Select Committee on Public Accounts Sixtieth Report


THE SALE OF AEA TECHNOLOGY

ADVISERS

Allocation of shares

35. Demand for shares at 280p each greatly exceeded the 80 million shares available (Figure 4) making it likely that there would be a premium in the aftermarket and that there was potential for considerable profits to be made from any shares allocated. Contrary to the usual practice in privatisations, the Department did not monitor the process of allocating shares to institutions by their broker Cazenove, including allocations made to three Cazenove companies and one to a Schroders company.[30]

36. The allocation used Cazenove's standard allocation criteria, although these were not set out in writing or published in advance. Neither was a specific weighting given to each of the criteria, this made the allocation itself a matter of judgement. By July 1997, companies owned by Schroders and Cazenove (Schroders Investment Management and Cazenove Fund Management) had purchased 13.35 per cent and 4.74 per cent respectively of AEA Technology's shares.[31]

37. Each of the four Executive Directors of AEA Technology also applied for shares at the full price and with no preference or priority. Each was allocated around 36 per cent of the amount they applied for, the average for institutional investors. This was in addition to shares they obtained preferentially on the same basis as other employees of AEA Technology (Figure 5).[32]


Figure 5: Share Allocations to Directors of AEA Technology

  


38. Since the rise in value of the shares owned by Schroders and Cazenove companies far exceeded the fees they received from the Department as advisers, we asked what safeguards there had been to ensure that Schroders' and Cazenove's advice to the Department on pricing the shares was free from conflict of interest. The Department told us that the shares held by Schroders and Cazenove were held by separate companies on behalf of clients such as charities, trust funds and pension funds. Cazenove separated their merchant bank operation from their investment management operation. This was common place in the market and accepted by the regulators. The Department accepted, however, that they should have been involved in the allocation of shares to these companies. The Treasury Officer of Accounts confirmed that this was good practice.[33]

Success fee

39. Part of Schroders' remuneration (£2.55 million), as financial adviser to the Department, was a success fee of £1.99 million. This was based on their own valuation of the company which was not reviewed by an expert third party. The Department agreed with Schroders that the success fee should be a minimum of £1.05 million if proceeds were obtained equal to the mid-point of Schroders' valuation, increasing to a maximum of £2 million if higher proceeds were obtained.[34]

40. The Department told us that they did not think it necessary to seek an independent view of the valuation on which Schroders' success fee was based. They chose Schroders as advisers at the end of a competition during which each of the competitors suggested a methodology for valuing the company. They compared these methodologies and Schroders' was similar to the others.[35]

Conclusions

41. We are concerned that, contrary to established good practice, the Department did not play any part in the allocation of shares by Cazenove to institutions which included Cazenove and Schroders companies. As such allocations may result in considerable profit for those who receive the shares, overseeing allocations based on objective criteria published in advance of the sale is good practice.

42. We note that, as part of their remuneration, Schroders received a success fee based on the extent to which proceeds exceeded a valuation they themselves had made before they were appointed. We consider that when setting the basis of advisers' success fees it is not sufficient to rely on valuations made by advisers themselves before they are appointed and when they do not have a clear idea of the business or its potential. We reiterate our predecessor's recommendation that where valuations are used as a reference point for success fee payments for the body carrying out the valuation, the valuation should be checked by an independent party who is aware of this intention.


30   C&AG's Report paras 3.32-3.35, Figure 11 Back

31   ibid paras 1.20, 3.36 Back

32   Evidence, Appendix 1, p19 Back

33   Qs 6, 21-29, 58-61, 161-181 Back

34   C&AG's Report. Figure 7, paras 2.23-2.28 Back

35   Qs 7-8 Back


 
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