by Tom Bower
Goldman Sachs however insist that the option was agreed before the closed period began, which is correct, and that they already owned the 15.65 million shares, although they have not produced the paperwork as proof. At best, the deal can be said to have encouraged Goldman Sachs not to sell MCC's shares which would have depressed the price.
By law, that deal should have been disclosed to the board of MCC but Jean-Pierre Anselmini, his deputy chairman, subsequently stated that he was not formally informed. Andy Smith, a junior press officer at MCC, registered the disclosure at the Stock Exchange's Companies' Announcement Office where it remained unseen by, among others, MCC's broker, Michael Richardson.
During that period, Goldman Sachs bought or continued to hold not only those 15.65 million MCC shares but bought a further 25 million in the market. By the second week of October 1990, Goldman Sachs were holding 47 million MCC shares which, since Goldman Sachs insists it was not buying on Maxwell's behalf, suggests that the brokers had great faith in MCC's fortunes.
October was not only the publication date of the 1990 annual report but also the deadline for the first repayment of the debt. Amid the uncongenial publicity, Maxwell could find no buyers for the companies he wanted to sell. Reluctantly, he resorted to a familiar solution. He announced that the privately owned Mirror Group would buy MCC's printing plants in Canada and America. The deals were notable.
Quebecor Printing was sold by MCC to the Mirror Group for £58 million, 70 per cent more than Maxwell might have received from a disinterested purchaser. A second print plant, Donohue in the USA, was sold by MCC to the Mirror Group for $19 per share, $8 more than Donohue's shares were selling on the stock exchange. Maxwell was injecting £135 million of his private money into the public company to keep MCCs share price high. The previous year, the private companies had bought £336.1 million of other MCC assets. The critical factor was that Maxwell had to borrow all that money and that he used MCC shares as the guarantee for the loan. The price of MCCs shares had become an issue of more than passing interest.
Sensing that his critics were still dissatisfied, Maxwell announced two further deals: the sale of Pannini, an Italian manufacturer of stickers for £60 million; and the sale of Collier, the American encyclopaedia publishers, for a sum still to be negotiated. As the deals were publicised, Maxwell watched MCC's shares rise on his monitor. Gratified, he did not mention for some time that those two companies had not been sold.
Throughout that year, Maxwell's enthusiasm and boisterous self-confidence had grown in parallel with his debts. The 1990 report was written by Reg Mogg just before what Mogg calls his 'career move' to Polly Peck. In the report, approved by Coopers & Lybrand, Maxwell praised 'the remarkable and rapid transformation in the affairs and standing of our group'. Heaping more praise, he added that the company had achieved 'virtually all the principal targets which we set ourselves a year ago'.
Indeed, according to the accounts, pre-tax profits in the last twelve months had reached a record £172.3 million and there had been record sales of £1.2 billion, although the growth rate was falling. But once again, the profits were not earned from publishing but from what were called, 'discontinued activities' (£34.6 million) and 'other operating income' (£47.9 million). Moreover, according to the accounts, interest payments on the £1.9 billion debt were up from £17 million to £108 million, notably strange amounts on those huge sums.
But among the most significant items in that year's accounts was the value of the 'intangibles': that is, the monetary values which the accountants decided they could place on the goodwill and publishing rights which MCC owned. Those values would then be entered in the MCC balance sheet which would show what MCC was worth. The critical importance of the 'intangible' values was that they directly influenced Maxwell's business credibility. It was in Maxwell's interest to persuade the accountants to agree to value the 'intangibles' as high as possible because his borrowing powers were boosted and the price of MCC's shares would rise - which was exactly what Maxwell desired.
When those 1990 accounts were being written, some believed that Maxwell had overpaid by about $1 billion for Macmillan. Reg Mogg disagreed. After conducting what Mogg describes as a 'thorough valuation', Mogg entered MCC's 'intangibles' at a hefty £2.2 billion. 'It was a very professional operation,' he says. 'I think you need to take a twenty-year view on values.' Mogg secured the agreement of Neil Taberner of Coopers & Lybrand to those valuations and accordingly had fulfilled his statutory duty. Other qualified accountants assessed MCC's 'intangibles' at £1.5 billion. After subtracting all MCC's debts, those independent accountants claimed that MCC was only worth £300 million. Which figures were chosen was subjective but the choice was of singular influence on Maxwell's ability to raise more loans and to bid for more businesses. Once the 'intangibles' were agreed at £2.2 billion, Maxwell needed only to find profits which would match that figure. Doubts were growing about what City jargon called 'the quality of the profits'.
By the time the 1990 report was published, Maxwell had parted with Laing & Cruickshank and moved to the City brokers Smith New Court. The magnet was Sir Michael Richardson, Smith's chairman, who had known Maxwell since he organised the flotation of Pergamon Press in 1964. Richardson, renowned in the City as one who marches towards the sound of gunfire, knew his advice would be needed during his friend's ups and downs: ‘I was perfectly happy to take over when Bob asked me.' Hyperactive clients, Richardson knew, produce fees. As Maxwell's problems increased, Richardson would explain that the crisis was in Maxwell's private companies which were beyond his responsibility. Smith, like Goldman, began buying MCC shares and urging their clients to follow. But changing brokers could provide only a cosmetic, temporary respite.
Maxwell's 'put-option' gamble with Goldman Sachs had failed. When it expired, MCC's shares were selling at 155p, 30p less than he had bet. The cost to Maxwell was £5 million. As newspaper reports speculated about the debt, MCC shares continued to fall to new lows around 140p. Maxwell admitted that support for the MCC share price had cost £75 million, although some suspected a higher amount. Maxwell needed money and his only immediate source was MCC's interim dividend due in December. The board meeting at the end of November was more heated than normal.
In November 1990, MCC reported its six-monthly profits (to September). As usual, Maxwell reported increased profits (up 6 per cent from £85.1 million to £90.1 million) but the good news was not due to publishing. Instead there was a £41 million increase in what were called 'foreign exchange profits'. Once again Maxwell declared himself 'satisfied' and 'confident', raised the dividend and watched as the shares rose 5p (149.5p to 154p). The debt was still £1.9 billion and he was pledged to reduce it by $750 million within four months. But not everyone on the board was satisfied. Jean-Pierre Anselmini, the deputy chairman was, reportedly, still furious about the 'put-option'.
'Maxwell promised that he would tell Jean-Pierre if he took out another "put-option",' recalls one eyewitness. For Anselmini it was disturbing that he was not regularly consulted by Maxwell. He was concerned by the 'confidence' which Maxwell always included in company statements. In November he was particularly worried about MCC's proposed interim dividend payments.
Until then, Maxwell had often taken shares instead of cash, but in November he wanted cash. Basil Brookes, the new finance director, opposed his employer. 'We can't afford a high dividend and we can't afford you taking cash,' he told Maxwell. Their argument was heated and there were suggestions that Brookes might threaten his resignation. Brookes was already concerned that Maxwell's attitude towards observing the Stock Exchange rules was cavalier. 'They're a bunch of has-been, useless stockbrokers,' scoffed Maxwell. 'I'll decide what they can have and when.' Nevertheless Brookes seemed to have won. Maxwell even agreed that his assurance would be in writing. But the victory was short-lived. Maxwell needed cash, not shares, and he acted accordingly.
There was however some consoling news. The 'poison pill', used by Harcourt Brace Jovanovich t
o block Maxwell's bid, had become a suicide pill: Harcourt was on the verge of bankruptcy. More good news was that Murdoch's debts (A$10.5 billion) eclipsed even MCC's problems and News International's share price seemed to be in free fall. There was a notable difference, it was said, between Maxwell and Murdoch. The Australian owed the banks so much that banks could not afford to allow him to go broke without bankrupting themselves. Maxwell's business was too small for his and his banks' survival to be dependent upon each other.
Yet his dream of rivalling Murdoch had disappeared. In July he had been unable to bid for a share of BSB, the British satellite TV station, and in early October he pulled out of television altogether by selling his stake in Central TV for £24.6 million, half of what he would have got had he waited another six months. He also sold his stake in the French station, and all his cable interests including a 51 per cent interest in MTV, the pop station. His dream of becoming a satellite owner rivalling Sky had evaporated.
In the weeks before Christmas, Maxwell's pace had occasionally slowed. Increasingly, he would enjoy flying to his yacht, the Lady Ghislaine, to relax in a style which ranked him among the world's richest. In both the main stateroom, dominated by a 180-degree curved window above a silver sofa, and on the four decks Maxwell could entertain and impress dozens of visitors with comfort. All were asked to remove their shoes before boarding. The craft, with its normal complement of thirteen crew and two chefs, could be chartered for about £100,000 per week. Part of Christmas 1990 was spent in the Caribbean. Maxwell enjoyed speaking on one satellite phone while another line transmitted a fax.
The festivities did not dispel the problems. MCC's share price was at the same level as in 1985. Two directors resigned and Richard Baker, MCC's deputy managing director, left after twenty-three years' service. These were the first of a trickle of accountants who began resigning from Maxwell's employment. Most would complain of exhaustion but their grounds were said to be Maxwell's inexplicable demands. On 4 January, Headington sold a five-week 'put-option' of 30 million shares to Goldman Sachs. Anselmini would reportedly complain that, contrary to the agreement, he was not told by Maxwell. Maxwell would not lose any money on that gamble.
By early 1991, Maxwell owned just 68 per cent of MCC, 16 per cent more than nine months earlier. Buying shares was no longer an option and Maxwell had run out of money. For the first time, pundits introduced the term, the 'Max-Factor'. For some the term meant that MCC was undervalued because of his presence. Others used it as a euphemism for their outright suspicion.
In February 1991, Maxwell flew to New York to seek a solution. Among those consulted was Robert Pirie. Over coffee on a Saturday morning, the American banker, who had been Maxwell's adviser when his client became so indebted, suggested that his client sell Pergamon Press. According to Pirie, 'Maxwell said yes.' The sale would be a watershed. The empire would lose its biggest cash producer. Maxwell also finally resolved to sell a minority share in the Mirror Group. The Macmillan legacy was the dismantlement of the jewels of his empire. Kevin's boast in 1988 that only three out of thirty-one Macmillan employees had left after their take-over was obsolete as about another dozen followed. Macmillan remained profitable but unsettled.
It was at this point that Maxwell ignored reality and compounded his plight by indulging in an ambitious fantasy. His target was the New York Daily News, owned by the Chicago Tribune Group, which for the previous two years had been racked by industrial strife.
The Daily News was suffering an illness which Maxwell believed he could cure: overmanning by a rebellious and corrupt labour force, crippling restrictive practices, uncontrolled expenditure, antiquated machinery and weak management. One of three tabloids in New York, the News in its heyday was the nation's largest daily with a circulation of two million. But, in March 1991, the employees who were members of trade unions had been on strike for nearly five months. Although published and sold throughout the dispute by non-unionists, the News's circulation had collapsed to 300,000 and its advertising revenue had practically disappeared. According to the owners, the accumulated losses since 1980 were $250 million, half having been incurred in the previous fifteen months. Unable to cope with the violence and the daily losses of $700,000, the Tribune's management had threatened that unless the strike ended by 14 March, the newspaper would be closed. But even closure would cost an estimated $100 million in pay-offs to the workers.
Such is the state of New York's politics that the Tribune's managers had received scant support from politicians. Governor Mario Cuomo spoke for many when he urged the strikers who were burning delivery trucks and intimidating non-strikers to: 'Stay strong, you're fighting for all of us.' Even the police had failed to protect the legitimate business.
Bestriding an irreconcilable dispute was honey to Maxwell. Not since he defeated the Mirror Group's unionists during the eighties had such an opportunity arisen and it was the same city where Murdoch had lost a fortune before abandoning his attempt to modernise another tabloid, The Post.
Over the previous years, Maxwell had stayed in contact with Jim Hoge, the News's publisher and president. Either Maxwell or Sidney Gruson from Rothschild Inc. would discreetly telephone Hoge to ask if the paper was for sale. Regularly and politely Hoge would decline the offer.
Just before the strike, union leaders had phoned Maxwell to ask him to consider buying the paper. Maxwell had laughed when Hoge again declined the offer: 'Only those who own the paper can sell it.' That changed when the Tribune issued its ultimatum to the unions and looked for buyers. Maxwell declared his interest but told Hoge that he refused to become involved in a competition. He would only come in when the other bidders had left the arena. 'He played it according to Hoyle, the whole way,' commented Hoge, comparing Maxwell to the bridge master.
On 5 March, the all-clear was given to Maxwell via Robert Pirie. At the same time, Hoge told the trade union leader George McDonald to telephone Maxwell in London. McDonald knew that it was a crucial call. Without any competing bidders, the newspaper's existence depended upon Maxwell's decision. Potentially, Maxwell's position was powerful and the unionist's was weak. Even McDonald, a seasoned fighter, was nervous when he made that night-time call but his fears soon dissolved. Maxwell's response was surprisingly weak: 'Do you think it's worth my while to come?' asked Maxwell.
'We'll give you concessions,' answered McDonald. Ten minutes later, McDonald felt he had achieved more with Maxwell than in two years with the Tribune group. But he sensed that Maxwell was hooked. 'You know,' he smiled with a New York accent, 'owning the Daily News is like a visiting card for sheiks, kings and queens. It opens the door for people and I guessed he wanted it that bad.'
On 6 March, Maxwell announced that he would negotiate with the unions to save the newspaper. Armed with the Tribune's offer of $60 million if he took over the liability no later than 15 March, Maxwell imposed a tougher deadline. The unions were given just five days, until 11 March, to capitulate to his demands. While Maxwell was flying to New York, McDonald responded stridently and predictably: 'Maxwell will not be granted "management rights" . . . We will of course consider any demands he makes.' The hint of concessions was music to Maxwell.
True to form, when Maxwell met McDonald on 7 March on the tenth floor of Macmillan's Manhattan offices, their conversation was marked by Maxwell's particular charm and cordiality - precisely characteristic of Bill Keyes's epitaph: 'He'll charm the birds off the trees and then shoot them.' According to McDonald, 'I called the unions in Britain and they'd told me what a scoundrel he was. They said that I had to get everything down on paper. And I did.' Maxwell demanded that 800 of the 2,300 employees be dismissed and added, as recorded by the television cameras, 'I'm not asking for "management rights'". McDonald noticed that sign of weakness. 'When the cameras had gone he told me, "I want the paper", so I knew that we had a deal if I got all nine unions into line and gave a few concessions and redundancies which the Tribune was paying for.'
The talks followed an established pattern.
Each union was given its own office so that Maxwell could shuttle between the fiefs, playing upon old rivalries. 'Maxwell was going backwards and forwards saying "yes" and "no" often to things he didn't understand,' recalls Hoge who was also given a suite of offices and observed Maxwell's punishing schedule. 'We told him what concessions he needed to make profits but I could see he would ignore us. He didn't analyse. He wanted the paper.'
After the first day, McDonald emerged: 'The progress made was terrific' By the second day, after a night's talks, Maxwell was reported to be demanding even bigger savings than the Tribune. 'Fine,' commented McDonald leaving the building with noticeable diminution of enthusiasm. The crisis hit at the weekend. Inevitably, Maxwell demanded exactly the opposite of his earlier promises. Namely the 'management rights' which the unions had adamantly refused to accept from the Tribune. It was a good moment for Maxwell to play his ace. 'I'm going back to London now,' he told the startled negotiators on Saturday evening. It was his wife's birthday. His parting words were intentionally ominous: 'I'm not so optimistic' To a passing journalist he added, 'When I pass a belt, I can't resist hitting below it.' This was vintage Maxwell.
Charles Wilson, the former editor of The Times, continued the negotiations. McDonald was not worried. On Sunday, the unions believed Maxwell's bluff had been called. 'They rewrote what we didn't like,' says McDonald who made the required phone call to London: 'Come back. We're still talking.' Maxwell returned and negotiated. 'It was a walk-out that didn't work,' thought Hoge bemused. Maxwell would, he realised, 'do anything to get the paper. The unions knew that he wouldn't walk away.'
One of the Tribune's bankers was less diplomatic: 'He was so arrogant and unreceptive to advice. He could have got a much better deal if he had driven harder. He lost tens of millions.'
Some of the blame is placed once again on Robert Pirie who, excitable in negotiations, failed to restrain Maxwell's own excitement which was fed by his regular walks through the Macmillan lobby. There, surrounded by eager journalists and waving television cameras, Maxwell became infected by his prominence and gradually lost the freedom to say the deal was off.
