Skinflint's City Diary
It is impossible to accept without reservation the press releases of the company promoter takeover men. How two and two makes five. Synergy. Economies of scale and so on.
The takeover trail often leads to an asset-rich company that has been chugging along for some years headed by various managements who have done what they can to increase sales by installing expensive plant, designing new lines and so on without much success. The rules adopted by one particular conglomerate in dealing with these situations once a company has been acquired have been revealed to me. The stripping goes like this: Step 1: Move your new head man into the buying department of the company acquired. Half of all purchasing is usually from two or three suppliers and by the high-level knocking together of heads it is possible to make an immediate saving which is a straight addition to the net profit — unlike extra sales that mean extra people, capacity and finance.
Step 2: Raise prices across the board. This has the satisfactory effect of reducing volume and releasing cash tied up in work in progress.
Step 3: List staff by depart ments, asking each department for a reduction of a fixed number of heads within sixty days. Later go back and ask for a further 10 per cent. These salary cuts hardly reduce output in the short term and the direct savings are a straight addition to profit.
Step 4: Sell surplus assets and plant realised as a result of completing Steps 2 and 3 above. Naturally persuade auditors that some of the profit on sales over book value should go into Profit and Loss account and not into Capital Reserve as the more oldfashioned would think.
Step 5: Hive and spin-off by share exchange or flotation (if large enough) any section of the business that can stand on its own feet, however unsteadily, until takeover by someone else is arranged or flotation is completed.
With the high rate of red,undancy recently it is not surprising to learn that in its essentials this is the process that has been followed by some of the largest industrial takeovers in the last few years. Distressing but presumably inevitable.
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