New Year Special: The Guinness Scandal

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1:03It was probably the most celebrated financial story of the 1980s. The takeover by Guinness of distillers, the giant Scotch whisky business, and the complicated legal battle and trials that followed. It's a story about regulation, about criminal behaviour and about a miraculous recovery from Alzheimer's. So it's got almost everything. Here to discuss it with us today is Nick Coach and author of The Guinness Affair, a famous book on the story. And indeed, he's brought along a copy which is autographed by the great man himself, Ernest Saunders, the chief executive of Guinness. And it reads, I forgive you, Nick.

1:44Nick, welcome.

1:45Nick Kochan: Thank you very much. Thank you very much for having me. It's good to have you. Maybe we can start by going back to the 1980s, because it's a long time ago now, and look at why the Guinness bid was such a sort of significant moment in the kind of takeover business and battles of the 1980s. I think we're first of all looking at a city that, up to this point, had generally been regarded as a gentleman's club, where people basically behaved by the rules, didn't go beyond. There may have been certain boundaries that they respected, but they didn't go beyond. They weren't exceptionally greedy. And I think what happened in the affair, in the Guinness Affair, was something broke.

2:29And that was the sort of greed barrier, if you like. The gentlemen were shown to be sharks. Number two was that we were introduced to some characters who were undoubtedly rather more colourful than the traditional city folk of yesteryear, if you like. We had political connections. We had connections to Margaret Thatcher. We had connections to the United States through Ivan Boski. We had connections to blue-blooded firms whose names would be completely unfamiliar. And most of all, we had a very aggressive, colourful, somewhat threatening marketing man who went by the name of Ernest Saunders, who was, to my enormous surprise, in fact, a family of an Austrian refugee.

3:16Ernest Saunders was actually born Ernst Schleyer. I think another thing was that the city was being opened up by what was called Big Bang, which had only happened basically a year earlier or much the same time. When Americans were introduced to the city, commissions were removed, and basically the gloves came off in the financial sector. Maybe we should say a few words about it because probably no one really knows what the Distillers Company Limited was. Part of this story is that we're looking at two opposed forces. One, this aggressive merging takeover financial engineers in the Guinness and their target, this stately company, distillers, owners of Johnny Walker, gold label, black label, whatever label it was, who were the Scottish establishment par excellence.

4:13Well, they were better. They were a cartel. They basically owned the whole industry. Well, before the Guinness bid for distillers, they bid and bought bells. We had sort of basically the battle for whiskey. Distillers was run by a quintessential Scottish gentleman by the name of David Connell and his brother John. These were Scottish gentlemen who were probably, you know, good at the engineering of distilling and so forth. and marketing because they sold into Africa and were very successful. But the aggressive marketing that they encountered with Ernest Saunders and his team and all their sort of investment banking expertise and so forth, this was completely and utterly revelatory and shocking to these Scottish gentlemen.

5:03And that's in a way that the business background. Distillers wasn't a monopolist, but it was most of the Scotch whisky industry. and it was run more like a club than a commercial organisation. Ernest Saunders saw the opportunity. Up until that point, it had been thought to be bid-proof because the Scottish establishment and the Scottish capital would rally round to repel borders. And so that was why it carried on for so long. It looked obvious to outsiders, even at the time, that this was a business which could be run far better. My only memory, I had a friend whose father was a director of distillates.

5:46The company had, wasn't quite RJR Nabisco, but it had a company plane. And the directors would sometimes finish board meetings and fly in their company plane to a race course somewhere to watch the racing. So it was a very kind of traditional setup. It actually was also a very profitable setup, wasn't it? We should come to the first sound of battle in the distance, which comes not from Guinness at all, but from another company called Argyle. And Argyle was a sort of supermarket business that was run by a Scottish entrepreneur called James Gulliver. And he basically was obviously a very successful businessman.

6:27Is that fair? He saw the opportunity. Guinness looked like a sort of bystander to start with. It had just bought Bells, which was probably the second largest distiller of whiskey in Scotland. That was a pretty acrimonious affair too. I don't think that Argyle really thought that Guinness would have a go at distillers. I think the one kind of thing which was going on in the world and probably emboldened all these people to try and take over distillers was in France, funnily enough, not generally regarded as a hotbed of modern capitalism. In the 1970s, Moet Hennessy, which was the big drinks business there, it had a manager, a guy called Alain Richard.

7:11And Alain Richard had essentially totally transformed the business by changing the way it was distributed and marketed. And he had taken back control from independent distributors. And the profits had gone up by a multiple. And I think that probably somebody like Ernest Saunders, for sure, would have been aware that this sort of transformation had not been undertaken at distillers. And therefore, there was a possibility to dramatically improve the profitability of the company. But let's turn to the other protagonist who comes in behind Gulliver and eventually mounts the successful bid, Ernest Saunders.

7:48Tell us a bit about him. You obviously said he's an immigrant. He came to Britain in 1938. How did he reach the position where he can launch this sort of bid? Well, Ernest Saunders came through the ranks of the marketing fraternity, starting with Beecham, going through great universal stores, and then going to Nestle. And all the time he's looking at this newly grown study field of marketing, of advertising, of promotion, of branding. and it's sort of tied up, I think, with the Thatcher image of the businessman, the newly confident entrepreneur. We see him being brought into Guinness, which itself was a sleepy company that had gone in various wrong directions.

8:35And I think he was brought in to say, right, sort us out. So then what did he do at Guinness? Now, Guinness, I mean, just to very quickly fill in what was Guinness. Yeah. So Guinness was an Irish company run by the Ives, the Lord Ives, who goes back to the founder of Guinness back in 1759, when Wolfe was climbing the heights of Quebec. You know, for many, many centuries, literally, it had simply been producing the black stout that we know as Guinness. and then I suppose in the 20th century the management started to think they could do something with their profits other than sort of buying horses and paintings and setting up ivy house and things like that and they started buying things the long and the short is that by the time Ernest Saunders arrives in I think 1981 yeah um we've got a sort of conglomerate of disparate memory i think there was a health or a vitamin pill company i think there may be in a company in the engineering field multiple companies but nothing to do with the central business of beer and saunders was brought in and the first thing he did was to chop away those businesses um and then he started to focus as marketing men do and we had the bells bid right my only thing about guinness Of course, Guinness itself was famous for its advertising.

10:02It had the Guinness is good for you. It was a very marketing-led company through much of its early years. By the famous novelist Dorothy Elsayers, I think, who wrote that. I think it's worth saying that Salders cut his teeth on Bells, which was, again, very strongly contested because this was a foreign company taking over one of Scotland's attractive businesses. One of the things which I find interesting about the Distiller's Bid is the way in which, certainly if you read the obit of Jimmy Gulliver, written, funnily enough, by Brian Basham, who's a public relations man who seems to have been quite involved.

10:41Basically what happened was that Jimmy Gulliver of Argyle wanted to make this bid, but he was cautious because he was thrusting businessmen. But, you know, he wasn't an aristocrat or a toff. And he thought that he might be brushed aside by the distillers board if he had the temerity to approach them and suggest that he'd be allowed to take over their business. His bankers told him, well, you know, to be taken seriously, you may want to bring in someone. This is according to Brian Basham. Then the person he lights on to get to sort of back up his bid is Lord Weinstock. Lord Weinstock was managing director of GEC, one of the largest companies in the country.

11:24With a huge pile of cash. He never spent anything. So what Basham says is he says, having put forward the suggestion that Weinstock should sponsor the transaction by taking a percentage, Gulliver was unable to obtain a formal response for three weeks. He was told that Weinstock was at a music festival in Germany and couldn't be disturbed. In the meantime, the distiller's share price rose on rumours which leaked with the usual city ferocity, something of which I think Mr Basham is well aware, to a point to which Gulliver began to reconsider his position, at which moment he was approached by a journalist who asked him about the rumours.

11:59Using carefully selected words and acting again on legal and other professional advice, Gulliver told the journalist it was not his present intention to bid. Accurately, his advisers had told him on the basis of precedence that such a statement would make him unable to bid for three weeks and he would then be free to bid, having re-evaluated his position. But the takeover panel, which effectively adjudicates takeovers, took a different view and imposed a three-month ban, which gave Ernest Saunders and Guinness their opportunity to get involved and mount their own bid. Gulliver actually managed to launch his bid.

12:35The distillers board was shocked at this. Who is this jumped up grocer who thinks that he can run the great distillers company? And the opportunity for Saunders was to come in and say, I'm your white knight. So that gets us to the point where Guinness has mounted its bid. And there are two companies, Argyle, run by Gulliver with a bit of support from Lord Weinstock and Guinness. but they're both smaller than distillers. And they are forced, therefore, to use their shares to pay for the business. So they're trying to persuade the other side to accept payment for their shares in stock. And therefore, the share prices of both companies becomes a very critical issue.

13:17So maybe you can give us a flavour of the problem that occurred to Mr Saunders at that point when he had put staked everything on intervening as the white knight in this bid battle. This is where Saunders and his banker were moved towards this idea of share support. What do we mean by that? We know that the higher share price would be the more attractive to the distiller's shareholder, who would be getting the shares of the bidder in return for their shares. So the higher the share price of Guinness or that of Argyle was going to be more of a winner for the distiller shareholders. And hence, you know, we have Saunders going cap in hand to investors and saying, buy into my bid secretly and I will indemnify you because you're taking a risk should you lose.

14:13And that's sort of where we're entering the territory of problems, shall we say. There was fees as well as the indemnities. So they had two bites at the cherry and were persuaded by Saunders that this was OK, because, of course, the attractions of a Guinness bid were such that there was no possibility, of course, that the share price would actually go down once the bid had gone through, which, of course, was a complete fiction. He persuaded them, apart from underwriting their costs and paying a fee, he persuaded them that once the bid had gone through, then the Guinness price would be so attractive that it would float up miraculously and they would be able to sell the shares at a profit.

15:03One nuance of that was that, if I recall, investors were also invited to sell distiller's shares to lower the distiller's price. There was a very complicated market manipulation going on in a way that's inconceivable in today's world. But there's also the key is that it was all obviously very much a secret affair. Whereas Argyle, I believe, had rather openly had Lord Weinstock involved. In this case, they went through a series of manoeuvres. So Saunders invested$100 million with a man called Ivan Bursky. And Ivan Bursky's business essentially was betting on takeovers. Yes. I mean, he invested$100 million of Guinness's money.

15:53Without it being approved by the board. They knew nothing about it. But this was about par for the course, the way Saunders ran the business. So basically, the people he went to were Bursky, who he called themselves arbitrageurs in New York. He was given 100. And then this man with a rather magnificent name of Tony the Animal Parnes was basically put to work finding people in the city who would join the club. And Saunders had, I think through his time at Nestle, had a relationship with a Swiss bank called Bank Loy, now part of Credit Suisse, but then an independent organisation. And he persuaded them that they should quietly buy shares in Guinness during the bid and maybe, as you say, sell distiller shares as well.

16:38Tony Parnes was a city mover and shaker in the old city style where things happened behind closed doors. And he had his network, which one assumes, but doesn't know, had been activated on many previous occasions without any disclosure. closure but this time you know when the music stopped the network was found to be acting in this sort of minute secret way yeah palms was i think what was known in the old city as a half commissioned man and a half commissioned man was somebody who basically had a seat in a stock broker's office but he was a kind of sole trader and he got half the commission and he paid the other half as a kind of rent for his chair and his license well let's leap ahead because this kind of secret machinations achieve their objective.

17:33The bid succeeds. The conspirators get paid£38 million for their£300 million of investments. Guinness is triumphant, and it all, for a moment, I suppose, looks great. So when does the whole thing blow up? How does it get discovered? And why do they end up with the police mounting an investigation? I think it's got something to do with Bursky. Well, yes. I mean, we've mentioned, I think, Ivan Bursky, an arbitrageur. Boesky was being investigated by the Securities and Exchange Commission in America. And the reports rather suggest that he dropped in the fact, you know, that he'd taken this hundred million dollars, as I think it was, and been offered by Saunders an indemnity.

18:14And that passed over to the serious fraud office, who had just been created. So we're talking about 1986 when the proverbial as it were hit the fan but the police were investigating for three three plus years while the serious fraud office was being established and it came into being in 1990 and at that point the authorities sort of clamped down and said right you know we're having a trial. Bursky was given a hundred million dollars and some of that money if not all of it was used to help the support operation. He was definitely buying Guinness shares. He was then picked up for something completely unconnected, I think to do with Drexel Burnham Lambert and takeovers connected with that.

19:01I think Michael Milken was, I think, involved in that. Yeah, exactly. So he basically then sung like a canary, saying, well, I'll trade you this information about this share support operation I'm involved in and Guinness. They then, as you say, informed the UK authorities, who in the autumn of 1986, effectively arrested a whole load of people. They are basically interviewed over claims that they're involved in market manipulation. And this becomes quite significant. The DTI is definitely involved because basically the DTI forces a whole load of financial people, bankers, out of their jobs at the investment bank that's advising Guinness, which is also involved, and changes the chief executive, kicks out the bankers who are involved in the bid, and they are all basically interviewed and told that under the new market regime in operation, they have to answer questions about their conduct or go to jail.

20:04So essentially what happens is then And through a series of interviews, they themselves sing like canaries. But unlike Bursky, they don't have any protection from prosecution, although they don't know this at the time. And over the next three years, the Crown assembles its case. And then to their immense dismay in the late 1980s, 89 perhaps, they're told actually there is going to be a trial. And we don't really need to ask you that many questions because you've already very helpfully supplied the answers to the DTI. They basically are slightly stuffed. They have to sort of say it's not fair, which is what I think they do.

20:42They argued that this was traditional city practice. OK. Was it, Neil? Was it customary? No. Even by the standards of the city, this was outrageous. You know, I mean, there was doubtless a bit of encouragement in the margins and other things, and there had been another bid beforehand where it had come up. But really, the size of the indemnities and the fees was ordered a magnitude bigger than anything had gone before. And they were all found in the first trial, which is the one involving Ernest Saunders, obviously the chief executive, some of the wealthy people who had backed the deal, not Ivan Bursky.

21:21Jack Lyons, Anthony the Animal and Gerald Ronson were all sent to prison for various terms. Jack Lyons was not sent to prison. um jack lyons pleaded illness oh i'm so sorry he was fined he was fine well gerald was also fine gerald was fined five million and he was jailed for a year i was actually at the case yeah when the judge heard about jack's suspected prostate cancer yeah and the judge said okay it'll be three million to you jack plus the author the jack was stripped of his night yeah He was. Not a dry iron house, really. Well, this becomes a recurrent theme with these trials. It does become a...

22:02Health becomes a major issue.

22:04Nick Kochan: But just to be absolutely clear who got what, Ernest Saunders, jailed for five years. Five years. It was later reduced. To 10 months. Reduced to 10 months. Jack Lyons was fined 4 million for theft and false accounting and stripped of his knighthood. Tony the Animal Palms was jailed for 30 months, reduced on appeal to 21 for false accounting and theft. Gerald Ronson, jail for a year and five million pounds for false accounting, conspiracy and theft. So that concluded in September 1990. The second Guinness trial, which was of the advisors, Patrick Spence was one. And the other was the Morgan Grenfell, who were the investment bank.

22:39The banker was a man called Roger Selig. Basically, that trial collapsed in February 1992, basically because Selig, who was conducting his own defence, was said to have become suicidal under the strain. The judge said, oh, well, we can't have that. This trial's going on for too long anyway. And then he said, well, it's not fair to try Spence on his own for a crime where he and this other fellow were co-conspirators. Selig were co-conspirators. So Spence basically got off. That was the end, really, of the trials. But now we come to the biggest healthcare thing in the whole story, which, of course, is where some people would argue Ernest Saunders got value for money from his lawyers.

23:22Exactly, sick note time. They were all terribly ill, these poor people with their enormously well-paid lawyers. We now fast forward to 1991, which is when a consultant psychiatrist was dragged before the Court of Appeal to make a plea on behalf of Ernest Saunders, who then served a few months in prison, in which he said that poor old Ernest was quote, unable to record three numbers backwards. He forgot the subject of a sentence almost before he had started, and he couldn't even remember who the President of the United States was. Well, I've written down what was accepted unbelievably by the Court of Appeal, that he had progressive, degenerative, incurable disease of the brain.

24:09Apparently, the Court of Appeal accepted this claim, and the doctor subsequently said, well, we thought he had it, or we were worried that he might have it. But in fact, he appeared to have recovered miraculously. Well, shall I tell you what he himself said only a year or two afterwards, when he went on in 1994, he basically was questioned about his, quote, miraculous recovery. And Saunders said, I was never diagnosed as having Alzheimer's. I was very unwell at the time of the appeal, perhaps hardly surprising with all the stresses and strains that I'd been under. The symptoms that I was suffering from could have well have been confused.

24:49He said, I don't know. I'm not a doctor.

24:57And he lived happily ever after. The only man to have beaten Alzheimer's disease. Well, he did very well. He went from strength to strength. He went on to become a consultant to Carphone Warehouse. and he did a rather lucrative job in America. And I think he achieved his aspiration of life, which was to acquire a Rolls-Royce. We all have our dreams. Just the one. It seems in the context of everything else, a very modest aspiration. Here's the description of his life in the mid-1990s. He has three homes, a London house in Putney, a country residence near Chichester in West Sussex and a chalet in Switzerland, a blue Rolls-Royce silver spur.

25:38ferries him to London's smartest restaurants, the Savoy, Conor, River Cafe and Coast. The chauffeur-driven H-registration roller would pick him up at the morning in Putney and drive him to meet his wife, Carol. Can I jump in with a little code of that, actually? It was stated during the trial that as a result of the trial, he'd broken up with Carol. Okay. And that Carol was sort of in retreat in Switzerland because she was going bonkers, like he was. Yeah. And they were divorcing. Yeah. And shouldn't the judge take account of the personal tragedy of Ernest Saunders? Yeah. But as you said, they miraculously, as with the Alzheimer's, seem to have come together again.

26:23So the moral of the story is, buy the best lawyers you can possibly afford. If one wants to draw the, as it were, the eternal conclusion, Neil, that is indeed the cynical moral of it. Okay, that's a cynical moral. But I think we should just finally sort of sum up, because I think if you look at this case, it was supposed to be a demonstration that the kind of adults and the lawyers and everyone was now in charge. It wasn't a private man, a sort of gentleman's club of the sort you described anymore. It was properly run, international securities marketplace and all that sort of thing. But I think if you look at this, you can't really draw any of those conclusions.

27:01It's a muddle, the Guinness affair. The legal case that's brought is sort of muddled and I would say a bit flawed for the reasons you mentioned about the fact that people were effectively incriminating themselves in front of the DTI and then finding themselves sent to prison for it. The judge, you kind of get the feeling that one of the reasons they got cut slack was because the judge was slightly uncomfortable perhaps with the whole process and felt that they had been put in a pretty unedifying position. But I think that the idea that there was some aspiration that this would, as it were, stamp the moral hammer on corruption in the London markets was absolutely not realised.

27:46And I think part of the problem was that the police completely over-egged the case. And I think this is something that has been learnt in subsequent cases. I think it was 38 charges were brought against these guys. 38 charges, six months of a court case, with the same 12 people sitting there for six whole months, listening to the most complicated, convoluted evidence from all sorts of, you know, city toffs and brokers and lawyers and people who had no idea what economic crime was really about. So in a way, it stamped the British mark on economic crime. Fighting it with a jury, untutored policemen, and a public that was raring for blood, in part, was absolutely a fool's errand.

28:38I think that it's much harder to pursue those sorts of behaviours today. You mean the insider trading? Yeah, because I think that the, if you like, that sort of where the fraud is happening is elsewhere, away from the securities markets, really, in derivatives. Bitcoin, crypto and so on. Where the scope is far greater now than it ever was in securities fraud. They knew that they were doing wrong. There's no question of it. They were not innocents in the jungle here. They thought they'd get away with it from Saunders onwards. And they would have done it in an earlier era. That was A Long Time in Finance with Jonathan Ford and Neil Collins.

29:26Production and editing by Nick Hilton. Please rate and review it on your podcast app.