Face value

Lord of the raiders
Nov 4th 2004
From The Economist print edition


The enduring significance of Lord Hanson, who died this week at the age of 82



THEY don't make businessmen like James Hanson any more. Tall, handsome and charming, a dilettante scion of a Yorkshire business family, in the 1950s he dated film stars such as Jean Simmons and Audrey Hepburn. He remained charismatic and charming to the end, but also became a hugely successful businessman—Britain's leading “corporate raider”. Though hugely controversial for much of his career, in many ways Lord Hanson's business philosophy is now standard practice.

After Lord Hanson and the late Gordon White, who was also to become a peer, teamed up in the 1960s, they founded a greetings card business and set about buying other companies, making fertilisers and bricks, to create a conglomerate known as Hanson Trust. By the 1980s, the firm was swooping on corporate prey on both sides of the Atlantic—preferring dull, undermanaged businesses in unglamorous sectors such as batteries, locks and safes. Like his fellow corporate raiders in America, including private-equity firms such as Kohlberg Kravis Roberts (KKR) and Forstmann Little, and wealthy individuals such as Ronald Perelman and Carl Icahn, Lord Hanson drew on innovations in the financial markets and new management thinking.

He saw that many firms were valued by the stockmarket according to the historic prices of their assets, rather than their (more valuable) potential to generate cash, and that fast-growing debt markets were willing to lend large sums against future cash flow. So buying an undervalued firm with lots of debt could quickly pay for itself. He also saw that many big firms were not managed to maximise shareholder value, and so contributed mightily to their own low valuation. This was especially true of diversified, strategically driven conglomerates. Hanson was itself a conglomerate, but differed crucially in that it bought firms because they were cheap, not for long-term strategic goals: Lord Hanson often said that if anyone showed interest in buying his group, he would send a taxi to bring them to discuss terms.

In the hands of Hanson Trust, firms were run to generate cash. Managers were loaded with incentives and left to get on with the job—usually involving determined cutting of such superfluities as lavish corporate headquarters (or, said critics, of investing in long-term growth). The cash generated went to repay debt used to fund the acquisition, and to deliver dividends to shareholders, who rewarded the firm with a rising share price.

Lord Hanson's greatest deal was probably the 1986 purchase of Imperial Group, a British tobacco firm with a diversified portfolio of sleepy businesses. He paid for the deal entirely by selling many of Imperial's subsidiaries, leaving him with a business that made an operating-profit margin of nearly 50%.

The exploits of corporate raiders did not go down particularly well even in America's capitalist heartland; they appalled many people in a Britain still struggling to get out of its post-war socialist slump. Although knighted by a Labour prime minister, James Hanson was ennobled by an admiring Lady Thatcher, who said that she wanted to run the country like he ran his businesses. By the mid-1980s Lord Hanson was widely viewed as the very essence of the supposedly ruthless capitalism that characterised the decade. After buying Imperial, he was likened to a dealer who bought a load of junk, tarted it up and sold it on as antiques.

Lord Hanson's main concern was, he said, shareholders, followed by customers, with employees coming last—an attitude that led him to be labelled an “asset stripper”. This cost him dear in 1991 when the establishment rose up to stop him buying ICI, a chemical firm with one of the most famous names in British industry. Although he bought a 2.8% stake in the firm, he never launched his bid, faced with the sort of moral indignation that the British usually reserve for a Tory cabinet minister caught in bed with his secretary. ICI hired Goldman Sachs to tell journalists that Hanson's accounts were a house of cards, and used corporate spooks to dig into his business dealings. They came up trumps, finding that Lord Hanson's partner, White, was running racehorses at shareholders' expense. Hanson retreated, never again to contemplate a deal so big. Five years later, the adventure ended when Hanson Trust split itself into four separately quoted firms, covering energy, chemicals, tobacco and bricks.


Shareholder value

In the 1980s, Hanson's share price outperformed Britain's top 100 firms by an astonishing 368%. But by the mid-1990s, it was falling in a rising market, as the intense scrutiny of the ICI affair led many investors to question the sustainability of its profits, which had come to depend in part on complex tax deals. Yet the asset-stripping charge was unfair: he built a genuine transatlantic business that, at its peak, employed 90,000 people.

In part, Hanson Trust was less necessary than it had been. Its techniques, from rewarding managers for maximising shareholder value to focusing on cash generation, had become standard business practice. Even ICI applied the Hanson treatment to itself, once the bid was dead, by first hiving off its pharmaceutical division and later shedding all its heavy chemicals.

None of this means there are no longer plenty of badly-run firms or underutilised assets. But today the task of reviving them has fallen to different creatures. Large shareholders are playing a bigger role in resolving problems at companies. And if they fail, there is a well-capitalised private equity industry, led by the likes of KKR, Apax and the Carlyle Group, ready to rush in to spruce up underperforming companies before selling them on. If Lord Hanson were starting out today, perhaps private equity is where he would be found. But perhaps not—for there is growing talk among the bosses of the big private-equity firms that they should become public companies, listed on the stockmarket like Hanson Trust. If so, the Hanson way may be less something for the history books than the shape of things to come.