MERGER, 'ORRIBLE MERGER!

Stephen Glover gives an insider's account of

the negotiating style of Andreas Whittam

Smith, who wants to buy the Observer The Independent wants to buy the Observer. It has been through the same hoops before, though on previous occasions there were no plans — as there seem to be now — to close down the newspaper. In these extracts based on his forthcoming book, Paper Dreams, Stephen Glover, one of the founders of the Independent, looks at earlier examples of the acquisitive tendencies of his fellow founder, Andreas Whittam Smith, editor and chief executive of the Independent.

ANDREAS found it difficult to plug away for any length of time at managerial tasks. From a remarkably early date, the fun of being chief executive lay in looking outside for deals or new relationships with other companies. Already by the late summer of 1987, less than a year after the launch of the Independent, he was dreaming of tak- ing over another newspaper — first the Times, then the Observer. Some time in August of that year, I walked into his room.

`Come in, Stephen. Have you heard my new idea?'

`No, I don't think I have.'

`Well, I think we should buy the Times. It can't be making money and its obvious that Rupert Murdoch doesn't feel any affection for it. If we could get it, we would have a newspaper with a circulation of what?'

`Well, the Times is selling nearly 450,000, and we're selling not far short of 350,000 . . . '

`Yes, that's right, you would lose some readers who are taking both papers, and others would just drop away, but I suppose that we could hope to sell, well, perhaps 650,000. What do you think, Stephen?'

`Well, I'm not sure.' I actually thought that Andreas had gone crackers. Notwith- standing our circulation successes, we were still losing large sums of money and here he was talking about buying another news- paper. 'I suppose that lots of people would not thank the Independent for actually clos- ing down another paper, whatever they might think of the Times.'

`Yes, there is always that to consider. Well, we'll have to think about it.' Subsequently the finance department may have produced some figures — the first of many such exercises — but Andreas's expansionist mood was checked by the board meeting a few days later when our chairman, Marcus Sieff, chided us for our poor cost control.

For a time Andreas did not talk about acquiring newspapers, but 11 months later his old notion of buying the Observer erupted again. There was, however, no indication that Lonrho, which in this con- text meant its chief executive, Tiny Row- land, wanted to sell it. Andreas took the bull by the horns, and on 20 July 1988 he wrote to Rowland suggesting a meeting to discuss the possibility of 'a close associa- tion' between the Independent and the Observer. 'The Sunday newspaper market', wrote Andreas, 'is a natural development for us.'

No reply was received from Mr Row- land to this letter. For a time the Observer was put on one side, and we began to think of launching our own Sunday news- paper. But when we started to discuss ideas, we felt lacking in inspiration. We were exhausted after the launch of the expanded Saturday paper and magazine.

As our plans to launch our own Sunday newspaper ebbed, so the Observer re- entered our calculations. Shortly before Christmas 1988, Andreas met at Mark's Club in London an American multimillion- aire publisher called Ralph Ingersoll who put a notion to him. Ingersoll Publications was looking to Europe for acquisitions. It was sizing up Lonrho's provincial newspa- pers, which included the Glasgow Herald. Mr Ingersoll had in mind to make a bid for all Lonrho's newspaper interests and then to sell on the Observer to a third party. Would Newspaper Publishing be interest- ed? You bet it would, said Andreas. The figure of £80 million, as a price for the Observer, seems to have been bandied across the table.

We had got hold of a copy of the Observ- er's internal management accounts, which showed that the paper had made a profit of just over £3 million in the year ending 30 September 1988, and we knew exactly how many people the newspaper employed. We also learnt that in September 1987 the Observer had seriously considered launch- ing a quality daily newspaper in order to spread its costs across the week.

Now that we knew the Observer's costs and revenues we could work out what prof- its we could make out of it. Obviously we could reduce its costs drastically by sharing overheads. On existing sales of 750,000 we could hope to make an annual profit of about £15 million. Even if its sales fell to 580,000 we could still make a reasonable profit of £4 or £5 million a year. Such a cir- culation seemed a bit pessimistic. Our board agreed that it was worth bidding up to £55 million for 'Andrew', which was our code-name for the Observer, named after the street which the paper had until recent- ly inhabited in the City. It seemed quite likely that our shareholders, who at the time tended to think that we could do no wrong, would stump up the money.

At 9.30 a.m. on 10 January 1989 the executive directors met Ralph Ingersoll in a private room which Andreas had booked at Brown's Hotel. Mr Ingersoll brought with him Sir Gordon Brunton, a peppery old relic of the Times who had hitched him- self to the young tycoon, and a couple of lesser side-kicks. We settled ourselves at a long table, fussed over by flunkeys offering us coffee. Mr Ingersoll, with Sir Gordon on his right, sat on one side; Andreas sat opposite him.

According to Sir Gordon, their formula for paying for a company was 'ten times operating cash flow'. On this basis he val- ued Lonrho's newspaper interests except- ing the Observer at between £110 and £130 million. He was a bit vague about the prof- its that these newspapers were making, but no matter. He accepted our figure of £8.4 million for the operating cash flow of the Observer and therefore valued the paper at about £80 million. He suggested that a bid for £200 million for all Lonrho's newspa- pers might clinch the deal. They would then pass on the Observer to us for £80 mil- lion. In a phrase which might have fallen more naturally from the lips of Ralph Ingersoll, he observed that no one had ever paid too much for a publishing com- pany.

Andreas conducted himself throughout these proceedings as though he had found himself for the first time in an Arab bazaar. This cautious attitude seemed to surprise Ralph — we were now on these terms — who had apparently formed the view from his conversation at Mark's Club, as well as a subsequent letter from Andreas, that £80 million was more or less in the bag. Andreas now came up with the alternative figure of £26 million. The basis for this was five times cash flow, £42 mil- lion, minus the estimated costs of reorgan- isation and acquisition. There was no magic about the fives times multiple. It was just half Ralph's figure.

Ralph now looked at Andreas as though he had turned out to be a bad disappoint- ment. 'I don't think that it is a realistic fig- ure for Andrew,' he said. Ralph had tried to enter into the spirit of the occasion by using our code-name for the Observer. Tiny Rowland was 'Cecil', (as in Cecil Rhodes, whom he was supposed to resemble in the scope of his African ambitions) and Ralph himself was 'Rand'. 'When we met, and subsequently, I had got the impression that you were in for more than that.'

At this point we adjourned. It was clear that we weren't going to get anywhere with £26 million. A colleague and I hinted to Andreas that he was being a little churlish. A little more give and there could be a deal. When the meeting reconvened in the same private room over lunch Andreas increased our offer to £42 million.

So it was agreed that Rand would bid £42 million to Cecil for Andrew on our behalf. I don't think any of us came away believing that this would ever happen that Cecil would ever sell or, if he did, that Rand would pass on Andrew to us.

Even after our plans to launch our own Sunday newspaper had been resurrected and were quite far advanced, Andreas's preference was still to buy the Observer. In June 1989 he and I had breakfast with Donald Trelford, editor of the Observer and a man with a reputation for great wili- ness, again at Brown's Hotel. The meeting had been arranged at Andreas's instiga- tion, though Trelford was keen to come.

Andreas began by saying that we had plans for our own Sunday paper. We could `go down that route'. However, there might be advantages in some sort of 'rela- tionship' with the Observer. The two news- papers were, after all, philosophically quite close together. The Sunday Correspondent, due to be launched in three months, would inevitably take some circulation away from the Observer, and there was a question as to the future viability of 'stand-alone' Sun-

day newspapers.

`Well, of course your Sunday paper would be affected too,' said Trelford, quick as a flash. His eyes darted nervously, as though we had laid a trap for him of which he expected no more than a sec- ond's notice.

Andreas half conceded the point. 'Yes, that's true, of course, though our labour and overheads would be very much less than yours.' Trelford cannot have known that we had read a copy of the Observer's management accounts.

`Well, I have always thought that a merger between the two newspapers might make sense,' said Trelford. `I should say, by the way, that Tiny knows all about this meeting, though of course I can't speak for him.'

`Quite,' we said.

`But I do think,' continued Trelford, `that a marriage of some sort makes sense. I've been editor of the Observer for far too long a time and my only concern now real- ly is to secure the future of the paper. Tiny is 71 and, although he's perfectly healthy, he won't last for ever.'

`Quite,' we both said.

`What sort of scheme did you have in mind?'

`What I have in mind,' said Andreas, 'is possibly the merger of the two newspapers into a new company in which Tiny Row- land might have 15 per Cent, and we would have 85 per cent. We do have a 15 per cent limit on share ownership.' Andreas added that he understood that Trelford had no aspirations to continue as editor but there could be some financial role for him in the new company.

Trelford did not seem overjoyed by Andreas's proposal of an 85-15 split, but he said that he would tell Tiny what had happened, and be in touch.

Andreas had been excited during our conversation with Trelford, but now that we joined other colleagues and began to discuss our own Sunday newspaper he became a little distracted and unwilling to concern himself with details. My impres- sion was that he was much more interested in acquiring the Observer than in develop- ing our own newspaper, so long as the right financial terms could be struck.

The next Sunday the Sunday Times ran a story about merger talks between the Observer and the Independent. Terry Robinson, a director of Lonrho, was quot- ed as saying that the Observer was not for sale. 'We've denied it many times. Why don't we put on the record that the

Observer is not for sale?' Donald Trelford admitted that talks were going on but would not be drawn further. The Indepen- dent has made a formal approach but I can say nothing more.' Andreas was quoted as saying only, 'This is a sensitive matter.'

I interpreted this story as a leak by Don- ald Trelford. It seemed that Trelford had brilliantly drawn Andreas and me into talks which he had then scuppered by making them public, thereby inviting a denial of sale by Terry Robinson, one of Tiny's clos- est henchmen. If this was true, Trelford was more than worthy of his reputation. The man was a wonder.

One of our non-executive directors, Bruce Fireman, who had had previous dealings with both Trelford and Rowland, then entered the lists. On Monday 3 July he rang Terry Robinson on his own initia- tive. Mr Robinson was out. A few hours later Bruce received a telephone call from Tiny Rowland himself, who said that he was sitting by a lake in Abidjan in the Ivory Coast. According to Bruce, Tiny mistook him for someone else, whether out of mis- chief or vagueness he could not say. Tiny was sure that Bruce was someone called Roland Franklin. He was, said Bruce, a bit `rambly'. Tiny told him confidentially that he was negotiating to fly Terry Waite out of captivity and into Nigeria. He also banged on about the perfidy of the Al Fayed brothers, whom he accused of hav- ing snatched Harrods from under his nose.

Despite all this, Tiny made some sense about the Observer. He expressed surprise that Andreas, having written a letter in July 1988, had not got in touch. His view was that we would do no more than break even if we launched our own Sunday newspaper. This, however, was not a way of saying that he would sell the Observer to us. The paper was not for sale. On the other hand, he might be interested in taking a share in the Independent — say 25 per cent. Bruce told him that this was not possible, since we then had a limit of 15 per cent.

The two of them had talked for ages. Bruce was tickled pink to have been on such terms with a tycoon. Tiny promised to ring him again when he returned to Lon- don in a few days, but he did not. As if on one of those machines you used to find on sea-side piers, the metal arrow had clanked back to 'Launch your own Sunday paper', and there it stayed.

We did launch a Sunday newspaper, in June 1990. The Independent on Sunday steadily eroded the Observer's already fragile circula- tion. Under the current plan apparently being discussed between Andreas Whittam Smith and Lonrho, the Observer would be bought by the Independent and closed down, and Lonrho would take a large stake in the Inde- pendent.

Paper Dreams by Stephen Glover is to be published on 20 May by Jonathan Cape at £17.99.