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TMT boom behind step up to respectability

Financial Times: TMT boom behind step up to respectability

“But the recent history of some corporations – think Shell, Marks and Spencer and Hollinger – shows only how things should not be done.”

By David Blackwell

Published: September 6 2004

Aim has proved so successful that it is now seen as an extension of the main market.

But it has not always been so respectable. Andrew Buchanan, of Close Beacon Investment Trust, reminds me that this newspaper illustrated an early report on Aim with a cartoon of a cowboy on a bucking bronco. You had to be a bit of a maverick to back it.

Mr Buchanan is celebrating his 10th anniversary as the fund manager of the Beacon Investment Trust. That makes the fund a year older than Aim itself, and it claims to have been one of the driving forces behind the creation of the junior market following the stock exchange’s abolition of rule 4.2.

The fund was set up to invest in the successor markets to rule 4.2, including Ofex and Easdaq. But a look at the fund’s top holding at the end of each year of its existence reflects the history of Aim.

In the beginning the top holding was Weetabix, the cereal company then listed on Ofex. But from 1996 all the top holdings have been listed on Aim. Dawson Holdings, the newspaper distribution group, was followed by Country Gardens, the garden centre company since taken over by Wyevale. At a time when many market professionals were doubtful that Aim would survive, the fund was investing in companies with a history, assets, good cash generation and often a dividend.

As the technology, media and telecommunications – or TMT – boom got under way, the top holding was in Zergo, the software encryption and security company that became Baltimore and briefly moved into the FTSE 100 in 2000. In 1999, it was NMT, which made syringes with retractable needles and was one of the surprisingly few Scottish companies to list on Aim. It was clever medical technology at the height of the Aids scare, but failed to take off.

JSB, the web filtering company now known as SurfControl, topped the bill in 2000, but in 2001 the end of the TMT boom saw a return to basics, with Enterprise, the facilities management group, as lead holding. For the next two years it was Auto Indemnity, which provides cars on credit to the innocent victims of road accidents.

But the largest holding at the end of June this year was International Greetings, the greetings card and wrapping paper company with a history, assets, cash generation and a dividend.

It can be argued that the TMT boom was the making of Aim because it forced the institutions to look at the companies flocking to join. Other junior markets wanted to join the party, but made the mistake of focusing on a narrow sector.

Easdaq and Germany’s Neuer Markt did not survive, but the broad spread of companies on Aim gave investors somewhere to turn – and the institutions have not gone away.

Over 10 years the Beacon fund has returned 144 per cent compared with 89.5 per cent for the FTSE All-share index. Its accounts for the year to June

30 show that the number of profitable companies in the portfolio of 52 was 36, up from 26 previously, and they are expected to report average earnings growth of 40 per cent this year. The number paying a dividend rose from 23 to 31.

The statistics back Mr Buchanan’s optimism about the outlook for the UK’s small companies. The economy is still growing, he says, and most small companies do not carry enough debt to be worried by further increases in interest rates. He also expects the new issues market to tick up over the next three months, although the market’s appetite will not be as strong as in spring.

Code guide

The directors of small companies should be able to look up to the big boys to see how corporate affairs are managed. But the recent history of some corporations – think Shell, Marks and Spencer and Hollinger – shows only how things should not be done.

The Quoted Companies Alliance, which represents smaller quoted companies, has produced a guide that simplifies the Combined Code and clarifies the slightly less demanding requirements for companies outside the FTSE 350. The main difference is that smaller companies need to have only two non-executive directors, instead of one for every executive, as recommended by Higgs for the top 350 companies.

But, as the QCA guide points out, that does not mean that there is any room for complacency on smaller boards, which need to pursue sound governance just as much as large companies.

The success of the “comply or explain” principle depends on intelligent engagement between companies and shareholders. Aim companies are exempt from the code, but the QCA suggests compliance would be a valuable aspiration . . . “and we would urge them to use the principles of the code as goals to be achieved”.

The guide has the backing of the ABI and NAPF, and costs £25. A little more than 100 copies have been sold – can investors assume that the remaining 1,500 companies with a quote have got corporate governance sussed? [email protected]

Financial Times: The Hollinger Chronicles: the dramatic story of a press baron’s downfall (

By Tim Burt and Andrew Parker

Published: September 4 2004

A500-page saga of alleged fraud and corporate theft at one of the world’s leading newspaper empires, is being studied this weekend by a small army of corporate lawyers, forensic accountants, stock exchange regulators and court officials.

Over the coming days and months, the findings of this week’s report by Richard Breeden, former chairman of the US Securities and Exchange Commission, will be cited in lawsuits and counterclaims that could deliver a fatal verdict on the career of Conrad Black, the Canadian-born media magnate.

Barely 10 months ago, Lord Black was master of all he surveyed: chairman and chief executive of Hollinger International, the US-listed publishing group that he built over almost 20 years to include Britain’s Telegraph Group, the Chicago Sun-Times, Jerusalem Post and a host of American local titles.

Since then, the 59-year-old entrepreneur has been emasculated – stripped of his boardroom titles, accused of looting the US-listed publisher and trounced in a set of court-room defeats. The board of Hollinger has sold the Telegraph titles – its “crown jewel” – in a £665m deal with Britain’s Barclay brothers and ordered a detailed inquiry into the chairman’s business affairs.

Throughout, the businessman who rose to both wealth and prominence at the helm of companies such as Massey-Ferguson, Canada’s Dominion Supermarkets and the Argus conglomerate has remained defiant. “Judgment Day hasn’t come yet,” he proclaimed some months ago. “The real story is how so much of the financial media think, ‘Hallelujah, here is another mini-Enron’.”

Judgment Day, so far as Mr Breeden was concerned, arrived this week. After a 14-month investigation, he concluded that Lord Black and his associates had taken more than $400m (£223m) from the company – representing 95.2 per cent of its entire adjusted net income for the six years to 2003.

In 22 chapters of allegations, drawn from 750,000 pages of documents and 60 witness statements, the so-called “Hollinger Chronicles” list “aggressive looting”, “fiduciary abuses”, “fraudulent acts”, and plundering Hollinger on a vast scale.

The alleged abuses range from excessive management fees paid to Lord Black and his associates to expense claims for stereo equipment, opera tickets, charity donations, company-funded private jets and domestic staff.

In one “deal the Blacks cut for themselves”, the company subsidised a $212-a-head birthday dinner for Lord Black’s wife, Barbara Amiel, the columnist, at New York’s exclusive La Grenouille restaurant, where 80 guests dined on Beluga caviar and lobster ceviche. Mr Breeden commented ruefully that at least it was less expensive than the Sardinian party thrown by Dennis Kozlowski, the disgraced Tyco chief executive. But he concluded: “Hollinger was a company where abusive practices were inextricably linked to every major development or action. . . ethical corruption was a defining characteristic of the leadership team.”

Lord Black and David Radler, the company’s former chief operating officer, have denied any wrongdoing and condemned the findings. In a statement redolent of Lord Black’s rhetoric, Ravelston, his private investment vehicle, said: “Mr Breeden and the special committee have squandered more than $25m of shareholders’ money in a futile 14-month investigation that paralysed Hollinger International, eroded the value of its assets, and persecuted and defamed the men and women who created the value they are now vandalising.”

In previous rebuttals, Lord Black has dismissed the charges against him as “horse feathers”, and branded his detractors a “pack of famished wolves”.

The Breeden report is now being scrutinised by the SEC, which has delayed its own investigation pending completion of Hollinger’s internal inquiry. The Department of Justice is also understood to be studying the findings, as is Judge Blanche Manning of the US district court. Judge Manning will consider the findings when she hears a $1.25bn damages claim by Hollinger against its former chairman and associates including Mr Radler, Lady Black and Dan Colson, former chief executive of the Telegraph.

The claim seeks damages of $380.6m, plus interest of $103.9m. But the total of $484.5m could be trebled under federal racketeering statutes. Amid other lawsuits, Lord Black and his allies are seeking more than C$850m (£365m) in libel damages from Hollinger in the Canadian courts, while shareholders at Cardinal Value Equity Partners are seeking another $300m from the company and its former directors.

But those legal moves have been overshadowed by Mr Breeden’s committee’s long-awaited report, which skewers Lord Black with evidence gathered by compensation experts, tax advisers and private investigators.

It is a humiliating experience for the entrepreneur who emerged from the suburbs of Quebec to dominate Canada’s media scene. Now his defence will begin in earnest. Having digested the Breeden report, Lord Black, who remains the chairman of Hollinger International, and his legal advisers plan to launch a discovery process examining the documents and evidence amassed by his accusers.The company has also hired Gottschalk Forensic Accounting Valuations, the auditing firm, to examine related-party transactions affecting the company.

All the investigations centre on Hollinger’s pyramid ownership structure and how the money flowed around the group, which gained its New York listing in 1994. At its heart, the allegation against Lord Black and his colleagues rests on claims that the company over-compensated its top executives and failed to instal an audit committee to police its fee structure. Those complaints were first raised last year by Tweedy Browne, the US investment firm that owns 18 per cent of Hollinger International.

Pressure from the firm, taken up by other investors, forced Lord Black to form a special committee last year to examine the claims. That committee, which commissioned the Breeden report, initially uncovered $32m of unauthorised management payments and non-compete fees paid to Lord Black and others via Ravelston, the private investment vehicle behind Hollinger Inc.

The $32m has since been repaid with interest. But the special committee has not been sated. It alleges that fees paid every year to Ravelston, which owns almost 80 per cent of Hollinger Inc, were excessive. Those payments, in turn, were used partly to service the balance sheet at Hollinger Inc, which owns 68 per cent of the voting rights and 18.2 per cent of the equity in Hollinger International.

According to the Breeden report, the split shareholder structure allowed Lord Black to hold voting control of the publishing group, which at its peak in 1997 comprised more than 500 newspapers with a revenue of $2.21bn. As such he was said to have a “hammerlock” on board appointments – bringing on passive independent directors.

Allies of Lord Black point out that the company’s structure was made clear in the original public offering prospectus, and that all the payments were approved by the company’s audit committee. “Breeden has an axe to grind,” according to one Black associate. “Some aspects in Conrad’s favour have been ignored.”

That claim is rejected by Hollinger’s special committee. It believes the board was misled in approving nearly $200m in “unjustifiable” management fees. Compensation paid to executives, via Ravelston, was 20 times the remuneration levels at the New York Times or 55 times those at the Washington Post.More than $90m was paid to executives for non-compete agreements signed by Lord Black and others when Hollinger embarked on a $3.57bn disposal exercise in the late 1990s. That culminated with the $2.1bn sale of Canadian titles to CanWest almost four years ago.

The CanWest deal was typical, according to Hollinger’s internal investigation, of abusive practices at the company. CanWest agreed to pay almost $52m of fees to Lord Black and his associates, as well as a side deal in which Ravelston would receive $3.9m a year. These fees were said to have been demanded by the Hollinger side.

The disposals coincided with other alleged misconduct including $5.3m in incentive payments to directors of Hollinger Digital – including Richard Perle, the former US deputy defence secretary – in spite of $67.8m in investment losses at the start-up vehicle.

Mr Perle is accused of failing in his duties as an independent director because his Trireme investment company was partly funded by Hollinger, while ignoring many of the papers presented to the company’s executive committee. Other directors, including Henry Kissinger and Lord Weidenfeld, also admitted to only scant knowledge of the company’s structure.

“The executive committee and the audit committee was where the action was,” said Lord Weidenfeld, who left the board two years ago. “We deferred to the judgment of the audit committee. We were given the figures; we assumed they were carefully evaluated.”

Cardinal Value Equity Partners, the investment firm suing the company, believes the report supports its claim of failings by the committee, led by Jim Thompson, former governor of Illinois.

Mr Breeden appears to agree. “The audit committee failed to take any of the steps, or to ask any of the questions, that might have made their review of both management fees and non-compete fees meaningful.”

While admitting the committee may have been misled by Lord Black, its apparent oversight joins a catalogue of boardroom failures that Mr Breeden says allowed the Blacks to treat the company as their “piggy bank”.

His report is one assault in a battle that could yet last years. Lord Black’s representatives argue that the allegations are long on invective, but short on substance.

They maintain the former Hollinger chairman will be vindicated in court, where he expects to prove that not only was there no misconduct but his actions were approved by the board.

One former Hollinger director was less robust. “It was thought the payments were all justified by the financials,” said the board-member. “I’m shattered, but I suspend final judgment until the courts decide.”

Mr Breeden has decided not to wait. In his report, he states baldly that Lord Black and Mr Radler operated part of the company for their own benefit.

He adds: “These were the truly ‘bad actors’ in the Hollinger Chronicles.”

British tax authorities objected to efforts by the Telegraph group – once Hollinger International’s prize asset – to treat management fees charged by Conrad Black’s private company as tax deductible expenses, according to Richard Breeden’s report, which also found that Telegraph group executives complained about the difficulty of making a profit because of the “exorbitant” management fees.

The Breeden report alleges that while Lord Black and his associates imposed excessive management fees on Hollinger International and its subsidiaries, they also used shell companies in Barbados to minimise their personal tax bills.

Daniel Colson, former chief executive of the Telegraph group, was interviewed by the special committee of Hollinger International’s board that hired Mr Breeden to conduct the inquiry. “Colson told the special committee that he and the Telegraph’s CFO, Niamh O’Donnell-Keenan, would often lament how hard it was to make the paper earn a profit when saddled with management fee charges that they believed to have been exorbitant from the Telegraph’s perspective,” says the report. Mr Colson, according to the report, said the Inland Revenue had over the years disallowed significant portions of expenses attributable to management fees that Ravelston charged to the Telegraph group. “This led Hollinger to reallocate to its US operations a significant portion of the fee that otherwise would be attributable to the Telegraph,” says the report.

Meanwhile, Jack Boultbee, former vice-president at Hollinger International, told the special committee that Lord Black and his associates took part of their remuneration through two companies incorporated in Barbados.

The committee was unable to find out exactly how much Hollinger paid in management fees to Moffat and Black-Amiel, the Barbados companies, but it estimated the amount at $7.8m.

Moffat is Lord Black’s middle name. The company’s shareholders were Lord Black, Mr Boultbee, David Radler, the former deputy chairman at Hollinger International, and Peter Atkinson, another former vice-president at Hollinger. Black-Amiel’s shareholders were Lord Black, Barbara Amiel, his wife, and Mr Boultbee. The report says neither Moffat nor Black-Amiel appeared to have any employees or provide any services to Hollinger. “The special committee has determined that neither Black nor [his wife] was doing anything meaningful through these shell Caribbean corporations,” it says.

Mr Boultbee said Moffat and Black-Amiel paid income tax at a rate of 2.5 per cent, and dividends paid to shareholders were not taxable in Barbados. “The special committee finds that Black, Radler, Boultbee, Atkinson and Amiel Black defrauded Hollinger by accepting payments that lacked all substance and appear to have been designed solely to create an appearance of reality to allow evasion of income tax obligations for the individual recipients,” says the report.

Lord Black’s supporters rejected any suggestion of tax law violations. They accused Mr Breeden of using language unsubstantiated by evidence of wrongdoing. Mr Boultbee could not be reached for comment. A Telegraph spokesman declined to comment.

Andrew Parker and Tim Burt

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