Examination of witnesses (Questions 80
- 99)
MONDAY 18 MAY 1998
MR MICHAEL
C SCHOLAR, CB,
MR NEIL
HIRST and MR
RICHARD LAZARUS
80. What were the total earnings that Schroders
had from the total fees? I heard that there were 5 per cent handling
or advisers' fees in total possibly for the whole of the sale,
so what was Schroders' element of that?
(Mr Lazarus) It is in the Report, is it not? It
was £2.55 million. It was over an 18-month period.
81. What was the bonus fee? Was that on
top of that?
(Mr Lazarus) That was included.
82. How much was the success fee?
(Mr Lazarus) The amount we got at the conclusion
was £1.99 million.
83. So that is not on top?
(Mr Lazarus) That was on the flotation of the
sale.
84. So it was £2.55 million total fee,
plus the success fee of £1.99 million.
(Mr Scholar) No, that included it.
85. What is this about a quality fee? Did
you get the quality fee as well?
(Mr Lazarus) What we agreed at the time of our
appointment was that we would reduce by £100,000 the amount
that we would otherwise be entitled to under the proposal we had
originally made and leave ourselves in DTI's hands as to how much
of an amount up to £200,000 the team at DTI felt that we
were owed on some quality-related criteria.
86. What was that amount?
(Mr Lazarus) In the end they awarded us £185,000
out of that £200,000.
87. I know in the Report it says that your
company as at July 1997 had a 13.35 per cent stake in AEA Technology.
Is that right?
(Mr Lazarus) I would obviously wish to take this
opportunity to emphasise the distinction between what Schroders
earns for its own account and its fiduciary responsibilities for
its mostly pension fund clients for whom it owns those shares.
88. So they are still all held together,
are they, or are they in separate accounts?
(Mr Lazarus) I do not know. I am not on that side
of our business.
89. But you are here answering for Schroders?
Is that right?
(Mr Lazarus) I am here answering as the DTI's
adviser in a corporate finance capacity.
90. Well, it is important because I am just
trying to get a grasp at your earnings in this whole matter. It
was around about 13.35 per cent in July 1997. Do you know what
the stake of Schroders is today?
(Mr Lazarus) It is a matter of public record,
but it is around 16 per cent.
(Mr Scholar) But that has nothing to do with Schroders'
earnings.
91. Well, I can be the judge of that, if
you do not mind. May I just ask whether or not Schroders or, Mr
Lazarus, you are aware that the DTI had a guideline which suggested
that no person should really hold more than 15 per cent in order
to avoid jeopardising independence of control over AEA Technology?
Do you know about that rule?
(Mr Lazarus) This is of course unrelated to the
flotation. At the time of the flotation, the DTI took certain
powers, and it has chosen to use those without taking advice from
myself or, as far as I know, any other merchant bank, but it has
used those criteria entirely unrelated to the flotation and that
is a situation which has only cropped up relatively recently.
92. Can you answer the point about the 15
per cent, Mr Scholar?
(Mr Scholar) We received an application from Schroders
via the Chairman of AEA Technology in September last year as to
whether Schroders could exceed the 15 per cent limit which is
laid down in the special share which the prospective Secretary
of State holds, because one of Schroders' clients already had
some of these shares and by taking on that extra client, they
would get themselves above the 15 per cent limit. Our Ministers
decided to agree to that request.
93. So I am just trying to look at the total
income to Schroders. Do you know, Mr Lazarus, whether or not in
fact all of the shareholdings that you have taken subsequently
to the privatisation, including from day one, have been for your
clients or have they been for the company itself?
(Mr Lazarus) As far as I am aware, they are all
for clients and that is our core business within that division.
I have to say that our business would not operate if we did not
have properly structured Chinese walls, as every regulator that
we work for is aware of.
94. But they were a good buy, were they
not, the shares?
(Mr Lazarus) The shares have performed in line
with some of the relevant market indices. They have done less
well than some others.
95. But they made a lot of money for your
clients?
(Mr Lazarus) Our managers have done well.
96. So would it be fair to say or would
it be very cynical of me to say that by getting them at a good
price, it was in your company's interests?
(Mr Lazarus) I am at a loss because I have not
answered questions to this Committee before, so I do not know
the best way to answer that question, but I think it would be
fair to say though that as the company has expanded within the
software industry and most of the eight acquisitions have been
within software rather than within the old engineering business
which previously dominated it, it has come to be rated somewhat
more as a software business than as an engineering business. This
has given it a virtuous taint. I think it would be fair to say
that had our investment managers bought pure software businesses
or companies, such as Capita or Misys or Sage, they would have
done even better, so yes, it has been a good buy, but not by any
means as outstanding as some other software businesses and yes,
it has done certainly much better than many of the engineering
companies.
97. Let us just get right down to brass
tacks. How would you answer these allegations that are made that
perhaps Schroders, in advising the DTI and helping to set the
price in the first place, were perhaps doing it for their own
profit?
(Mr Lazarus) We were not part of the allocation
process.
98. But in terms of setting the price and
subsequently purchasing the shares, surely there is the perception,
right or wrong, that you might have profited from having a very
low share price?
(Mr Lazarus) Well, I would answer that by saying
that we would have little by way of corporate finance business
for any of our corporate clients if anybody seriously thought
that that was the way we operated.
(Mr Scholar) I do not think it is right to say
that it was a very low share price. There was a premium of 17
per cent which remained for some time in the after-market. The
growth that we have seen has been subsequent to that and most
of it attended upon acquisitions made by AEA Technology.
99. Well, I do not have many constituents
who can earn a 15 per cent return on their capital in one day.
I find that quite an unusual thing, and I just feel it worth trying
to get the information right in the first place, whether or not
this was a fair price in the market, so I do not think there is
anything to be lost in asking those questions. Can I just ask
finally about the restructuring arrangements and I think I need
to ask Mr Scholar this question. It cost £121 million, this
restructuring. Why was it such an abysmal failure? Why was it
that there was a report written in December 1995 telling you that
there were great financial management control problems and that
the company would not be able to live up to the Stock Exchange
Regulations?
(Mr Scholar) The restructuring started earlier
than that report and took place during 1995 and 1996. As I said
before, it followed much earlier restructuring. This was an industry
which had over 40,000 people in the 1960s and it now has 4,000
or 5,000 people in it, so it was an industry where, because nuclear
power stations were not being built in anything like the numbers
that they were in the world and because this body is no longer
a nuclear research organisation which it was set up to be by the
1954 Act, it has changed its whole mission and it was, therefore,
necessary to engage in very substantial restructuring.
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