BUSINESS
Will 2007 repeat the madness of 1987?
Richard Northedge looks back on a year in which it was all too easy to separate fools from their money — and wonders whether we’re heading for another one If you remember 1987 at all, it is probably for the October hurricane and the stock market crash. Because they coincided, they are inextricably linked as though one caused the other. In fact, despite falling 23 per cent, the market was back on its feet before the debris of the storm had been cleared. Share prices ended 1987 higher than they began, making the crash a downward blip on a rising graph unlike the turn-of-the-21st-century meltdown that has left prices well below their dotcom levels after six years.
As the 20th anniversary of 1987 looms, rather than remember the October storms we should look back to the preceding months of market madness — and the subsequent era of corporate disasters. This was the year when Tie Rack was floated to raise £12 million — and equity-mad punters subscribed more than £1 billion. It was the year when the Saatchi & Saatchi advertising group — fresh from giving Margaret Thatcher her third election victory — proposed a bid for Midland Bank, which had once been the world’s biggest bank. To anyone too young to have witnessed it or so old they fear their memory is playing tricks, that must seem unbelievable.
To jog your memory a bit more, this was the year of Jeffrey Archer’s libel case against the Daily Star, of the sinking of the Herald of Free Enterprise, the Hungerford massacre and the King’s Cross fire. For those who like history to repeat itself, there was a Gulf War and a coup in Fiji, the pound was at a four-year high and the Bank of England was giving stern warnings about debt levels — not least to those who were borrowing to buy shares. This was a debt for equity swap on a grand scale. Savers were withdrawing £7 billion a month from building societies — so much that the big societies had to cancel a rate cut before they implemented it because of the cash outflow. One 23-year-old accountant earning £6,400 ended the year owing more than £1 million on his stock exchange deals.
There was so much equity on offer. Britain’s Sids, having received their slice of privatised British Gas in late 1986, were offered British Airways, Rolls-Royce, British Airports Authority and British Steel in 1987. So much money was pouring into shares that the Stock Exchange chairman asked the government to exclude small investors from privatisations while brokers caught up with their paperwork.
But there was no stopping the cash-hungry government, which also offloaded a £7.5 billion tranche of British Petroleum in a worldrecord equity offering. Billboards were plastered with ads for shares. Besides all those state sales, Eurotunnel invited the public to throw away £750 million of equity so that it could borrow £5 billion of debt to pour down the same hole.
Separating fools from their money was just too easy. Existing quoted companies jumped on the cash-raising bandwagon. Perhaps it was the millions Midland Bank raised in its rights issue that whetted the Saatchi brothers’ appetite, but the cash saved neither of them. Robert Maxwell extracted a record £630 million from his shareholders for an American bid that never happened — but he kept the cash and it kept him afloat a little longer. Blue Arrow beat even that record with an £837 million issue that, like the BP share offer, was stuck with the underwriters when the market crashed — and Blue Arrow’s backers ended up in court accused of hiding the unsold shares.
Whether takeovers made sense mattered little to companies with cash to spend. The newly floated TSB made three separate bids to waste its dowry: its purchase of Hill Samuel did the most damage to the TSB balance sheet. Ferranti paid £421 million for a US defence company before finding its order book was fictitious and going bust. British & Commonwealth financed a bid for Mercantile House by selling its money-broking arm to someone who didn’t pay — and went bust. No one could make Canary Wharf’s sums add up, but the Reichmann brothers’ Olympia & York bought it anyway — and went bust. Property group Mountleigh bid for everything, even considering a £2 billion offer for Sir Terence Conran’s Habitat-toMothercare Storehouse group — and, guess what, went bust too. A company valued at just £45 million did attempt that £2 billion bid for Storehouse. You couldn’t make it up.
All sense of value was lost that year. A pension fund trust received eight successive bids from Trafalgar House and Mountleigh before the gavel fell; Axa of France and New Zealand’s Ron Brierley made seven bids as they leapfrogged each other to buy the insurance group Equity & Law. Antipodeans such as Robert Holmes à Court and John Elliott were over here buying in force, and not only companies: Alan Bond watched a Japanese insurance company pay £35 million for Van Gogh’s ‘Sunflowers’ so he bid a record $57 million for the same artist’s ‘Irises’. The cheque bounced.
Shares continued to rise after 1987 but the madness, like the London housing market, had peaked. It thus took time for the insanity to be exposed as such, with many companies limping into the 1990s before expiring. WPP, originally a manufacturer of supermarket baskets until it audaciously took over America’s mighty J. Walter Thompson ad agency in 1987, delayed its financial restruc turing until 1990; Eurotunnel staggers on even now. Rather than make bids, Saatchi & Saatchi and Midland vied to see which of them would have to be taken over first. The first Guinness arrests came in 1987 but the trials dragged on as government inspectors appointed that year at Blue Arrow and Mohamed Fayed’s House of Fraser too slowly produced their sorry histories. Art prices collapsed and Britain’s housing market descended into a deep trough of negative equity as reality caught up with illusion.
Should we look back at this bizarre history with the bemused nostalgia reserved for Victorians covering their naked piano legs — or is there a lesson for 2007? Our worry should be that however ludicrous it now seems for an ad agency to try buying a leading bank, in the heady days of 1987 the prospect was treated seriously. We watched each mad episode without building them all into a big, ugly picture. If any small boy cried out that the emperor’s new clothes were deficient, no one was listening: the ridiculous was regarded as reasonable. So how can we know we are not acting with similar stupidity now?
Will current property purchases of City office blocks or Chelsea houses look, with hindsight, like an obvious case of buying at the top? As we enter the new year, it is not bids by British companies that might prove crazy, but bids for them. Will we one day look back on those 1987 privatisations and wonder why we allowed foreigners to take over BAA and Corus, as British Steel is now called? Will we regret allowing an Australian fund to buy Thames Water or the Spanish to own Scottish Power? Will we pinch ourselves to ask if Richard Branson really did try to acquire ITV through a once-bankrupt American company, or was it just a figment of the imagination? Will we discuss with amazement the extended auction for the London Stock Exchange?
Or is it the highly geared acquisitions by private-equity funds — unknown bidders without access to new capital from public markets to rectify their errors — that are sowing the seeds that could make 2007 the new 1987? Marx said that history repeats itself first as tragedy, then as farce: having done the farce first time, let us be careful the tragedy does not come round 20 years later. Watch out for hurricanes.
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