Examination of witnesses (Questions 180
- 199)
MONDAY 18 MAY 1998
MR MICHAEL
C SCHOLAR, CB,
MR NEIL
HIRST and MR
RICHARD LAZARUS
180. Did you give any positive advice? No.
Can I come back to you, Mr Scholar. Can I ask you why it was that
the amount of allocation of shares to financial intermediaries
was increased from ten to 12 per cent when this left other applicants
with just over 22 per cent of what they applied for?
(Mr Scholar) The decision to increase the allocation
to intermediaries from ten to 12 per cent still left a low proportion
of their orders satisfied. 22 per cent was a lower proportion
of orders satisfied than was obtained for the institutions where
I think we had an average allocation rate of 36 per cent. It brought
the two somewhat closer together. It was an allocation procedure
which is not criticised in the report in any way at all. We gave
everybody who applied, rather Cazenove gave everybody who applied,
the same percentage. It did not differ according to the size of
the applicant or any other criterion.
181. Are you aware, Mr Scholar, that in
paragraph 1.20, page 14, just five institutions subscribed for
30 per cent of the shares and made a profit in so doing based
on the sale of the company at the time and the valuation today
of 115 million?
(Mr Scholar) Yes[9].
182. Does not that scaling back to just
22 per cent for other applicants give rise to the indictment that
the sale was far less than competently handled?
(Mr Scholar) No, the market has gone the way it
has gone. It might have gone the other way and they might have
all made a loss. I do not see the fact that the market has risen,
and with it AEA Technology's value has risen, shows that anything
untoward was done.
183. Have any of those institutions other
than Schroders applied to you to increase their valuation over
the 15 per cent set by the Government?
(Mr Scholar) No.
184. So Schroders is the only one. Do you
think that the book making process was widely tested enough or
does the report, which indicates that it was tested on far too
narrow a range of institutions, hold up?
(Mr Scholar) I think it is very difficult to be
dogmatic about these matters. The range that is selected on these
occasions varies widely. The report derives an average over a
period of time. If it derived an average over a shorter period
of time the number would be different. The reasons we selected
this range at the time were market reasons based on recent market
experience and the belief that this would yield the greatest proceeds
for the taxpayer.
185. Can I ask the Comptroller & Auditor
General, given that such a large proportion of the company was
bought by so few institutions, are you absolutely satisfied in
your investigations there could not possibly have been any collusion
or insider trading in the flotation of AEA?
(Sir John Bourn) We found no evidence of collusion
or insider trading in the course of our investigation.
186. Paragraph 3.28, page 39, which you
have quoted from, Mr Scholar: "...a price higher than 280p
led Cazenove to believe that there was a precipice just beyond
280p where demand would fall very sharply." Given that that
was never tested and given the events subsequently and this huge
rise in the increase of the value of the company, indeed the huge
rise in the value of the company immediately after floatation,
do you consider in hindsight that the Department was given good
advice?
(Mr Scholar) I do not accept the premises of your
question. It was tested. Five institutions declined to bid at
£2.80. That was a test. Secondly, I do not accept that there
was a huge rise in the value of the shares immediately after the
sale. There was a 17 per cent rise which was higher than the Department
expected but it could not I think be fairly described as a huge
rise.
187. I cannot see how you can fail to say
it was anything other than a huge rise when you set the price
for sale at 280p and within a short time thereafter the price
was well over £3.00, £3.37 to be precise. How can you
possibly say there was not a huge rise immediately following flotation?
(Mr Scholar) One would expect a rise in that time.
We expected a rise of something under ten per cent, seven per
cent I think was the figure given in the report but that was a
rather spuriously precise figure. One expects a rise, in this
case around ten per cent or below ten per cent. It was 17 per
cent. I do not regard that as a huge difference.
188. Could you let the Committee have a
note on those shareholdings that I have already quoted, of the
directors' shareholdings, at the time of the flotation and now
so that we can see how the directors' shareholdings have moved
since flotation, and indeed what allocations the directors in
your principal advising companies, Cazenoves and Schroders, actually
were.
(Mr Scholar) I am sorry, I am not sure what the———
189. I would like to know, and I am asking
the Chairman if we may have a note, as to what the directors'
shareholdings were at the time.
(Mr Scholar) The directors of AEAT, is that right?
190. AEA Technology, yes. Your advisers
presumably disclosed to you what their directors' shareholdings
were at the time of flotation and presumably it is published information
as to what those directors' shareholdings are now. Could we have
a note of that?
(Mr Scholar) Yes, I am happy to provide that note[10].
Mr Clifton-Brown: I
am very grateful. I think, Chairman, looking at this I agree with
Ms Eagle's comments that this has to be one of the most unfortunate
episodes of the taxpayer being shortchanged that I have sat on
in this Committee. I hope when the report is issued that Mr Scholar
will reconsider and read carefully the Hansard copy of some of
his replies because I have to say that I agree with colleagues,
I believe some of the replies have been some of the most complacent
I have heard from any of the witnesses who have appeared before
this Committee since I have been on it. I have no more questions.
Mr Campbell
191. Good afternoon, Mr Scholar, I will
not detain you very long, I just have two points I would like
you to help me make my mind up on. The first one leads on directly
from what you have just said to Mr Clifton-Brown. I would like
you to look at figure three which is on page 15. You have described
at some length this afternoon the grounds for believing that there
could have been a degree of pessimism about this sale given the
problems facing the nuclear industry, including the question of
liability. You have talked about the media context in which this
decision had to be made. You have also talked about later freeing
the company from constraints, making acquisitions and therefore
making it a much more viable company. I think the point that my
colleagues were getting at is if you look at figure three, from
the day of the sale, the view that you had and your advisers had
about what this company was worth and the level at which it could
perform was significantly different from day one and every single
day after that from what the market's view was.
(Mr Scholar) If you look at that graph on page
15, you see for the first month the share price remained fairly
static. After that initial rise from day one to day two from 2.80
to 3.23 it did not alter very materially. The volume of trading
in those early weeks was not huge. I do not think it is fair to
say that because there was some demand at £3.23 in those
first few weeks that a price of £3.23 for the whole stock
would have been obtainable on 25 September. I do not think that
is a reasonable inference to make. I do not think that we seriously
under-priced the stock.
192. You are asking us to believe that your
view and the position that you took on what this stock would be
worth even in 12 months, slightly more than 12 months, you are
talking about it being worth three times as much as people were
actually paying for it, are you seriously telling us that is a
natural market reaction, that there was not anything wrong with
your original valuation?
(Mr Scholar) The whole market went up; AEAT went
up with it. It also benefited from its freedom in the private
sector.
193. And you could not have foreseen this?
You must have known before the sale that constraints would have
been lifted. You must have known before the sale about the possibility
of making acquisitions. If you did not know everybody else did.
(Mr Scholar) Mr Campbell, it is possible to make
a disastrous acquisition. It is quite possible to make an acquisition
and to see your share price fall like a stone. They could easily
have done that.
194. They could have done that but they
did not. In fact, this is a hugely significant rise. This is really
big bucks, is it not, for the people who have invested in this?
(Mr Scholar) It is wonderful to sit here after
the event and to look back and say all of this was foreseeable
at the time; it was not.
195. We are not asking you to foresee the
future but we are asking you to make a judgment, not just on what
was correct on that particular day but could you not have foreseen
the different situation which would emerge given the sorts of
changes you have described? Were you the only people who did not
know of the changes that were going to happen in this sector?
(Mr Scholar) No-one in the market expected this
price to rise like that. The expectation in the market was that
the price would be £2.60/£2.70 and there might be a
tendency——
196. For people who did not take that advice
and put money in they have been extremely fortuitous, have they
not?
(Mr Scholar) They have been fortuitous in many
purchases that they have made, they have been very, very lucky.
The market could have gone the other way.
197. And some of the people that were giving
you advice instead of sticking with what they believed to be the
case, a pessimistic scenario, they did not put their money where
their mouth was, they did the opposite, they actually put their
money into this and they have been extremely fortuitous as well.
(Mr Scholar) Their clients have done well.
198. Their clients have done well. Thank
you. The second point, and I hope you do not think I am going
to open up this can of worms about phasing because to some extent—I
do not want to insult my colleagues—I think we have been
going up the wrong track here because you have actually been giving
me the answer to what I want all afternoon. You have talked about
a firm Government policy, you have talked about wanting to sell
it cleanly, you have talked about a clear line from ministers.
The reality is you did not have to ask ministers or advise ministers
about phasing at all, did you? You did not have to write a paper
because you knew from day one what the Government's position was.
They wanted this sold. They wanted it sold as quickly as possible.
It had to be sold before the General Election come what may. That
is the reality. You did not even have to think about phasing,
there was not even time for phasing.
(Mr Scholar) We could have attempted a phased
sale.
199. But the ministers did not want that.
What is the point of you going to ministers with a paper about
the benefits or otherwise of phasing, you knew fine well that
ministers were not interested in phasing at all, they wanted this
sold before the General Election.
(Mr Scholar) You are quite right, they did not
want phasing, they made that perfectly plain, and we saw no market
advantage in phasing; in fact we saw the opposite for the reasons
I have given.
Mr Campbell: There
may have been reasons why they did not want it phased. For example,
they may have wanted it privatised because they had some assumption
that it would do better in the private sector. They may have been
creating a market. We have actually seen that with other privatisations.
It also leaves some of us with the view that they wanted rid of
this to get the money from it because they were actually stoking
up the chest with which to fight the General Election. I will
not ask you to comment on that.
9 Note by Witness: The four institutions held
30 per cent of the shares in July 1997 as stated in paragraph
1.20 of the NAO report. On the initial allocation they received
altogether only 16 per cent of the shares. Back
10
Note: See Evidence, Appendix 1, page 19 (PAC 314). Back
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