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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