The first tranche would come from us. In those days, an MBO was a ‘pound of flesh’ situation. The financial institutions wanted to ensure if things went wrong, the MBO team would hurt and what's more, hurt big time!
Fortunately, all six of the team owned their own homes. Together with a mortgage provid-er, we were each able to borrow what was then a substantial sum against our respective properties. It proved we meant business and was our equity ‘risk’ investment towards the acquisition cost. The balance would need to come from a financial institution of some sort. David Haggart advised us to never give personal guarantees. Under any circumstance. Tell the institution a flat no! Risking our family homes was more than enough!
We prepared an information pack for each potential lender. It covered the history, our products, customers and suppliers in addition to biographies on each of the team. Of course, it included financial information, the last few years of profit and loss, balance sheet and source and application of funds (cash flow), management meeting minutes and so on.
Against opposition from Frank Murphy, our Finance Manager, I included the financial reporting pack for the last month. This was a massive tome, 25 mm thick, a document which analysed every aspect of expense, solely necessary for BL to consolidate its accounts worldwide and quickly. Remember this was before computer compatibility online connectivity and well before the Web and Microsoft Excel. Frank argued it was of no use to a bank. My opposing case of its value was purely in its weight. It was impressive! A company of that size analysing and controlling expense to that depth of detail. Such control. Of course our first cost saving, once independent, was to drop all the nonsense of the financial reporting pack.
The first step was to get the four UK Clearers in; NatWest (Gordon Wayne), Midland (HSBC), Barclays and Lloyds. All sent their local Commercial Managers, excepting we continued with Gordon Wayne, of Birmingham. Gordon's stance was we needed the guidance of a corporate investor and introduced us to ICFC (now 3i Capital). We began negotiations with them in late 1981.
The Midland fellow, accompanied by the local Syston Branch Manager (also Joe Eames' personal bank manager), gave us a speech about metal-bashing in decline, a sector certainly not for him. He left. Shortly after, there was a knock on my door, Joe's local grey-haired branch manager reappeared. "Gentlemen, I apologise for the total idiot I work for. Good luck. You are sitting on a great potential opportunity."
The man from Barclays was a bigger prat. Barclays, we discovered was true to its reputation of being the carbuncle on the arse of banking.
The man from Lloyds was much more positive, if a little slow in reacting. I felt we could work with Lloyds.
ICFC fielded a young and progressive man to negotiate with us. He was personable but greedy. They agreed to lend us the medium term funds but, in return, wanted 45% of the equity of the new company. We said no. It fell progressively over the ensuing weeks - 30%, 25%, 20%, 15% and 10%. Each time we said a resolute, no. The assets available would cover the ICFC sum lent. Where's your risk? We eventually negotiated ICFC down to 3.8%! The ICFC chap said, “There we are, got there in the end - just 3.8%.” "No!" Don Walker, observed wryly, "We remain 3.8% off our objective."
Working in the tough auto industry, we were expert negotiators.
Of course, all this activity had to be kept secret. Only my secretary knew what was going on. This was not only a condition of the terms agreed with BL, but also practical. If the workforce were to find out they could be made redundant, it would cause upset and create great uncertainty. Plus, key staff may start to look for employment elsewhere. The best can always find alternative jobs. Always.
This is where Frank Murphy came into his own. He was a great lover of the possession of money. It was his hobby. Never spent any, but loved the stuff. The best offer before us was NatWest + ICFC at 3.8%. Next was Lloyds, similarly. We liked Gordon Wayne of all of them. But the shared equity galled. Money for nothing. Plus, the equity partner would always be the elephant in the room. They would be seeking an ‘exit’ in (say) five years. Or worse, encouraging us to get bigger via acquisition.
I knew from a lot of reading most acquisitions fail. Especially reading 'Anatomy of a Merger' which analysed the varying fortunes of the AEI-English Electric merger(s). BL was another highly visible example before our eyes. I was wary out of principle. If it looks too good to be true, it usually is.
I was aware all my time, skills and effort needed to be deployed into determining a new direction for Rearsby and to vastly changing Rearsby in every respect. To move it from a low wage reliable competitor, to a world class supplier to the world's best OEMs. I didn’t know the detail, but I was sure of the direction. A mammoth task given our starting point. Standing still wasn't an option - we wouldn't survive. This was blindingly obvious to me.
Indeed, during all this negotiation, I had booked myself on a fact finding trip, organised by Unipart to Japan visiting Honda and Toyota vehicle plants and more importantly, several of their suppliers. This would take place in early January 1982. We were at this stage in October 1981.
Frank said: "Give me two weeks. I will walk the City of London to determine if I can put an equity-free deal together." We agreed. He disappeared. We heard nothing. He eventually reappeared, not looking too well. He looked tired and worn out, but at the same time on a big high! This process was repeated years later, but in the opposite direction.
He said, he thought he had got there. The Bank of Ireland had opened a branch in Leicester and wanted to increase its clearing volume and mid-sized business banking significantly. Then, there was the Royal Trust Company of Canada, not a traditional bank, but big in pensions and property investments. Fortuitously, Royal Trust wanted to expose its portfolios to industry. Vitally, they were each prepared to go 'paripasu'! (The latter transpired to mean equal, equal). We met them together at Rearsby.
Ronnie Smith, the Bank of Ireland Commercial Lending Manager based in London warned: "Look lads, we are a small operation in the UK. I don't have a great deal of staff unlike the big four UK banks. If things go wrong, I cannot, indeed will not, help you out of it. I'll simply pull the rug from under you!" I responded immediately, "Ronnie I can definitely work with you!"
We elected to take the Bank of Ireland/Royal Trust route. It got a little sticky near the actual deal. The Royal Trust Company came up with less of a medium term loan than they indicated initially. We were about £200k short. We overcame this by borrowing the shortfall for one month from the Bank of Ireland, handing over 100% our first month’s sales receipts, which immediately put us into a large overdraft.
Banking Postscript
After four years, we decided to change the Clearer from the Bank of Ireland, due to rising costs. We called two banks, NatWest and Lloyds to quote for our clearing/overdraft business. NatWest was marginally more competitive than Lloyds. I enquired if Gordon Wayne still worked for NatWest in Birmingham and was informed he was now Regional Director, East Midlands Division. “In that case,” I said, “NatWest would get the business provided we had lunch with Gordon.” This was arranged. On the day, Gordon asked if it was true, was lunch the deal breaker? I explained it wasn’t, but we thought he had the highest of integrity during the original negotiations. Gordon revealed, following the final meeting at Rearsby, he had to pull his car up. He sat in a lay-by for 15 minutes reflecting. The first and only time he had done such a thing. He knew his insistence on an equity partner had cost NatWest the deal. I responded, the very core belief and integrity was, for us, a major plus. That, and no other reason, is why we returned to NatWest.
Returning to 1981. Two problems remained following raising potential funding.
1. Communicate and take the workforce with us
2. Go through the Due Diligence process
Now for much valuable work by Jim Robinson, Personnel Manager. He and I met the district union officials off site - to explain what had happened and what was about to happen. I knew from my Longbridge days they had severe misgivings regarding redundancy payments. In fact, Dick Etheridge jnr, confided in me, his father felt pushing for the Redundancy Payments Act, in the event, had back-fired upon trade unionism badly. Workers/union members being faced with accepting the largest single sum of money they would ever likely to possess, tempted them to take the ‘pot of gold’ in lieu of continued employment. This removed the ability of the unions to fight for jobs.
Bridget Patton, the feisty Leicester AUEW District Official and the only female in such a role in the skilled engineering Union, was of the same mindset. She had witnessed job after job go in the garment /hosiery industry. I was quizzed over the Terms and Conditions, length of service being retained, wages/salaries etc. I said all such aspects would remain the same, excepting we would need to return to PBR for direct workers due to the loss of productivity suffered having moved to Measured Daywork. She had no issue with that. In principle, I had union backing, in particular, Bridget's.
We arranged for a joint presentation to all Rearsby personnel on all shifts.
The possibility of closure came as a big shock and of course, from some, management were to blame and had engineered it all. MBOs were new to them, as it had been to me, months earlier. Why close us? We have been loyal. Very few strikes. Good quality work etc. Why not a cooperative? Indeed, there was a lot to take in.
I had thought of the possibility of a cooperative. It would take a great deal of effort to orga-nise and bring to fruition. I obtained a number of articles on setting it up. I read up on the successes and higher number of failures. Yes, I could probably have a go, but would it worth it? Would I find it stimulating? Was I a real democrat? Was I a ‘management by committee’ fan. Definitely not. How many could be persuaded to contribute funds? I knew the answer. Understandably, very few. Did we have the time? Would BL be amenable? The Triumph Meriden co-operative was a big mess, heading for failure. Labour politicians, such as Leslie Huckfield were abound and union activists, was that for me? No! There was no place for socialist politicians in my life; in particular, dangerous dreamers such as Tony Benn especially back at Rearsby. Harold Wilson’s judgment of Benn, when I listened to him in Leicester during that time, was similar. A view I shared of the other armchair ‘Hampstead’ socialist.
John Lewis was the only really successful cooperative I was aware of, but they had been gifted a strong company free of debt and socialists. Did I believe in a cooperative? No. Could I lead something I didn’t believe in? No. In the end, I was no socialist. I could pull off an MBO. I didn’t want to lead a co-operative. History records Triumph Motorcycles was very successfully revived by an East Midlands capitalist entrepreneurial property developer, John Bloor. Not a socialist in sight!!
It was November. A ground swell began to be orchestrated around Rearsby, by the ‘bar-rack-room lawyers’. If there was £1.8m for redundancy, why couldn't they have that and then start work for the new company. The redundancy money was theirs by right! Such a possibility was impossible. In principle; your job is made redundant. Ultimately there is no job. And, economically, it fell down. Immediately.
I asked Bridget to return and this time, see the workforce on her own without management present. Bridget loaded a proverbial brick into her handbag and beat them all on the head with it. She told them ‘you can’t have your redundancy money and have your job’. It was one or the other and she would support no one opting for redundancy when a job was on offer.
In the end, I personally wrote to all employees, at their home address (in the calm of a home environment where the employee is likely to discuss the issue with their spouse). Stating if they turned up on the first day under the new MBO ownership, they will have deemed to have accepted the new terms of employment. Those who didn't show up, will have deemed to have left their employment. Jim Robinson did a great deal of work prepar-ing for the change, in terms of documentation and 'fireside' chats with those whom he could reach out to and allay fears of the new future. In any event, it was better than the al-ternative. Closure!