by Tom Bower
Maxwell had barely entered the room before he announced, 'I've got to take the President of Nigeria around the House of Commons. I hope everything is satisfactory.' Whether Briggs had intended to mention his subordinate's concern and was " - prevented by his stammer from speaking is unknown. But certainly the board approved the accounts without any caveat or agreement for a 'Note', just in time to authorise the Stock Exchange to make its preliminary announcement of 'Pergamon's record profits'. Maxwell swiftly left the meeting. In early May, the accounts were sent to Fleming and Whinney Murray. For both, the status of Maxwell's private companies had assumed great importance.
Fleming had already heard about the high values which Pergamon's accountants wanted to place on the company's stocks and about Pergamon's valuable sales to MSI Inc. Accordingly, in December 1968, he had asked Sir William Carrington of Whinney Murray to undertake a close watching brief on Pergamon's financial management, especially because there had been several resignations from the accounts department. Whinney already had considerable knowledge of Pergamon's affairs because they had written their wide-ranging and reassuring report the previous year. On 9 December Carrington met Maxwell and insisted that he would only accept the new responsibility if Maxwell agreed to allow Whinney's staff full access to Pergamon's employees and if he personally had the right to vet all major schemes. To preclude any misunderstandings, Carrington stipulated that these unusually strict conditions of employment had to be agreed by all of Pergamon's directors and recorded in the company minutes. Carrington's proposals were never put to the Pergamon board. There are conflicting versions of what followed.
There can be no doubt that it is difficult for a merchant bank to establish an intimate relationship with its client while at the same time being totally frank with outsiders. In the course of his work, the banker will inevitably discover adverse facts regarding his client which, if publicised, would often create unnecessary short-term damage. Yet the banker's own interests and those of his other clients demand that on occasion a higher interest must be served which could well harm a client. This, at its most charitable, was Richard Fleming's predicament in early 1969. His relationship with Maxwell was akin to a good stepmother: while he had affection and respect for his 'son', he also recognised his deficiencies, but found it difficult to break the relationship.
During March 1969, Fleming realised that the buoyant profit forecasts for ILSC which Pergamon had announced during the News of the World bid were unlikely to materialise. In the course of a lunch in mid-April, Maxwell confessed to Fleming that because of BPC's interference ILSC's profits would be lower than expected. Both men recognised that Pergamon's image as a booming company was endangered. Without evidence of perpetual growth, Pergamon would have difficulty in launching future bids and in raising capital. Maxwell then turned to the approach from Leasco which he had originally mentioned to Fleming in January, soon after his first meeting with Steinberg. He explained that, while he would prefer a joint company with Leasco in Britain, the best solution would be an association with a company like Xerox. When they parted, Fleming was still optimistic about Pergamon's future although he accepted that, in tune with merger-mania, it needed to be part of a bigger group. Hence, when at the end of the month Xerox rejected his feelers, Fleming gave his blessing to Maxwell's talks with Steinberg.
It was at that stage, in early May, that Maxwell flew to New York and met Steinberg at the Hotel Del Monico to allay the American's concerns. Meanwhile, in London, the preliminary accounts for 1968 had been sent to Fleming and his questions had become quite pertinent. Several important new factors had been introduced into the estimate of Pergamon's results for that year.
Fleming felt that the draft was comprehensive but complained that, in the light of their recent conversations, it was too optimistic and lacked precise figures. Carrington, however, was dissatisfied outright and insisted that Maxwell should explain in his chairman's statement the full details of both the unusual relationship between Pergamon and MSI Inc. and the new valuation of the stocks. He told Fleming that although he accepted that MSI Inc. was not a dummy company, it should be sold to avoid any doubts about its independence. In anticipation of his imminent trip to America, Fleming on about 15 May delegated the detailed negotiations to his associate, Burnet Stewart.
According to Fleming's account, by 16 May Stewart had returned to Pergamon a proof copy of the accounts. Enclosed was a list of questions prepared by Whinney Murray which were to be discussed at a meeting arranged for three days later. The most important item was the MSI Inc. contract and the need for what would become known as 'Note 8', an explanation about the valuation of Pergamon's stocks. In the course of those three days, a bitter argument erupted between Maxwell and Briggs on the one side and Fleming and Whinney Murray on the other about that Note. The climax was a telephone call from Stewart, in the course of which the meeting scheduled for 19 May was cancelled and Stewart announced that Flemings was forthwith withdrawing its services. For Maxwell, the row threatened a major crisis with unpalatable consequences. The slightest whisper in the City that his merchant bankers were resigning would threaten calamity. It was in the midst of this row that on 17 May Maxwell telephoned Steinberg and set the deadline for their negotiations - Leasco's take-over would have to be announced prior to Pergamon's annual meeting, which was scheduled just four weeks later.
By 19 May, relations between Maxwell and his advisers had been generally repaired, although George Hazard, ILSC's financial director, had resigned, allegedly because he had disagreed with Maxwell's views of how the accounts should be prepared. On the same or the following day, all the parties met to discuss the Note. Carrington told both Maxwell and Briggs that a full and accurate description of Pergamon's relationship with MSI Inc. and its new methods of valuing its stock should be included as Note 8. Carrington claims that he left under the impression that Maxwell and his adviser had agreed. What remains unclear is whether Carrington also stipulated that there was to be explicit mention that there had been a 'change of practice' in the valuation of stocks. Inclusion of that phrase would have drawn immediate attention to the major source of Pergamon's record 'profits'. On the same day Fleming flew to New York and on 22 May Pergamon's accounts were finally approved by everyone.
When Fleming met Bernard Schwartz, Leasee's president, on 26 May, any disquiet he might have felt was well concealed behind the effete and rather charming self-assurance which at that time so characterised the traditional City gent. Like Steinberg, Schwartz was born in Brooklyn and displayed sophisticated acumen in finance; and like Steinberg, Schwartz had never been exposed to the unaccountable City institutions. Both Americans shared a naive but understandable trust in the supervision of financial affairs in London which dulled their instinctive streetwariness.
Inevitably the accounts of such an important conversation vary. Schwartz reported that Richard Fleming was reassuring about Pergamon and proved his confidence by explaining that his own bank held 13 per cent of Pergamon's stock on behalf of its clients: 'Pergamon is worth more than its share price,' said Fleming, 'and I won't let you steal it.' Fleming later denied saying those words and insisted that the meeting was no more than a chance encounter which covered merely general issues. He specifically recalled warning Schwartz to satisfy himself about Pergamon's financial situation. In view of what followed, Fleming's recollection is unlikely to be accurate since on the same day, over lunch at the fashionable Links Club, he repeated his glowing account to Leasco's lawyer, Robert Hodes. Fleming's account is that he described Maxwell as 'a difficult person to control', but expressed his belief that Pergamon's business was 'sound' although there was 'some' dispute about the balance sheet. Hodes remembers Fleming being much less cautious and can specifically recall that Fleming made no mention of the heated disputes which he had left behind in London.
Indeed, Fleming had been so reassuring that three days later, on 29 May, Steinberg, Schwartz and Leasco's director of corporate planning Michael Gibbs flew to London
, more anxious than ever not to let the deal slip out of their grasp. What would later be dubbed 'the SWOT team', referring to an elite American police unit, was well aware that Maxwell had imposed a deadline which expired in less than three weeks. But there was still mystery surrounding the company they were about to buy. Their strategy was single-minded. A list of questions had been drawn up before their departure from New York which needed to be answered if the $60 million deal was to succeed.
Maxwell, the generous host, had prepared a warm reception in Oxford, although Steinberg was not present as his two experts began the detailed discussions. Over drinks and lunch, the Leasco team were introduced to Kerman and Clark; and, while Kerman listened, Maxwell repeated how Pergamon's back-issue business was profitable and expanding. Specifically, the Leasco team claimed that over lunch Maxwell produced a balance sheet which stated that Pergamon would earn $8.4 million profits in 1969 and which included a forecast of $1.4 million profit if Pergamon owned ILSC completely. Afterwards the two were given a tour of Pergamon's headquarters.
Gibbs then disappeared for nearly one week into Pergamon's offices. When he emerged, he had obtained some answers but also had accumulated considerably more questions. Pergamon's profits, he discovered, were falling and Whinney's complaint about the absence of proper internal accounts and inventory control was more serious than he imagined. Once again everyone assured him that ILSC's profits were high, although the final accounts were not yet available. (An earlier assurance that he would be given the accounts for the first eighteen months was not fulfilled.)
But what particularly puzzled Gibbs was the trading relationship between Pergamon and MSI Inc. in New York. Majthenyi had told Gibbs that MSI Inc. was an independent trading company which bought and sold Pergamon's publications. At the time it seemed quite insignificant but his investigation revealed that in the past year no less than $1.1 million of Pergamon's profits had been earned by sales to MSI Inc. To his surprise, Gibbs then discovered that the vast bulk of MSI Inc.'s purchases were still stored, unsold, in Pergamon's warehouse. Gibbs's anxiety was assuaged by Tom Clark. MSI Inc., Clark explained, was in fact owned by Isthmus Trust Inc., which in turn was owned by a secret Maxwell family trust. It was all part of a scheme to avoid Britain's draconian tax laws. The American could only smile at the contortions performed by a socialist politician.
Schwartz had in the meantime become impressed by Maxwell. Despite the warnings, Maxwell seemed always ready to co-operate and proved to be a very important person. Every day, Maxwell invited his guests to a social whirlwind of visits to the House of Commons, Woburn Abbey and the opera while the evenings were filled by sparkling and memorable dinners with the leaders of British society, including the Duke of Bedford, and concluded with dancing at Annabel's night club. According to Peter Stevens, who managed Steinberg's interests in Britain, 'The SWOT team didn't have any time to swot.' Schwartz disagreed, although he was irritated by Maxwell's insistence on the snap deadline. But even that was explicable. Maxwell, he realised, was a 'quick' man who wanted to get things done and he seemed genuinely fearful that BPC would purchase his share of ILSC. Whenever Schwartz pointed out that Leasco needed hard facts, Maxwell promised his personal warranty which could be satisfied by the detailed investigation which would follow the public announcement of the bid. Schwartz left Oxford reassured, and agreed that they would be in contact again within a matter of days.
Travelling back across the Atlantic, the Leasco executives accepted that, although their original questions had been answered, there were many new ones which were equally pressing 'We couldn't understand', recalled Gibbs, 'all the different company names that kept cropping up. One of our concerns was that Maxwell was undisciplined and had bought a lot of small, unprofitable businesses. There seemed to be no rationale for his buying a lot of this crap.' Schwartz could still not quite understand Maxwell's family trusts which in law were not controlled by Maxwell. They played an important role in both the ownership of Pergamon shares and the ownership of the companies which traded with Pergamon. But Schwartz believed that Maxwell had assured him that he could speak on behalf of the trusts in negotiating the deal. Consequently, their report to Steinberg was positive. The proposed merger was advantageous to Leasco since, although Maxwell had exaggerated Pergamon's computer expertise, he did possess substantial material which could be exploited by Leasco's new data-bank equipment while the books and encyclopaedias had, in Maxwell's phrase, 'synergistic opportunities' for the Americans. However, Gibbs cautioned that everything depended upon Maxwell's complete co-operation after the purchase. Only at the end of the first week of June had the Leasco team recognised the very sharp difference between Leasco's and Pergamon's style of management.
While both Maxwell and Steinberg were ambitious entrepreneurs with an enviably refined ability to exploit the fast-changing and complicated science of accountancy and corporate finance, there were few other similarities. In 1969, Maxwell was an impulsive juggler who disdained the type of cautious financial controls which less flamboyant corporate managers espoused. Many of Maxwell's commercial interests in printing and publishing were gathered as passing targets of opportunity since everything was secondary to his overriding ambition for growth and influence. The notion that Maxwell possessed a master plan was an image cultivated by his public relations. Pergamon was Maxwell, and he managed it single-handed. Nothing could be decided without reference to him. Although he spent the week in London and returned to the Oxford headquarters only on Friday afternoons, his staff spent many hours daily on the telephone to Fitzroy Square and were often summoned down to London for consultations which were invariably delayed for hours while Maxwell pursued other business. Throughout the negotiations with Leasco, Maxwell rarely allowed even his outside advisers -the lawyers, bankers and auditors - to discuss Pergamon's affairs if he was not present. If Maxwell was motivated by a commercial strategy during the early part of June 1969, it was definitely not clear then, and it remains bewildering nearly twenty years later. Maxwell himself has never been satisfactorily forthcoming. Some felt that he was bored by Pergamon and wanted the cash to buy the ailing Sun newspaper and launch a second career as a newspaper tycoon. Others later arrived at more complicated explanations.
Steinberg's intentions are somewhat clearer. Pergamon was a solid publisher with potential. Leasco, which was then valued at $530 million, could afford to buy Pergamon. Steinberg was and remains a shrewd and thoughtful strategist. 'Every step which Saul takes', said his lawyer, 'is part of a plan and he has very high standards.' Pergamon, as presented in the accounts, fitted into his strategy, but the chance of a successful working relationship with Maxwell was slight. Steinberg believed in delegation. Having hired like-minded and talented staff from similar backgrounds, he relied on their work and judgement. Although his own authority was never questioned, there was a style of rigorous reporting, especially on financial matters, which Maxwell never contemplated. Steinberg, apparently excited by the deal itself, ignored their personality differences.
On 4 June, after he had digested his executives' report, Steinberg called Jacob Rothschild in London. Normally merchant bankers are consulted much earlier than two weeks before a deal is announced and are asked for their advice at every stage. But Rothschild was merely told that a deal was probable and was asked if he would act on Leasco's behalf. He agreed but warned his client that he had grave doubts whether Maxwell was the type who could work as a subordinate. Steinberg's enthusiasm remained undented.
Unbeknown to Steinberg, Sir William Carrington wrote to Maxwell the following day (5 June), acknowledging receipt of Pergamon's accounts, which had been officially signed on 22 May. Carrington stated that he was 'perturbed to find' on reading the report that Note 8 was 'considerably less informative than we had agreed in outline at our meeting'. In the glossy publication, Maxwell had diluted and scattered the information about the relationship and new valuation. Under the heading 'Acquisitions', on page six, the chairman reported that PPI would buy MS
I Inc. from his family trust, while on page fifteen Note 8 baldly stated, 'Stocks are valued at the lower of cost and net realisable value and include £266,416 of costs incurred in the year in respect of additional printing and reprinting of journals to meet firm orders.' Carrington believed that the unaware would remain uninformed. He concluded his letter with the news that since Maxwell seemed 'upset' about the questions which Briggs had been asked by Whinney, he had decided it was best that their proposed relationship be 'abandoned'.
On the same day, Fleming also wrote to Maxwell to point out that he shared Carrington's dismay about the accounts, and added that the confidence of the bank's investment staff had been 'shaken' by Pergamon's profits and its prospects even if the new stock valuation was correct. He concluded that the bank should therefore resign its advisory role after the annual meeting two weeks later, but he nevertheless offered to give Maxwell further help if required in his discussions with Leasco. Again Maxwell placated his banker and obtained an assurance that no announcement would be made before the annual meeting, due two weeks later. His attention now switched to Leasco.
Over the following week, Maxwell and Steinberg were in constant communication. Any doubts Steinberg might have felt were swept aside by Maxwell's guarantees and references to the recently audited accounts which had been approved by his independent bankers. By 10 June, Steinberg was satisfied that he should begin detailed negotiations and suggested that Maxwell fly immediately to New York. Maxwell agreed but, just before leaving, dictated letters to both Fleming and Carrington. Maxwell was wounded by their imputations and ultimatums and, after justifying the new and in his view fair valuation of the stocks, he asked them to reconsider their positions, especially their comments about Pergamon's profits.
