed to have been an unlawful massive exercise in stock manipulation. The most recent disclosures focus on these payments.
Among the first to admit involvement in share supporting was Heron International PLC, a financial services company which has been involved in several other takeover fights. Heron recently repaid 5.8 million to Guinness.
Heron said it was told any loss on its purchases would be covered by Guinness. If Guinness won the bid, Heron would receive a 5 million ``success fee'' and 800,000 ($1.2 million) for market losses and expenses.
Before Heron's admission, the Zurich-based Bank Leu, one of Switzerland's oldest banks, said it had bought Guinness shares and was given similar assurances of indemnity. Guinness made a 50 million deposit with Bank Leu, which bought 41 million of Guinness shares.
Another payment made by Guinness remains the source of sharply differing claims. Henry Ansbacher & Co., an investment bank, was given 7.6 million, which it says was used to reimburse clients who had purchased Guinness shares during the takeover bid.
After initially insisting the money was given to Ansbacher solely as a deposit, Guinness now says uncertainty surrounds ownership of these shares.
Under British law, offering financial inducements to a third party to manipulate a company's share price is illegal. It is also illegal for a company to use its money to buy its shares without shareholder approval.
On the basis of these disclosures, Argyll, the rival bidder for Distillers, is in a position to sue Guinness for damages incurred in its fruitless takeover campaign.
So far, eight prominent industry and financial executives have been dismissed or resigned as a result of the Guinness affair. Some who were not believed to be directly involved but were ultimately held responsible have left under pressure from the Bank of England, which is trying to repair the City's reputation.
Among those who have been fired or forced out: Ernest Saunders, chairman and chief executive of Guinness; Oliver Roux, finance director of Guinness, who was seconded from the Boston-based management consultancy, Bain & Co.; Christopher Reeves, chief executive of Morgan Grenfell, Guinness's former merchant bank; Graham Walsh, head of corporate finance at Morgan Grenfell; Roger Seelig, the takeover expert in Morgan Grenfell's corporate finance department; and Lord Spens, the head of corporate finance at Ansbacher.
While additional revelations about Guinness are not expected, analysts believe that further disclosures about other firms that may have been involved in the affair are likely.
``We're getting webs of names now,'' said Victor Maccoll, an analyst at Kleinwort, Grieveson & Co., a London brokerage. ``The bulk of names we're likely to hear will be from outside Guinness, people who were involved in deals with Guinness.''
There is also apprehension in the City that the government may launch investigations into previous contested takeover bids, although so far, the DTI appears to have no plans to reexamine any earlier ones.
Even so, in contrast to last year, the environment of the City has swung radically against mega-takeover bids and has put a damper on large deals.
With Britain likely to face a general election this year, the political fallout from the Guinness affair and other scandals has been enormous. The Conservative Party, which traditionally has close links to the City, has come under fierce attack in the press from the Labour Party and even by some of its own members.
There is mounting pressure on the Thatcher government to establish an independent commission, along the lines of the SEC, to police the City better.
``If there are more and more scandals like this, the government will come under extreme pressure to do something,'' says Mr. Healey of Acquisitions Monthly. ``People have lost faith in the City. Damage has been done internationally.''
In response, the government has strongly defended the City's self-regulatory practices, but has said that if the investigations by the DTI uncover any evidence that would warrant criminal prosecutions before official reports are complete, then that evidence would be acted upon immediately.
At the same time, in an effort to be seen to be taking tough action against financial wrongdoers, the government has proposed an amendment to the criminal-justice bill that would increase the penalty for insider dealing from two to seven years.
Analysts say cleaning up the City has become a crucial issue, particularly since last October's deregulation of the stock market - known as the ``big bang'' - and subsequent burst of freewheeling competition.
``We've got to control the global business of billions and billions of pension money coming through London,'' says Mr. Maccoll of Kleinwort. ``Ultimately, those billions come from the man in the street. People have got to be protected to the best of the financial community's ability.''