Following the merger of Varity with Lucas in 1996, CEO Victor Rice
moved quickly to change the Lucas management culture for the better.
But where shock treatment may work for managers, it rarely works for
shareholders. Many analysts were not in the least surprised at Rice’s
failure to convince sufficient UK shareholders that LucasVarity should
decamp from London to the US. It was a shame because his reasons for
emigrating were good ones.
There is a commercial case for plugging an ambitious automotive parts
corporation into pools of cheaper US acquisition capital. UK investors
may be sentimental about big name UK companies going abroad, but they
are not so sentimental that they pile into engineering stocks - which
remain unfairly undervalued as a consequence.
These arguments are complex but not impossible to get across. There did
not appear to be an attempt to provoke a debate in advance about the
relative cost of US and UK capital so the company’s rationale for the
NYSE listing came as a surprise to many. One large shareholder Mercury
Asset Management had clearly been squared, but LucasVarity had not
convinced its biggest UK shareholder Schroders, which voted against the
move. The rest of the UK pack followed suit.
The lessons from the affair are largely tactical. The size of the voting
threshold was set, at 75 per cent, unreasonably high in this case. The
second problem was the quality of the US ’paper’ that shareholders were
being offered in exchange. Third was the lukewarm City support for
LucasVarity’s existing policy of offering share buy-backs.
According to Andrew Lorenz in the Sunday Times, defeat never entered
Rice’s mind. This was a mistake, because investor opinion is not unlike
public opinion - it can take a sharp and unexpected turn if not handled
carefully.
I do not believe it was down to bad PR, the company clearly had a
long-standing investor relations problem. There should have been more
regular contact between the CEO, analysts and fund managers. With Rice’s
gung-ho reputation someone should have warned him that this operation
would not be plain sailing.
Where ’Britishness’ is an issue among shareholders, you can never be too
careful.
