Maxwell, The Outsider

by Tom Bower

  The second apocryphal version places Steinberg in the Con-naught Hotel in London during Maxwell's battle to buy the News of the World. A loud conversation at a neighbouring table distracts the American who after a thoughtful stare turns to his guest and whispers, 'Gee, that's the famous Robert Maxwell,' and introduces himself to the great man.

  A variation of this version is that Steinberg indeed overheard the conversation about the newspaper battle in the dining room but was more impressed by the protagonist's beautiful blonde escort. He assumed that it was Maxwell but it was in fact Murdoch.

  The truth is more prosaic, but only at the very outset. The relationship between the two rags-to-riches Jewish entrepreneurs would progress at a dizzy pace from reality to utter fantasy, in its path bruising the most protected egos, shredding carefully cultivated reputations and culminating in the apparent commercial ruin of Maxwell himself.

  The first contact was made on 14 January. Steinberg was working in his office in Great Neck, Long Island when Maxwell telephoned. Steinberg had heard about Maxwell during his recent visit to London and took the call to hear the Briton explain that he was at Kennedy airport and wanted to discuss a proposition. Within an hour the two met for the first time. Maxwell's proposal was simple but very attractive. Pergamon had a vast amount of scientific knowledge at its disposal while Leasco possessed enormous expertise in computers. The two should embark on a joint venture, he suggested, initially to compile a world patent index on computer which they would later expand into a scientific library with terminals throughout the world. A small Leasco subsidiary in Washington DC was already transferring some material from Pergamon journals on to computers and Maxwell believed there was scope for considerable expansion. Steinberg was gripped by the idea. Maxwell displayed impressive technical understanding about computers and information-retrieval. Recently, American newspapers had carried a brief report that Maxwell had made a take-over bid for Document Inc., a company which placed NASA's material on computers but the bid had been thwarted by the federal government because of security implications. Maxwell clearly understood the scientific world and was also, by all accounts, a highly successful businessman. His News of the World bid had been accompanied by favourable publicity in the British financial press. This seemed to be confirmed as Steinberg glanced through the brochure of Pergamon's 1967 annual accounts which Maxwell had, with a slightly theatrical gesture, passed across the desk. After a limited amount of small talk which ended with Maxwell announcing that he would have to dash back to London to attend a debate in the House of Commons, the two parted on the understanding that there might be further exploratory discussions in the future.

  But Steinberg quickly lost interest in the patent index because, as he explained in 1973, it was unprofitable. I told Maxwell it was premature to discuss any joint venture and I wasn't sure that we needed his particular expertise? "Over the following weeks, Steinberg noticed that Maxwell's name was frequently mentioned in the financial press, in connection either with Craven Insurance or with rumours that he would bid for McCorquodale, a specialised printing company. Maxwell was certainly worth closer attention. In early April, Steinberg was planning a trip to Britain and he telephoned Maxwell to suggest a meeting. Maxwell was on the verge of departing for another world tour but he proposed to delay his trip by one day because, as he told Steinberg, ‘I've been studying Leasco and there are many areas where we have a joint interest.' He added, 'Perhaps we can even discuss a merger.' Steinberg was surprised but keen to explore the possibility. On 25 April he arrived in London with his wife and Robert Hodes, his lawyer, 'for a preliminary discussion to see whether it made sense for us to acquire Pergamon'.

  In the turbulent and vituperative world of Wall Street corporate lawyers, Hodes was acknowledged as among the most honest and able. Throughout the turmoil of accusations and emotions that would characterise relations between the two tycoons over the following years, Hodes retained an accurate and relatively objective account of the events as they unfolded. In later statements, Hodes would say that there was confusion when the two sides met at Fitzroy Square. At the outset, their conversation was constantly interrupted by phone calls and visits: 'It's Evelyn de Rothschild,' said Maxwell, 'he's come to see me about a political matter. I'll be right back.' Minutes later, Maxwell was once again seated in the room but was again interrupted. Just after he had left the room, Tom Clark arrived and declared, ‘I'm just back from South Africa and the sales of encyclopaedias are fantastic' Maxwell returned and the telephone calls began: ‘It's Moscow; it's Berlin; it's a government matter . . .' Awed, the two Americans watched Maxwell's simultaneous management of his political and business affairs. When it was over, Maxwell dropped his first bombshell: he wanted to buy Lesco's international operations. Steinberg was flummoxed. Comparatively, Leasco was a giant and Pergamon a mere minnow. Leasco's international section, worth over $200 million and growing rapidly, alone dwarfed Pergamon. Laughingly Steinberg replied that it was not for sale, but how did Maxwell even intend to pay? ‘I haven't worked it out yet,' Maxwell replied, 'but I'm prepared to give Pergamon stock.'

  There was a moment's silence broken by Steinberg. The only topic for discussion, he insisted, was whether Leasco would buy Pergamon. Maxwell reflected and then agreed. In principle, Maxwell had undertaken to sell his company for cash and accept a subordinate position under Steinberg within Leasco. His only stipulation was that the preliminary negotiations should be carried out in New York where his associate, Ladislaus Majthenyi, commonly known as 'Martini', could supply all the relevant information about Pergamon's affairs. Steinberg and Maxwell stood up and solemnly shook hands; the visitors left soon afterwards. Outside, Steinberg was visibly excited. Another profitable take-over was under way. Apparently he did not hesitate for a moment to ponder why Maxwell wanted to sell his business. For Steinberg it seemed understandable that even the British politician would want to be hitched to his star. Yet over the following two weeks Steinberg's excitement waxed and then waned. Some mornings, often before 6 a.m., as he travelled around the world, Maxwell called with ideas and even suggested names for their new venture, but Steinberg's staff reported that they had made no progress whatsoever with Majthenyi. At the end of the month, during a call from Maxwell who was by then in Australia, Steinberg sounded distinctly cooler. If there was to be a deal, he told Maxwell, he needed to have a lot of detailed information about Perga'mon's business and Majthenyi was being distinctly unhelpful. Maxwell promised immediate action.

  Two days later, Leasco's director of corporate planning, Michael Gibbs, who had been delegated to handle the discussions with Majthenyi, arrived at Pergamon's New York headquarters at the Book Center. Majthenyi, a Hungarian-born accountant, was effusive. Pergamon, he explained, was 'very profitable' and its sales in the Americas through the privately owned company Maxwell Scientific International Inc. (MSI Inc.) had topped $2.5 million in the past year. But when Gibbs stepped out again into the Manhattan street his briefcase was strangely empty. Normally, in similar deals, he would leave the corporate headquarters with masses of documents over which he would pore in the days ahead to deliver a detailed report to Steinberg. But Majthenyi had pleaded that he was not authorised to pass on confidential papers. He had muttered something about the privileges of the private and public companies but Gibbs had not completely understood. Indeed, when he returned to Great Neck he was little wiser, beyond realising that the take-over of Pergamon might be more complicated than he had imagined.

  Steinberg was again uneasy and the following day when Maxwell called he complained about the lack of progress. Breezily casting aside the doubts, Maxwell reassured Steinberg that his trip was enhancing both ILSC's and Pergamon's profits and that he would immediately fly to New York. The two met in early May at the Del Monico Hotel. Maxwell was relaxed, charming and confident. Pergamon's sales for 1969, he told Steinberg, would be approximately $25 million with profits of £2 million. ILSC's profits would be about £1 million. 'Pergamon's performance', he pr
omised, was 'right on target'. Steinberg was somewhat reassured, and Maxwell was delighted that a deal, albeit still undefined, was under way. Steinberg's remaining doubts disappeared that evening.

  Steinberg had arranged to attend a Democratic Party fund-raising dinner and he apologised to Maxwell that he would be unable to entertain him since a dinner jacket was obligatory. 'Don't worry,' said Maxwell, 'I'll get one.' By the time they had arrived at the Waldorf Hotel, Steinberg was pleased that Maxwell was present because he would have an opportunity to impress the British politician by displaying the scope of his own contacts, especially with the party's leaders, Teddy Kennedy and Hubert Humphrey. No sooner had they walked into the ballroom than Steinberg's vanity was shaken. In his deep resonant voice, Maxwell yelled, 'Hubert!' and Hubert Humphrey turned round in the middle of the crowded room and shouted, 'Bob, what are you doing here?' According to Steinberg, 'Maxwell knew more people there than I did.' Any lingering doubts momentarily vanished.

  In the course of the following two weeks., Maxwell sent Steinberg letters, telexes and reports from London with information about Pergamon. But on 17 May the mood abruptly changed. Maxwell telephoned Steinberg and announced that the deal would have to be completed before Pergamon's next annual meeting, which was scheduled for 19 June, just four weeks later. 'Speed is important,' he said. Maxwell explained that he wanted to buy BPC's share of the 'profitable' ILSC but it would be much easier if Pergamon were already a Leasco subsidiary. All the information he needed, Maxwell assured Steinberg, was contained in a letter to Bernard Schwartz, Leasco's president.

  Maxwell's letter to Schwartz was unambiguous. After an informative r6sum£ of Pergamon's recent take-overs and its future plans, Maxwell disclosed an eye-opening example of how Pergamon earned its profits: twenty thousand copies of the Pergamon World Atlas had been sold at £20 each while the cost of production to Pergamon was a mere £1 10s. But it was ILSC and Maxwell's relationship with BPC which dominated the letter. The joint company, he conceded, had not been as profitable as he had at first imagined. BPC, he wrote, 'is afraid of me and desire to sever the partnership and acquire ILSC'. He added that he wanted to do the reverse and acquire BPC, 'whose sales and profits I know I could double within two years'.

  ILSC, he admitted, had run into some trouble and as a result Hedley Le Bas had been fired because, Maxwell alleged, 'he was too fond of liquor', while Jenman was fired 'because of dishonesty'. Both men strongly denied the allegations. Although both dismissals were in May and June 1968, and Pergamon had issued public statements praising ILSC's profits since then, Maxwell nevertheless wrote to Schwartz to say that ‘It was not until after the battle for News of the World, towards the end of last year, that I realised the inadequacy of the then management.' Harold Moppel, ILSC's financial director, he wrote, had also been fired and he, Maxwell, had taken on the day-to-day management.

  Maxwell's compression of the chronology confused the issue, since the News of the World battle had only ended in January of that year, 1969, but his assurances about ILSC's current profits were exceptionally explicit: 'I enclose ... a copy of the first quarter's management accounts and profit forecast prepared on a most conservative basis. These accounts were presented to and accepted by the ILSC board last Thursday; you will see that the company is running well, margins have already improved substantially and will continue to do so as we reduce our administration costs.'

  The paragraph which followed was equally unambiguous: TLSC made a substantial profit for its first 18 months' trading.' But Maxwell added a critical qualification: 'If the accounts were judged by American standards, the profits for that period would be £800,000, but if British accounting practices were used, then we shall end up making neither a profit nor a loss' although there would be 'enhanced' profits from 1969 onwards. The estimates Maxwell quoted were annual sales of $20 million 'and rising very fast', especially in America.

  Steinberg and Schwartz were reassured by Maxwell's letter and, although they realised that ILSC needed further examination, they still could not understand Maxwell's reasons for wanting to complete the deal at breakneck speed. But any doubts were cast aside the following week when Richard Fleming, the chairman of Robert Fleming, Pergamon's merchant bank, arrived in New York.

  Fleming's role in the imbroglio which developed over the following months would unintentionally accord with the bank's own description of itself as 'a rather remarkable merchant bank'. The bank had been founded in 1932 and had deliberately retained a rather discreet image, unlike the family's two authors, Ian and Peter Fleming. Until the mid-1960s it had exclusively managed client funds which amounted to an impressive £1,200 million. But when the merger-mania began, Richard Fleming had decided that his bank should expand into corporate affairs and reap the enormous profits available. Richard Fleming's personal misfortune was that he understood little about corporations or their accounts.

  Maxwell had approached Fleming in March 1968 (before the News of the World bid), to inquire whether the bank would act for Pergamon. Knowing of Maxwell's reputation, Fleming was hesitant but, keen to attract new corporate clients, he sought two guarantees. With Maxwell's agreement, Fleming commissioned the accountants Whinney Murray, who were closely connected to Fleming, to report on Pergamon. Fleming also wrote to Isidore Kerman, Maxwell's solicitor and a Pergamon director, asking for an 'unprejudiced view' of the company. In a personal conversation, he explained to Kerman that the bank would rely on the lawyer's professional assessment. Kerman's written reply stated: 'Mr Maxwell is a man of undoubted integrity and Pergamon Press Ltd is well run.' Pergamon's only problem, added Kerman, was that Maxwell 'took on too much'.

  Whinney's report, which was presented on 13 June, had also been reassuring. The adverse rumours in the City, wrote the accountants, were untrue: 'The company has an undoubtedly impressive growth record. . . . None of this can have been achieved without good management.' Maxwell was given great credit for his 'drive and guidance'. Regarding the state of the accounts, Whinney Murray had also been satisfied, reporting that all the budgets, expenses and sales forecasts 'have been prepared in a proper manner'. There was slight criticism of the 'undoubted difficulties within the accountancy function' but this was to be expected of a company which 'had to struggle in order to keep pace' with its growth. Their only caveat concerned ILSC's accounts, which Whinney had been 'unable' to check, although 'We have however been assured by Pergamon that all indications show ILSC's trading results to be ahead of budget.' Fleming, at that time, possibly did not realise how crucial the encyclopaedia profits were to Pergamon's fortunes.

  On the basis of Whinney's report and Kerman's testimonial, Fleming's formal appointment as Pergamon's advisers was confirmed on 21 June 1968. But, less than four weeks later, Fleming told Maxwell that he had had second thoughts and would not be offended if they quietly dissolved their new relationship. Maxwell was disquieted and tried to persuade Fleming to reconsider. Within a few days, the banker told Maxwell that he would after all advise Pergamon but strictly on the condition that, to deflect the Establishment's prejudice, Maxwell should appoint both an independent chairman and a new financial director. Maxwell accepted the conditions but the appointments were not made. As will be seen later, a new group chief accountant, Edward Garside, had recently been hired, and that, Maxwell felt, was sufficient. But Fleming was uneasy during the next year before his departure to New York.

  All of Fleming's discussions with Leasco executives were conducted on the basis of what Pergamon's accounts for 1968 would disclose. The New Yorkers, confident that their instincts were finely tuned, remained nevertheless unaware of the tension and drama which had preceded the publication of the twenty-page, purple-covered brochure containing Pergamon's 1968 accounts. Maxwell's business reputation centres on how those accounts were prepared, and what they revealed.

  The schedule for preparing Pergamon's 1968 report was tight. The company's annual meeting was set for 19 June 1969 and, to meet the deadline, the printing and circulation of th
e report had to be completed by 22 May. A company report is generally divided into three parts. The first contains a statement by the chairman describing key events over the past year and setting out his predictions for the future. The second part is the balance sheet as compiled by the company's own accountants to satisfy all the legal requirements. The third part, and probably the most important, is the verification by a reputable firm of accountants who, while paid by the company, are quite independent. Called the auditors, they state that having read the chairman's statement and having scrutinised the balance sheet, they are satisfied of its total veracity. The auditors' report, although normally brief, is the crucial guarantee both to the public and more importantly to all the City and government agencies that the company's officials have produced an honest and accurate statement concerning the company's health. For Maxwell, intent on demonstrating that Pergamon's pattern of growth was unceasing, the 1968 report was more important than ever.

  For even the most successful and untroubled company, the compilation of the report produces a hectic period of intense discussion between the directors, accountants, bankers and auditors about how the company's affairs can and should be presented. As Maxwell was rightly fond of saying, accountancy is not a science but an art. With total honesty and strict adherence to the law, it is quite possible for the same accountants to draw up a balance sheet which, using identical basic facts, portrays the same company as highly profitable or as in debt. Simply by deciding whether income should be described as profit, or placed in the reserves column, or carried forward to the following year, or set off against an earlier loss, the image desired may be achieved. There are similar variations in valuing a company's assets - its property, stock and goodwill. But there are three major caveats to what might otherwise suggest controlled chaos. There must be consistency from one year to another; the accounts must comply with the law; and the accounts must also comply with the practices and standards which are agreed by the accountancy profession. There is no dispute that in 1969 the standards and practices of British accountancy were at best variable and at worst wildly misleading.