Are Institutional Investors Influence over Publicly Listed Companies Over-stepping the Mark? | Business

The beginning of the industrial revolution created new opportunities as well as problems for the business enterprises of that era in that there were a limited number of individuals as well as investors who could finance the large sums of capital needed to underwrite the vast scale of equipment, resources and expansion required. In order to capitalize upon the numerous opportunities which were presenting themselves as well as avoid being overexposed in any one venture, financial markets rose as a means for several investors to join in sharing the risks as well as the financial investment. The beginnings of the preceding, financial markets, started in Europe to finance the industrial revolution as well as the expansionist policies of the British empire (eCommercenow, 2005).

Today’s financial markets are the medium for the processing of variousbusiness financial transactions ranging from new issues to stocktrading. Through the issuance of shares as well as financial reportingand public disclosure businesses are able to raise capital to financenew plant and equipment, expansion, research and development along withother purposes to increase sales, market share and bottom lineperformance. The ability to raise capital does come with certainexpectations on the part of shareholders who hold a stake in theperformance of the company, thus its directors and management mustproduce bottom line results. This measure of influence afforded bystock regulations and shareholder representation in the affairs of thecompany through annual shareholder meetings and voting on the Boardcreates interesting scenarios. Shareholders are able to reviewmanagement’s performance and as such can question various aspects atthe shareholders meeting. Substandard performances have seen directorsand executives removed from their positions, as well as serving to fueltakeover bids by investment companies who advise shareholders that theycan receive a better return under their management. The reverse of thisscenario also occurs. When the company has done and/or is doing well,the accumulation of assets, cash and other related positive financialaspects serve as attractive bait for various investment companies toseek to take over operations.
In the United States, the quintessential corporate investment firm isKohlberg, Kravis Roberts (KKR), known for their utilization of theleveraged buyout (LBO) through the creation of limited partnerships totake control of corporations. Known for their leveraged buyout of RJRNabisco, Gillette, Safeway, Borden and other companies (kkr, 2005),they have acquired the reputation as corporate raiders. Known as aninvestment holding company, Guinness Peat Group Plc focus on acquiringpositions in as well as owning public companies engaged in variousindustry sectors. This case study shall examine the offer by GuinnessPeat for De Vere Group Plc focusing upon the reasons resulting in theoffer as well as the factors contributing to same.

Chapter 1 – Case Study, Guinness Peat Plc / De Vere Group Plc

1.1 The Climate
The events leading up to the offer by Guinness Peat Plc for De VereGroup Plc find themselves rooted in the overall climate of global aswell as the British stock markets preceding 2004 when the indicatedoffer was tendered. 2001 saw a recession grip the United States economythat affected a drastic reduction in growth in developed as well asdeveloping countries throughout the globe(nyu.2005). The pattern ofglobal bull and bear markets during the prior decade had seen itsfortunes tied to the economic and stock market performances of theUnited States and Japan as the principle regional economic engines inthe Americas and Asia. The unification effects of the European Unionand the adoption of the euro as a singular measure of currency wouldnot go into affect until January 1, 2002 (euro.com, 2005), thusEurope’s influence on global markets in 2001 was still fragmented, withGermany being the most consistent performer. Koutmos (1995) and Bae etal (1994) postulated that events, such as corporate news, job data,positive and negative developments, that transpired in the market inthe United States are rapidly transmitted throughout the globe and helpto influence global market performance.

The preceding is a result of the dominance of the United States marketin trading volume as well as being the most influential source andproducer of information. The attacks on the World Trade Center in NewYork city, as well as subsequent commercial airliner attacks inWashington D.C. and Virginia, impacted global economies furtherintensifying the recession that had started in March of that year. Thepreceding view of the United States as a driver of global economies isalso shared by Masih et al (2001) whose empirical evidence confirmedthat price leadership in U.S. markets influences global economics andstock market indices. This market sensitivity to news from the UnitedStates creates a climate whereby international investors tend tooverreact to news transmitted from this source, and be less concernedwith news from other regions (Becker et al, 1995).

The foregoing, along with a summary of subsequent years leading up tothe 2004 offer by Guinness Peat, helps to chart the mood and climatefor shareholders and investors that created the atmosphere for thepreceding. The recovery in 2002 was one that showed a growth in output,but not jobs, and thus was considered ‘weak’ by economists. And stockmarkets were further affected by the accounting scandals in the UnitedStates involving Enron, Worldcom and other Blue Chip firms. Thesecontributed to a loss of confidence by investors and saw the LondonFTSE fall 24 percent from its May 2002 peak (Middle East Survey, 2002).The Bear market that had gripped global economies was in its third yearand represented the longest consecutive period of declining stocks inthe United States since 1939 through 1941 (Taylor, 2002). The foregoingalso affected stock markets as well as economies in every majordeveloped and developing country throughout the globe.

It is important to understand the conditions that contributed to thelong running Bear market as these events would later influence GuinnessPeat Plc in its analysis of De Vere Group Plc and the need to place amajor deal in its investment portfolio after some lean IPO and stockperformance years. The Bear market run was driven in 2000 through 2002by the following factors (Taylor, 2002):

1. The Technology Bubble burst and there was an overvaluation of the stock market in other sectors as well.
2. 2001’s recession along with the slow pace of the recovery thatgripped most the major developed economies, as well as most developingeconomies.
3. Investor loss of confidence in analysts, companies, CEO’s and WallStreet in general as a result of scandals and corporate wrongdoing.
4. The threat of terrorism, war and varied geopolitical concerns becameheadline topics with scant resolution in terms of solving or resolvingthe fundamental causes or proponents.

The significance of the preceding events manifested themselves in:

1. The biggest bankruptcies in history as Enron with $63 billion, wasfollowed by Global Crossings at $25 billion, along with Kmart with $17billion, and a host of other companies, not to mention the priordot.com shakeup which was still affecting various industries.
2. The Sarbanes – Oxley Act of 2002 was a sobering reminder of thepotential for corporate financial reporting as evidenced by theindicated bankruptcies that preceded its passage. It was enacted toinstill renewed investor confidence in the market as a result of newlaws enacted to control the potential for white-collar crime withsevere penalties.
3. Governmental Actions
The weakness in economies throughout 2002 caused the United StatesFederal Reserve to attempt to restore confidence by cutting interestrates by 50 basis points on November 6, 2002 in conjunction with asimilar action by the European Central Bank which occurred on December5, 2002. The heavy U.S. trade deficit as well as United Statesoverspending on its budget kept markets from rebounding and created theenvironment whereby the U.S. dollar declined.

Each of the preceding contributed to a stagnated U.S. market and aresulting weakness in major global markets thus aiding the long Bearrun. It is important to understand the aspects that drove the marketsdown over the three year period of 2000 through 2002 as this will helpto explain investor and shareholder sentiment in the United Kingdomduring 2004 as well as the management rationales for Guinness Peat’s DeVere offer. Taylor (2002) indicated that there were four factors tokeep in mind regarding the poor performance of financial markets andeconomies during 2000 through 2002, In order for the Bear market tocome to an end, Taylor (2002) stated that two or more of the indicatedfactors had to change:

1. Stock prices needed to fall, or corporate earning needed to rise in order to eliminate stock overvaluation in the market,
2. America’s economy needed to recover and begin expanding,
3. confidence needed to be regained by investors in the integrity of the stock market, and
4. The various geopolitical threats and concerns resulting from terrorism needed to be brought under control.

2003 saw a modest recovery in the stock market and global economiestaking hold. Part of the optimism was attributed to the ending of thewar in Iraq, but more telling were the improved earnings reports fromcompanies and increased dividend yields which helped to pull investormoney out of bonds and back to stocks (Boland, 2003). Sellers (2004)indicated that the strength of the market recovery in 2003 was not tobe found in the major indices, but in a broad look at how the averagenon blue chip stocks performed during that year. Sellers (2004)indicated that 5,201 of the Morningstar index of 5,999 stocks (87%)recorded stock price gains. The preceding, along with a 26% gain in theStandard & Poor’s 500 index where fully 92% of all the stocksrecorded an increase in year end stock prices signaled across the boardeconomic strength. For the year the NASDAQ composite increased by 50%,the Dow Jones industrial average recorded a 25% gain, and the Russell2000 increased by 45% for its best year its 25-year existence.(Norris,2004) These developments in the American financial markets aided aswell as coincided with recoveries in other countries. The tracking offinancial market and economic performance in the United States duringthe preceding periods, 2001 through 2003, is important as globalmarkets are influenced by developments in the American economy. Theindication of market conditions in the United States closely mirroreddevelopments in the United Kingdom thus signaling an end to the longestrunning Bear market in history. It is important to note that as aresult of trade, and other economic variables, that the Britishrecovery lagged approximately three to five months behind the recoveryin the United States.

The market shakeouts recorded as a result of the recession, scandals,Sarbanes – Oxley Act of 2002, and governmental actions helped torestore market stability and the resulting investor confidence. Thepreceding summary of global stock markets and economic conditionsrepresents important background information in understanding theattractiveness of De Vere Group Plc to Guinness Peat Plc in terms ofits Partial Cash Offer in 2004. The financial misreporting and otherglowing corporate and industry predictions that marked the foundationsof the Bear market signaled a return to equity and asset barometers asindices of corporate strength and performance and this is the corporatefinancial area that Guinness Peat concentrated on in its appeal to DeVere shareholders.

Chapter 2 – The Takeover Attempt

2.1 The Makings of An Attractive Takeover Target
To understand the reasons as to Guinness Peat’s interest in De VereGroup Plc, one must be cognizant of the workings of public companiesand the environment in which they operate.  These factors were present,from an historical as well as contemporary standpoint, when GuinnessPeat made the internal determination to proceed with its Partial CashOffer for De Vere Group Plc. In order to understand the context of suchdecisions by an investment company, such as Guinness Peat, evaluatingwhich potential target to seek and for what reasons, along with  anunderstanding of what might have been considered as the rationale(s)for making such an offer shall be explored.

Founded in 1801 (Wikipedia, 2005), the London Stock Exchange is theconduit via which public companies interact with financial markets. Inthe United Kingdom the exchange is the watchdog over the rules andregulations governing publicly traded companies, unlike the system inthe United States where the Securities and Exchange Commission asseparate and autonomous government agency oversees rules andregulations. In 2001 the United Kingdom enacted the Financial ServicesAgency (FSA) (Carriere et al, 2002) which combines all prior UnitedKingdom agencies having oversight concerning securities matters underone umbrella. The role of this agency might one day encompass aregulatory position that might be similar to the United StatesSecurities and Exchange Commission, however at this time it operates asan independent agency “…that regulates the financial services industryin the United Kingdom”. (FSA, 2005) The FSA has been provided with abroad array of rule making as well as investigative and enforcementpowers to enable it to meet the four statutory objectives set forth forits existence (FSA,2001):

1. Market Confidence – to maintain investor confidence in the financial system,
2. Public Awareness – to promote a clear understanding of the financial system to the general public,
3. Consumer Protection – to secure an appropriate measure of protection for the public, and
4. Reduction of Financial Crime – to reduce the extent for which it ispossible to utilize a commercial enterprise for an end that isconnected with the commission of a financial crime.

The extent to which the London Stock Exchange is revered can be foundin the fact that the countries of continental Europe have modeled theircapital markets on the British system.(Carrie et al, 2002) GuinnessPeat, under Sir Ron Brierley, aspires to a reputation as “…the WarrenBuffett of the South Pacific…” (Sharechat, 2001) and thus the firm hasacquired a reputation as a corporate raider. While the term itselfsounds somewhat ominous the actual practice (corporate raid), is aviable financial strategy. A corporate raid is when an investmentcompany (usually the initiator of such events) seeks a hostile takeoverof a public company whereby the assets of the acquired company are soldoff in pieces and the prices such a liquidation of the entities withinthat business produce exceed what was paid. As a result, the acquiredcompany in most cases no longer continues to operate. The term“hostile” is utilized in this instance as Guinness Peat’s offer for DeVere Group Plc was targeted at shareholders to cause them to vote infavor of the Partial Cash Offer.

The effect of corporate raiders in terms of the economy as well as theshareholders of the companies involved is still a source for widedebate. There are proponents who believe that corporate raidsconstitute a damaging activity for shareholders and the economy in thatthey cause and create large-scale economic disruption of activity, notonly for the affected company, but for the companies that do businesswith it as well. It is pointed out that the closing of factories,branches or business outlets create levels of unemployment for thoseworkers whose jobs disappear as a result. On the other side of the cointhere are proponents who believe that the existence of corporateraiders help to cleanse the market of companies where management hasbeen lax in managing assets. An example of the preceding is when acompany has large assets and a low stock price. In such an instancecompany management should seek higher stock pricing thus increasinginvestor confidence and providing shareholders with either dividends orthe opportunity to trade shares and derive a profit. As a result someargue that corporate raiders serve to prevent business managers frombecome complacent and thus find means to redistribute assets (capital)from lower performing sectors of the economy to more productivesectors. There are those who point to the fact that the existence ofraiders is a factor as to why the market performance of companies basedin the United States during the 1990’s exceeded those in Germany andJapan where corporate raiding is not permitted. The maximization ofshareholder value is one of the responsibilities of management inseeing to the interests of the company’s shareholders, as well as thecompany itself. (Mayer, 1999)

The recession climate that gripped capital markets and global economiesfrom 2000 through the beginnings of 2003 created a lot of anxiety onthe part of shareholders as well as investment firms in that theopportunities to yield profitable outcomes had diminished to scant fewopportunities. The recession period followed one of the longest runningBull markets, 1989 through 1999, which saw the dot.com, technology andtelecom revolutions. The pent up desire to return to the profit makingof that era could have been a factor in Guinness Peat’s De Vere offer.In order to equate if this, or other factors are the reasons behindthis event, an analysis of both De Vere Group Plc and Guinness Peat Plcis in order. The preceding will examine these companies during 2000through 2004 in order to gain a perspective on their operations,profitability and other factors, as these areas had an impact on theOffer of Guinness Peat in 2004.
 
2.2 De Vere Group Plc
Trading on the London Stock Exchange as De Vere Group Plc (DVR), thecompany engages in operating in both the hotel and health / fitnesssectors, two areas that the company sees as growth oriented. This focuswas arrived at in 1999 when the company opted to transform its corebusiness as a diversified leisure group to the current corporatepositioning. The preceding shift in direction was under taken tomaximize shareholder value and entailed management shifting resources,administrative systems and personnel from the tenanted as well asmanaged pub businesses. The tenanted division, which consisted of theInn Partnership, was sold for £370 million in January of 1999, and themanaged division, Greenalls Pubs and Restaurants, was sold for £1.14billion in December of 1999. Management utilized a portion of theproceeds from these sales to return £529 million to the company’sshareholders by a special dividend and capital payment, while £392million was utilized to pay off debt. The structured company waschanged from Greenalls Group to De Vere Group in 2000. The precedingsale of the indicated business entities signaled management’s intentionto completely divest itself of all Tavern and drinks wholesalingbusinesses. This was accomplished by the end of February 2001 when 17depots were sold and the remaining units closed.

The present company, De Vere Group Plc,, consists of two hotel brands,De Vere Hotels and Village Hotels & Leisure Clubs, as well as aseparate health and fitness brand titled Greens. In addition to thepreceding, De Vere also owns a small sized white spirits company calledG&J Greenall (Drinks Business Review, 2005). De Vere Hotels are thecompany’s upscale market chain that consists of 21 locations. Targetedat the corporate and leisure markets these hotels have conference and abroad array of leisure facilities, including golf clubs. De Vere’smid-range hotel division consists of 14 Village Leisure Hotels thatcontain health and fitness facilities. The De Vere brand name hasenjoyed public acceptance in its positioning and this has permitted thecompany to leverage this awareness to create De Vere Resort Ownership,which are lucrative timeshare lodges are the company’s resortproperties. These lodges are currently situated in three locations:

1. Cameron House, Loch Lomond,
2. Slaley Hall, Northumbria
3. Belton Woods, Lincolnshire

The Greens brand consists of stand-alone health and fitness facilitiesthat are targeted at the premium segment of the market. This division’sconsumer strategy focuses on the adult segment of the population andalso appeals to families. There are 15 Greens each comprisingapproximately 40,000 square feet of space equipped with gyms, steamrooms, spas, saunas, pools and facilities for aerobics. De Vere’sG&J Greenall division manufacturers spirits under its own brandname, Greenalls Original and Daresbury Q, as well as manufacturingpremium brands for Bacardi International (Bombay Gin and BombaySapphire). It is the performance of the company in preceding years thatgenerated the interest of Guinness Peat in tendering its Partial CashOffer. As such, the years succeeding the 1999 management refocus holdthe answers to this question.

2.2.1   2000
The effects of the shift in corporate operations undertook bymanagement in 1999 were revealed in the company’s Annual Reportstatements. The Chief Executive’s Operating Review summarized thefinancial position, in comparison to 1999, as follows:

Table 1 - 1999 – 2000 Comparisons – De Vere Group Plc.
(De Vere Annual Report, 2000)
2000
Turnover 1999
Turnover 2000
Pre-tax
Profit 1999
Pre-tax
Profit
£478.4m £899m £37.9m £91.9m

While the figures indicate a sharp decline from 1999 figures, they alsoreflect the loss of revenues from divestiture as well as the £529million which was paid to company shareholders via a special dividendas well as the £392 million that was used to pay company debt. Theresulting leaner company was therefore able to concentrate its energieson the new direction with a better looking balance sheet in terms ofdebt ratios and thus attractiveness to finance new operations from thecash derived from the sale of divisions. Although the overall revenuedeclined, as a result of the sale of operations and the fact that thesale of business divisions contributed just eight weeks of earnings,the company’s revenues from those businesses it retained showed anincrease of 13.5 percent to £232.5 million, compared against £204.9million reported for 1999. The new health and fitness divisionsincreased their revenues by 15.2 percent to £206.6 million from £179.2million, and this combined with the core hotel operations returned aprofit of 15 percent, or £15.5 million. (De Vere, 2000)

It is interesting to note that De Vere actually functioned in a similarmanner to a corporate raider when it changed the course of its businessstrategy by selling off existing operations to invest and enter whatmanagement deemed more profitable business sectors. De Vere’s entryinto the health and fitness sector focused on the inherent weakness inthis growing segment which was dominated by smaller local and regionaloperators. The unified nature of its market positioning under a largepublic company added luster to its entry as the company focused onupscale market imaging and demographics. Its Greens division profitedfrom this positioning in terms of what the public perceived as qualitymanagement decisions that were overseeing this middle marketdemographic entry. The facilities are new, well planned and not lackingin the latest equipment and techniques. The ability of the company tofocus economic clout on facilities and equipment provided consumerswith a unified and identifiable brand it could trust. The precedingresulted in a membership roster of 78,000 in the De Vere Hotel, VillageLeisure and Greens divisions.

2.2.2 2001
The company’s move to hotels and health and leisure facilitiesrepresented the acquisition of real estate which the company eitherdeveloped through the construction of new facilities or purchased viaexisting operations such as the Cavendish Hotel for £60 million whichit purchased in December of 2000. These build outs and acquisitionshave the effect of strengthening the company’s balance sheet from thegain of developed properties as well as the revenue derived from theseoperations. In addition, memberships generate a continuous revenuestream as well as a base for marketing promotions and other activities.The company’s upscale market approach left its core business lesssusceptible to economic swings as a result of the relative demographicstability of the upper income profile. The company increased the numberof hotel rooms under the De Vere brand to 4,303 units, representing a10.8% increase, and generated an operating profit of £49.7 million asopposed to the £46.5.  2001 represented the company’s first full yearunder its new operating structure and core businesses (De Vere, 2001).The company considered a sale of its Greens division, however theevents of September 11th in the United States caused the Board torethink its position in light of the looming economic uncertainty. Theglobal economic slowdown that followed flattened the company’s earningsand slowed the development of new facilities as well as marketexpansion in a tight travel and entertainment sector.

Table 2 - De Vere Group Plc Operating Highlights 2001
(De Vere Annual Report. 2001)
 2001
£m 2000
£m % change
Turnover 273.8 232.5 +17.7%
Operating Profit 49.7 46.5 +7.1%

2.2.3 2002
The company managed to fair quite well in 2002 with strong performancesthroughout the Group’s divisions in its upscale market niche. Oneexample is the increase of 1.4% and 0.7% in the company’s De Vere Hoteland Village Hotels & Leisure Clubs, respectively. The precedingcompares against industry declines of 2.9% in the country’s provincialmarket. (De Vere, 2002) The foregoing attests to management’s decisionto target the upper income segment of the market in a defensive moveagainst market downturns, and as a marketing move at higher profits dueto disposable incomes. The preceding helped both of the company’s hotelbrands to outperform the market. The company’s positioning andlong-standing sponsorship of the Ryder Cup positioned it in the premiumcategory further adding to the brand’s worth. In the tough climate thatimpacted the business as well as consumer travel and leisure markets in2002 as a result of the aftermath of 9/11, the De Vere Group stillmanaged to grow by 1.8% in a receding market.

More importantly the company’s stock share price managed to maintain asteady moderate upward swing during the global recession earning it thereputation as a stellar performer. The soundness of the company’sdecision to build of new facilities along with acquisitions of existingupscale hotel properties saw the value of its tangible assets rise to£848.473 million, and with investments standing at 6.804 million the DeVere Group’s fixed assets totaled £855.277 million.

Table 3 - De Vere Group Plc Operating Highlights 2002
(De Vere Annual Report.2002)
 2002
£m 2001
£m % change
Turnover 293.9 273.8 +7.3%
Operating Profit 51.9 49.7 +4.2%

2.2.4 2003
At the end of 2003 the De Vere Group had 21 De Vere Hotels representing3,310 rooms, an increase over the 2002-year end total of 3,298. Moreimpressively, the preceding was accomplished in a receding market. Thevalue of the company’s fixed assets increased from £855.277 to£869.214, with tangible assets rising to £859.114 (from £848.473), andinvestments increasing to £10.100 from £6.804.(De Vere, 2003)  2003 sawthe company’s stock price leave its hover between 500 and 400 rangesand move into the solid 600 category at year end. The stock performancedemonstrated public confidence in the progress of the company, as wellas the steady progression of successful openings and operating resultsin a tough industry sector. The company accepted the resignation ofPaul Dermody who stepped down from the role of Chief Executive, a rolewhich he occupied for three and a half years after forty years ofservice with the company. Carl Leaver was appointed to his post fromWhitbread Plc where he was the Managing Director for Travel Inn as wellas a prior position of Operations Director for Marriott’s Country Clubgolf resort hotels. (De Vere, 2003)

Table 4 - De Vere Group Plc Operating Highlights 2003
(De Vere Annual Report.2003)
 2003
£m 2002
£m % change
Turnover 312.2 293.9 +6.2%
Operating Profit 54.7 51.9 +5.4%

2.2.5 2004
2004 saw a strengthening of the hotel market in the United Kingdomafter three years of decline or stagnant growth. The strengthening ofthe travel and leisure segment of the market permitted the company toincrease the average room rates by 2.0% to £84.81 (De Vere, 2004). Theeffectiveness of De Vere’s market positioning in the upscale segment ofthe market (demographics), along with the consumer perception ofsuperior service and an effective marketing campaign were theunderlying reasons attributed to the foregoing. The preceding wasdemonstrated by the 80% occupancy rate at the acquired De VereCavendish hotel, which was purchased in 2001. The foregoingimprovements in occupancy rates included the Village Hotels and LeisureClubs which demonstrated occupancy rates of 80% compared to theindustry average of 67.8%, with an increase, on average, of 5.1% inroom rates to £55.10 (De Vere.2004). Fixed assets totaled £860.817m,against £859.114m recorded in 2003, and investments accounted for£10,243m compared with £10.100m in 2003, for a total of £871,060 for2004 (£869.214 for 2003). (De Vere, 2004)

2004 marked the year that Guinness Peat Plc tendered its offer for 25%of the company’s issued share capital which was soundly rejected by theshareholders of which just 0.55% voted in favor. (Bloomberg, 2004) Anexamination of the De Vere’s asset, earnings and stock price points toa company that had successfully implemented a new direction in its corebusiness and positioned itself in the upscale hotel and leisureindustry categories. After just four short years the company had earneda stellar reputation for quality and service and had grown to 21 DeVere hotels and 13 Village Hotels & Leisure Clubs. Membership salesat Greens totaled 68,400 individuals and this division had turnedprofitable in 2003. G&J Greenall increased sales by 6.9% to £28.8and signed a new agreement with Bacardi International through 2012 witha higher margin clause. In all instances the company either met orexceeded its goals and returned shareholder confidence in achievingresults in adverse market conditions marked by 2000 through 2003.

Guinness Peat’s Partial Cash Offer for 25% of De Vere’s issued sharecapital represents an occurrence where the nuances of the offer requireclose examination as to Guinness’ intent.

Table 5 - De Vere Group Plc Operating Highlights 2004
(De Vere Annual Report.2004)
 2004
£m 2003
£m % change
Turnover 321.8 312.2 +3.1%
Operating Profit 57.6 54.7 +5.4%

 

2.3 Guinness Peat Plc

2.3.1 Background on the Company

Although headquartered in London, the Guinness Peat Group Plc is one ofNew Zealand’s premier companies, listed on the London, Australian andNew Zealand stock exchanges. With a market capitalization of £690.9million the company has the financial resources to fund its investmentstrategies, which include holdings in financial services, manufacturing(thread and foods), building as well as raw materials (aluminum).(GPG,2005)  Its holdings are primarily in Europe as well as Australia andthe company’s small but experienced core of executives operate with ahands on attitude. The company is known for its selective investmentstrategy which it makes mostly in public companies. The preceding isfor the purpose of enhancing share value through the influence ofshareholders as well as announcements and topics at the acquiredcompany’s meetings.

Sir Ron Brierley is known as an ‘active investor’ and some tend tolabel Guinness Peat as a corporate raider, however, he explains hisstrategy as akin to an entrepreneur who “…stirs things up and addsvalue.” (Sharechat,2001)  Labeled as the “Warren Buffett of down under”(Sharechat, 2001) Sir Brierley’s firm, Guinness Peat, has not performednearly was well as his namesake whose yearly performance for 36 yearshas averaged 23.5%.(Sharechat, 2001) However, Guinness Peat hasoutperformed the capital markets wherever it has investment interestsover the past nine years. When Sir Brierley took over the company in1991 it totaled £40 million ($60 million) in shareholder funds, afigure that now totals $1 billion. Sir Brierley has an active investorfollowing of approximately 25,000 individuals who have stuck with hisstrategies almost from the beginning, thus providing the company withthe clout it needs when the right deal presents itself. Lacking debtGuinness Peat is a sound investment company, further proven by SirBrierley who takes no salary or fee’s. Rather, Sir Brierley is thesingle largest shareholder in Guinness Peat and states that hisinterests are the same as the other shareholders, thus he strives toachieve gains on their behalf. In the past Guinness Peat tended to siton its investments, engineering strategy and market changes to steercompanies down more profitable paths. This hands on style has beensomewhat modified under present circumstances as Sir Brierley hasstated that when one notices that the company’s strategy is changing“…go sell your stock quick.” (Sharechat,2001) He explains the precedingas protecting his investors and the company in that they minimize thedownside, and by having investments spread across a number of industrysectors that Guinness is not over positioned in any one deal, thus ifthey do make a mistake the company will still be in a strong position.

The preceding overview of Guinness Peat and Sir Brierley provides anunderstanding of the corporate philosophy and will be helpful inanalyzing the De Vere Group offer. A company, as well as its leader’sreputation, is forged in past deals and how they ultimately faired interms of investor and shareholder results. Prior to the De Vere offer,Guinness Peat reaped a large dose of negative publicity as well as atarnished public and industry image. The company held a 16% interest inInchcape, an international automobile dealer in the United Kingdom. TheBritish press called Guinness a ‘…troublemaker…” (Sharechat, 2001) whenthe company made demands that Inchcape be sold off and $343 millionreturned to shareholders. The furor in the press resulted from Guinnesshaving stakes in other vehicle dealers, namely Ryland, Perry andQuicks. It was argued that these companies could possibly benefit fromthe sell off of Inchcape’s dealerships thus seemingly representing aconflict of interest.

Table 6 - Guinness Peat Group Plc Holdings 2002
(hemscottinvestment analysis, 2002)

Company Sector Holding
(%) Market
Cap
(£) Price
(p) Div
Yield
(%) PE Forecast
EPS
Growth
% Discount
To Net
Assets
(%)
Coats Textiles 21.3 356 50.5 6 10 na 43
Dawson
Intl. Clothing 29.9 43 42 na 420 na 20
De Vere Hotels 8.3 387 348 3.2 13 6 29
Gowrings Restaurants
& Car
Dealers 11 10 108 4.6 8.5 41 35
Nationwide
Accident Car Repair
Services 20.7 22 83.5 4.1 14 na 47
Quicks Car Dealer 21 39 96.5 5.2 11 10 20
Ryland Car Dealer 26.3 27 92.5 6 10 na 2
Stylo Clothing
Retail 12.6 18 29.5 na 17 na 72
Tops
Estates Property 4.7 81 180 2 12 17 54

And the preceding example is not an isolated case. The company is knownas a share activist in the United Kingdom by attempting to halt theDeutsche Borse merger (Sharechat, 2001). Although the company has aless than 1% stake in the London Stock Exchange, it flexes its musclesin a manner that exceeds its clout as well as welcome. The Britishfinancial circles are well aware of the company’s bloody battle withCoats Viyella. Guinness’ 12% holding in this company was leveraged toremove the board in favor of individuals more aligned with itsthinking. The company also angered the British public by staging threeraids on the family owned Young Brewery. Its 7.8% stake was utilized,as in other cases, to force management to either hear and or adopt someof its demands. These actions, while possibly in the interests ofGuinness’ shareholders, has tarnished the company’s reputation and thustends to set management as well as shareholders on their heels whenGuinness becomes involved.

2.3.2 The Guinness Peat Offer
In March of 2004 Guinness Peat made a “partial cash offer to acquire28.5 million shares of De Vere…” (Guinness Peat, 2004) based upon thefollowing reasons as contained in Guinness’ Offer document:

1. The cash offer entailed 415 pence per share, which at the time ofthe offer represented a premium on the stock closing of 22 March 2004at 408 pence of 1.7%.
2. As a 35% shareholder Guinness indicated that it would seek toutilize a more progressive and dynamic strategy to result in a releaseof the substantial value it indicated is hidden in the currentcorporate structure.
3. The company stated that it would seek to accomplish the preceding byselling off the De Vere Hotel Division to yield the highest potentialfor its value which Guinness believed was occurring at that point intime.
4. That Guinness Peat would oversee the preceding developments through its management.
5. Guinness indicated that in order for the Offer to be successful that:
a. Over 50% of the De Vere shareholders with voting rights need to approve the Offer
b. And that the indicated acceptances would entail a minimum of 28.5 million shares

The Guinness Partial Cash Offer stated that in the De Vere 2003 AnnualReport that the company set this division’s net asset value at around£552 million. Guinness indicated that this figure included theliabilities of the De Vere Group headquarters which stood at £26.2million. Guinness indicated that this accounting methodology masked theasset value of the hotel group and represented an asset that could besold off with the proceeds returned to shareholders. Guinness indicatedin its Offer that the De Vere Hotel division was actually worth more asa private business in that the average price fetched by sale is 10.1times the EV/EBITDA, as opposed to the market valuation of 8.7. TheOffer also indicated that De Vere had under performed, in terms ofshare price appreciation, the hotel and leisure industry segment andthat management’s strategies were not yielding maximum return on fixedassets.

De Vere did not respond to the preceding Offer thus prompting GuinnessPeat to extend a “Final Partial Cash Offer to acquire 28.5 millionshares of De Vere Group Plc” on 8 June 2004. (Guinness Peat, 2004) This“Final Partial Offer…” stated that: (Guinness Peat, 2004)

1. De Vere’s Board record of maximizing shareholder value has not been borne out by its record.
2. The De Vere’s Board has not disclosed a proper valuation of the De Vere Hotel division free of outside debt.
3. The De Vere Hotel division has been seriously undervalued in termsof share price and that the present Board has not implementedcorrective actions to address this shortcoming.
4. And finally, that the De Vere Board refuses to address maximizing value for shareholders.

This “Final Partial Offer…” recommended the following correctivemeasures as the plan to correct the foregoing: (Guinness Peat, 2004)

1. Dispose of the De Vere Hotel division at a price in excess of £550 million (before transaction costs),
2. to avail the company (De Vere) of the present low interest rate which would help to structure such a sale,
3. to return a substantial portion of the proceeds from such a sale (De Vere Hotel division), to the company shareholders,
4. to ensure that in the future the De Vere Board utilizes a shareholder beneficial approach to operations.

Throughout the Partial Cash Offer’s extended by Guinness Peat, the sameissue was tackled, a sell off of the De Vere Hotels division which hasbeen under reported as a result of the company's headquarters debtbeing assigned in that segment of the financial reports. Guinnessstressed in its Final Partial Offer that it was not seeking control ofDe Vere, simply to release undervalued assets to the benefit ofshareholders through clear fiscal reporting and advantages for salethat exist in the present market. Guinness increased its share priceoffer to 430 pence which represented a premium of 5.4% over the 22March 2004 closing price of 408 pence. The Final Partial Cash Offer wasalso rejected by De Vere shareholders as just 0.55% replied to theaffirmative.

2.3.4 Guinness Peat Offer Analysis
GPG’s (Guinness Peat) Partial Cash Offer was based on itsinterpretation of De Vere’s financial reports that indicated the DeVere Group headquarters debt of £26.2 million is why the Division’sasset valuation for its hotels was only £550 million. Guinness proposedshifting this debt thus freeing up the conditions for sale in a postrecession market where the potential bidding for these premiumproperties would be driven to their true market value. The otherassumptions utilized by Guinness Peat in proceeding with such an offerentailed their analysis that competitor firms would be eager to bothrid themselves of De Vere in their competitive sector, but alsostrengthen their own positions through the acquisition of premiumperforming properties.

Guinness Peat’s Partial Cash Offer did not address the manner in whichthe £26.2 million in headquarters debt will be structured, as well asthe fact that this debt would represent a burden on the remainingperforming divisions as the percentage of debt to revenues wouldincrease dramatically. Said change in the debt to earnings ratios woulddrive De Vere’s stock downwards under the reduced divisional format andfurther limit the company’s ability to fund acquisitions for existingdivisions or new opportunities. The Guinness Partial Cash Offer alsofailed to address that the sell off of De Vere’s flagship brand namewould erode the prestige of its remaining brands thus resulting in afurther deterioration of their brand image and how this would impactupon the remaining division’s ability to compete in a market which thecompany itself would have made stronger via a sale to key competitors.

The Guinness Peat Partial Cash Offer also contained some strikingadvantages for GPG in that it would be able to gain control over thissegment of De Vere’s assets and the dispensing of the sale proceedsthus regaining its Offer price plus profit in a relatively short spanof time. The preceding, when coupled with the negative publicity thatGuinness received in the British press for its handling of the Inchcapeautomotive dealership, Deutsche Borse merger with the London StockExchange, Coast Viyella boardroom blood bath and the three attacks onYoung Brewery, created a climate of distrust on the ultimate motives ofGPG. Guinness Peat’s actions of 2004 could be gleaned from earlierresolutions to the De Vere Board in 11 January of 2001 when the companyheld its 10 percent stake. The following resolution was submitted to DeVere by Blake Nixon, the United Kingdom Executive Director for GuinnessPeat. It proposed the following to be addressed at the upcoming annualmeeting: (GPG, 2001) 

1. The return of up to £50 million to shareholders via an off markettender offer for a total of up to 15% of the company’s issued capitalat a price limit of £3.00 a share,
2. To spin off Village Leisure and Greens as a separate public company,

Nixon stated that the Board of De Vere had not done enough to maximizeshare value. Ultimately, Guinness Peat’s Partial Cash Offer did notimpress De Vere shareholders in terms of its proposition or its shareprice offer. Further, the preceding broad operating and financialconsiderations were not addressed and presented a concern to thoseinvestors who had or would not have recovered their initial share priceinvestments from the sale distribution plan offered by Guinness Peat.As indicated, the remaining entity would be a substantially reducedcompany and the debt to earnings ratio would further dilute the marketshare price. This end result would have provided De Vere shareholderswith an immediate cash compensation, but left them with a weakenedcompany in a strengthening market. Guinness Peat’s Partial Cash Offerdid not specify the distribution terms and leaves one to think thatbased upon past history that GPG would recoup all of its initialinvestment in De Vere as well as reap the proportionate share of cashfrom the De Vere Hotel division sale for a handsome profit. Theshort-term benefit of this proposal did not appeal to the majority ofDe Vere shareholders for these as well as other reasons.
 

 Stakeholders
Rahman and Jorg (2003) state that the “…importance of therelationships…companies have with stakeholders…” go beyond thehistorical understanding of this term. They bring into the stakeholder/ company relationship the viewpoint that it is more than monetary, italso entails trust and a commitment to objectives that best serve theinterest of the company and therefore its stakeholders as well. Theword itself, stakeholder, was first utilized by Marion Doscher (Stewartet al, 1963) as described in a report to business subscribers. Sincethat time, the concept of a company’s stakeholders has evolved andbecome defined to mean those individuals and groups which the companyhas “…unfair non-contractual effects.” (Kelly et al,1997) British PrimeMinister Tony Blair said that “We need to build a relationship of trustnot just within a firm but within society…” (Blair, 1996). Today’sunderstanding of stakeholders focuses on the relationship thatcompanies have with this group. Rather than viewed as individuals andor groups to be managed, today’s corporate thinking see them as a“…network-based, relational and process-oriented view of company /stakeholder engagement…” (Rahman et al, 2003) Rahman and Jorg (2003)further expand upon the preceding by stating that the modern dayrelationship between the company and its stakeholders, is based upon “…mutuality, interdependence and power.” (Rahman et al, 2003)

The competitive nature of today’s business environment has created aclimate whereby corporations operate in multiple countries, thus makingtheir actions, performance and behaviors visible to broad groups ofindividuals and institutions. Williamson (1993) indicated that trust inbusiness is actually a matter of calculation, based upon self-interestas well as consideration for others, as well as one’s own reputation.Rahman et al (2003) bring up the point that operating a company in theinterest of stakeholders can be inviting trouble as differing groupscompete for control and thus there would not be a clear indication ofwhich group has priority. In the instance of the Guinness Peat ‘PartialCash Offer’, Sternberg (1994) argues that operating a company in thismanner “…provides no guidance…as to how competing interests are to beranked or reconciled…”(Sternberg, 1994) And while the word‘stakeholders’ refers to anyone that has a stake in the well being of acompany, in the context of the Guinness Peat Offer for De Vere, whatone is really referring to are shareholders, as stakeholders do notidentify those who actually put up funds for their ‘stake’ in thecompany’s operations (Dunlap, 1996). Thus, in the context of thispaper, stakeholders is a term that reminds business managers to bemindful of those groups and individuals who have a financial stake inthe corporation. The preceding also means that those suppliers,employees and non-financial stakeholders also need to be considered inthe context of business decisions and how these groups and individualwill be affected by business decisions as well. (Rahman et al, 2003)

 Corporate Governance
Shleifer and Vishny (1997) provide some clarity concerning what iscorporate governance as they define it as “…the ways in which suppliersof finance to corporations assure themselves of getting a return ontheir investment…”(Shleifer et al, 1997). Rahman and Jorg (2003) statethat corporate governance concerns itself with holding a balancebetween social and economic goals as well as between communal andindividual goals. The framework (corporate governance) encourages theefficient use of resources and also requires the managing of theseresources. Bavly (1999) furthers the preceding by stating that “Just asevery social structure has its own accountability system, in theclassic market economy a company is held responsible in themarketplace.”(Bavly, 1999) He goes on to add that one of theobligations of corporate governance is providing information to enablethe shareholders of a company to understand how the capital they haveinvested is and has been put to use, as well as the financial standingof the company in terms of these resources. Carriere et al, (2002)point out that concern regarding corporate governance has seen almostevery European country issue some type of Corporate Governance Code ina two year span beginning in 2000. Carriere et al, (2002) indicate thatthe preceding has been caused by the fact that investors have placedemphasis on being able to scrutinize the practice of companies as wellas those groups comprising their interests.

This so called opening of the inner books on whom the company doesbusiness with in financial as well as other fiscal matter providesinvestors with a picture of the potential entanglements and otherunseen arrangements that could affect decisions and actions. This wasthe point that Guinness Peat referred to in their Partial Cash Offer,the assignment of headquarters debt against the De Vere Hotel divisionasset sheet. The failings of various American corporations, Enron for$63 billion, Global Crossings at $25 billion and others, has causedthis (corporate governance) to become an important area of focus(Taylor, 2002). Bakan (2004) stated that there tends to be a basic“…amorality…” Bakan (2004) inherent in competing in the business arenaand as such corporations sometimes act in this manner. The area ofcorporate governance holds management accountable for its performanceand management of the company, as well as the “…the proper use ofexecutive power…” (Bavly, 1999) The scandals and bankruptciesexperienced by the market during the past few years has strengthenedthe resolve of the general public, and government(s) to makecorporations accountable through adequate disclosure of informationthat if withheld, could mask the rationale behind important decisions.

 Company Ownership
The case study of Guinness Peat’s Partial Cash Offer for De Vere bringsinto question the make up of what individuals, companies, institutionsand special interests hold stock in the company and their potentialagendas. Guinness, as an investment company, has and had demonstratedits tendency to acquire a representative share of a company, usuallybetween 7 and 20% depending upon the share price and number ofoutstanding units, and then present its agenda to shareholders throughvarious means. Mr. Nixon of Guinness Peat did this in 2001, when hesubmitted a resolution to the De Vere board seeking that the followingbe put forth at the annual shareholder’s meeting:

1. The return of up to £50 million to shareholders via an off markettender offer for a total of up to 15% of the company’s issued capitalat a price limit of £3.00 a share,
2. To spin off Village Leisure and Greens as a separate public company,

This preceded the Partial Cash Offer to acquire 25% of the issuedcapital shares for the purpose of selling of the De Vere Hoteldivision, which was unsuccessful. In truth, Guinness Peat actuallysabotaged its own efforts as a result of prior dealing in the UnitedKingdom where the question of its ownership affiliations were calledinto question on its deal to attempt selling off dealerships underInchcape. The British press found that Guinness’s ownership ofcompeting companies Ryland, Quicks and Gowrings indicated a potentialconflict of interest and this, plus battles with Coats Viyella andYoung Brewery were negative corporate events which tarnished GPG’sreputation and tended to label it as a corporate raider. The rules andregulations regarding disclosure of ownership provides the investingpublic with the opportunity to see what affiliations are present andwho owns what. This important background information gives investors,both individual as well as institutional, the ability to formulatetheir own decisions concerning the potential effects of the preceding.

Table 6 - Guinness Peat Group Plc Holdings 2002
(hemscottinvestment analysis, 2002)

Company Sector Holding
(%) Market
Cap
(£) Price
(p) Div
Yield
(%) PE Forecast
EPS
Growth
% Discount
To Net
Assets
(%)
Coats Textiles 21.3 356 50.5 6 10 na 43
Dawson
Intl. Clothing 29.9 43 42 na 420 na 20
De Vere Hotels 8.3 387 348 3.2 13 6 29
Gowrings Restaurants
& Car
Dealers 11 10 108 4.6 8.5 41 35
Nationwide
Accident Car Repair
Services 20.7 22 83.5 4.1 14 na 47
Quicks Car Dealer 21 39 96.5 5.2 11 10 20
Ryland Car Dealer 26.3 27 92.5 6 10 na 2
Stylo Clothing
Retail 12.6 18 29.5 na 17 na 72
Tops
Estates Property 4.7 81 180 2 12 17 54

Bernstein et al (2003) point out that various stock option schemes, aswell as incentives for performance provide executives with theopportunity to accumulate large blocks of stock in lieu of, or inconjunction with bonus and salary incentives. He also indicates thatwhile there are instances of abuse, the offering of stock options canactually create a climate whereby top management fulfills operationalobjectives to receive these rewards, thus benefiting shareholders aswell in the increased bottom line and market performance. Guinnessattempted to make such a point regarding Lord Daresbury’s stake in DeVere subsidiary G&J Greenall, the division that manufacturersprivate label as well as contract spirits. The attempt however, did notreveal or suggest any conflict of interest in the running of De Vere,and the contributions of that division to the company’s bottom line hadbeen positive, without the incursion of any debt.

 Shareholder Powers
It is generally agreed that the system of corporate governance in theUnited Kingdom places shareholder interests above those ofstakeholders, such as employees and creditors. Shareholders have theright to buy one or more shares in publicly traded U.K. companiesthrough the stock exchange (eiris, 2005). As such, they are entitled tocertain rights and powers, such as voting rights which effectivelycause the owner to be a member of the company, as the vote entitled theowner to voice opinions on company activities. As a shareholder, onehas the right to information on the company and this is usuallytransmitted through the company’s annual report, newsletters andmailers on new developments, press releases and through the company’sinvestor relations department. Taylor (2002)  Ownership of sharesentitles the owner to vote, attend, as well as to have the opportunityto speak at annual company shareholder meetings where one can vote inmembers of the Board of Directors, financial auditor and resolutionsbrought forward by the Board. (Gillan et al, 2002)  As a voting rightsshareholder one can also accept or reject the company’s annual reportas well as any dividend proposed and these voting powers may beextended to other individuals via proxy, which provides them with theopportunity to vote your shares in your absence.

This participation in the affairs of the company is one of the benefitsof owning stock in a public company where the rules and regulations areknown. Shareholder rights include the ability to table and supportvarious resolutions put forth by one’s self or others provided you havethe support of 100 shareholders each having a minimum of £100 in valuewith respect to the shares held. (eiris, 2005)  Said resolution alongwith a statement of no more than 1000 words can be presented inaccordance with the company’s rules and regulations for this area. Theindividual weight of a shareholder is minimal, depending upon thenumber of shares held, and thus that individual’s financial commitmentto the company, however, through the use of resolutions, proxies and adefinitive plan of action, one’s individual powers can be multiplied bya group of like minded individuals to weld power. Taylor (2002)

 Management Responsibilities
The well publicized abuses that occurred at WorldCom, Enron and othergiant American public company scandals have brought the Boards ofDirectors under increasing scrutiny as it is their responsibility tooversee corporate operations, executives and adherence to legal rulesand regulations in the conduct of business. Stiles (2001) states thatthe “…expectations of boards of directors are changing…” (Stiles, 2001)in that their roles as “…rubber stamps…” (Stiles, 2001) for managementhas lead to abuses. Individual as well as institutional investors havebeen awakened by the examples of “…malfeasance orincompetence…”(Stiles, 2001) In the United Kingdom the individualshareholder is dwarfed by institutional investors (banks, pensionfunds, investment firms, insurance companies, etc.) who hold 60% of theordinary shares of United Kingdom public companies. (Stiles, 2001). Stiles (2001) puts forward that Boards exist to take an active role inthe planning, research, development and follow through of significantplans, policies, decisions and activities undertaken by the company asa participatory activity, rather than the aforementioned ‘rubber stamp’involvement. The Board is the internal governance facility thatreviews, questions and seeks confirmation for management’s plans, thusproviding the company, and its investors, with a watchdog that servesthe best interests of the company. Stiles (2001) stated that boardshave a responsibility to act as “…a control mechanism to reduce thepotential divergence of interests between corporate management andshareholders.” Stiles (2001)  Shleifer et al (1988) put forwardexamples whereby management’s lack of fundamental operatingresponsibilities created events whereby breaches of corporate ethicsoccurred. Management has its own moral as well as ethical codes viawhich to operate and it is their responsibility to act in the bestinterests of the company as well as shareholders at all times tomaximize value. This is the function of upper management, as it also isof the Board.

The case study of the Guinness Peat Plc Partial Cash Offer for limitedcontrol of De Vere Group Plc with respect to the handling ofdivestiture of the De Vere Hotel division is an example of the mannerin which institutional investors influence, impact and changecorporations through their presence as well as takeovers. It is arguedthat investment and institutional investors help to keep the managementof public corporations ‘on their toes’ with respect to achievingmaximum shareholder value. (Sharechat, 2001) The role, influence andimpact of institutional and investment firms in the running andoperation of companies has grown as a result of the development ofpension fund systems as well as cadres of investors of high net worth.(Gillan et al, 2002) These large blocks of investment money weldconsiderable power and target those companies where their investmentswill yield the best results. The target companies can either be stellarmarket performers, or under performers with hidden assets or sell offbenefits attractive to a particular investment group.

Today’s public arena has suffered through a number of instances wherebylarge corporations have either mismanaged assets or worst, mislead thepublic concerning the state of their affairs. The burst of the dot.comand technology bubbles, along with the after shock of the September11th attacks on New York city created a climate of relative desperationon the part of public company managers to earn a return that wouldsupport or increase the stock share price. In a recession market, thosecompanies that are able to either maintain or increase their shareprices stand to gain additional share price support through the buy inof investors liquidating from other stocks or holdings (such as bonds)(Gillan et al, 2002).  The foregoing also applies to the managers oflarge institutional funds as well as investment firms such as GuinnessPeat. Declining markets actually represent opportunities to acquiresubstantial blocks of a company’s issued share capital as a bargain. Asthese investments have an intrinsic value or opportunity which saidinvestment firms seek to capitalize upon, their entry as a shareholdertakes on increased clout as shareholders are aware of the outsideeconomic climate and tend to seek means to further solidify theirholdings.
The preceding existing shareholder value and profit concerns regardingtheir share positions, as well as the relative uncertainty within themarket regarding future performance provides the environment to putforth resolutions for change, such as the Guinness Partial Cash Offer.The clout of an investment or institutional firm buying into acompany’s stock serves to further support the price as well as providea climate of optimism on the part of the general public as to thecompany’s future prospects. (Gillan et al, 2002)  While the followingmight not be true on most cases, it must be remembered that the generalpublic is not engaged in the day to day nuances of the market and thustend to read that investment choices of institutional companies aspotentially positive signals. As one would suspect, the preceding aswell as a multitude of other factors are utilized by these types offirms to ‘pave the way’ for their entry into a particular stock, aswell as for their individual agendas.  The questions is, are thesecompanies over stepping their boundaries in a market that is foundedupon supply and demand principles in a financial stock acquisitionenvironment, rather than whom has the power to upset the balancethrough the application of large blocks of money to swing balances intheir favor.

Unfortunately, the later policy holds as much validity as the former.The system of checks and balances in a free market economy are bothdefined as well as obscure. Corporate managers are responsible formaximizing shareholder value, and when they permit economic conditionsto impact the performance of a company in a negative manner, they areaccountable to shareholders as to why. In the same context, this alsoholds true for all areas under their stewardship, such as financialreports, profits, and assets. Thus, management does have a measure ofcontrol with regard to what types of monies are drawn to their stock,and for what purposes. Institutional investors usually take positionsto achieve growth on sound companies that have demonstrated a superiortrack record. Investment firms, however seek to capitalize on ashort-term basis for their investments, as their strategy is immediategains, and then settle in for resulting profits, or simply immediategains and then opt out of future financial involvement. This predatorystance is the nature of their existence and thus strategy matrix. Andwhile differing investment firms conduct their businesses in differingmanners, with respect to the methodologies employed, their corerationales remain the same.
The enactment of the Sarbanes-Oxley Act of 2002 is one of the countermeasures that will and does keep managers aware of the pitfalls of missreporting financial information and thus tightening the climate forinvestment firm influence through heightened corporate operations inall quarters. Guinness Peat’s case study provided a rounded approach onthese defined as well as obscure aspects in that the Partial Cash Offerwas based upon what Guinness claimed was underperformance in the marketsector, as well as financial reporting that hid the value of certainassets. The premise, in theory, held promise, but the actual facts andexecution were less than stellar. The £26.2 million that Guinnessindicated De Vere was utilizing to under valued its De Vere Hotelsdivision which reported its assets as £552 million. As the indicatedsum represents an amount less than 8%, its significance in terms ofcash ratio is doubtful. Further, Guinness provides the unsupportedassumption that the value of this asset would be substantially higherin the private sector thus fetching a price in excess of the combinedtotal of £578.2 million (£26.2 million for debt and £552 million forthe De Vere Hotel division asset value). In addition, the Partial CashOffer on the part of Guinness did not address how the new reduced sizeDe Vere would appear to financial analyst’s as a result of theincreased income to debt ratio given the divestiture of the company’slargest revenue streams (the De Vere Hotel division).

The assumptions, while not borne out by the methodology, provide andexample of how the innate checks and balances of the free enterprisesystem generates the appropriate conclusion in most instances. This isnot to say that institutional and or investment companies are anegative influence on market behavior, or that they act in a mannerthat belies the best interests of the whole. The free market systemrelies upon the ability of its component, people, to adjust to new waysof doing business that is brought about by challenges and opportunitiesas they present themselves.

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