Bosses who want it all

A founder wanting to buy out shareholders makes them all the keener to hold on.

by Patience Wheatcroft, business and City editor of The Times

Lord Kirkham and Tony Pidgley come over as self-made men and proud of it. Through their own labours, they have built thriving businesses and made themselves multi-millionaires.

They have also made lots of money for their shareholders. Now, it seems, this has begun to rankle with them. Why work for shareholders when they could be working for themselves?

Both men decided they would like to buy back from investors the businesses they had started, the furniture chain DFS for Kirkham and house-builder Berkeley for Pidgley. Their motives may not have been entirely pecuniary.

The demands made on public companies are now so onerous that many a CEO wonders whether retreat into the unquoted arena might be preferable.

Dealing with the latest corporate governance commands while trying to satisfy the whims of short-term investors can be tiresome and time-consuming. Men such as Kirkham and Pidgley would rather be left to get on with running the business.

The financial motive is rarely completely absent, however, from the decisions of those who started with nothing and achieved great wealth. When he realised that investors might not be persuaded to sell to him, Pidgley was prepared to settle for an alternative arrangement that simply offered him the opportunity to make a great deal of money.

He had not been working for a pittance. In August last year there was surprise when his total package swelled to £4.7 million, thanks to his retrospective inclusion in a long-term incentive plan. But Pidgley, who famously spent his early years living with his adoptive gipsy parents in a disused railway carriage, wants more.

When he unveiled his imaginative scheme and asked shareholders to bless a deal that could deliver him £36 million, the reaction resembled that which greeted Oliver Twist's request for a second helping. Yet investors realised that if Pidgley did well from the deal, it would be because he had generated impressive returns for the company. A demotivated, sulky Pidgley would not be in shareholders' best interests.

Kirkham left investors in little doubt that he was feeling pretty disaffected with life at a publicly quoted DFS and would be even more fed-up if they rebuffed his attempt to buy back the company. The non-executive directors spelt out their qualms about his likely commitment to the business if he did not get his way. There were even veiled suggestions that he might be tempted to set up a new venture in direct competition with DFS.

Some investors took umbrage at this behaviour. While Pidgley was graciously agreeing to continue working for the interests of investors even as he enhanced his proprietorial hold on the business, Kirkham was interested only in being rid of outside shareholders. At a higher price they might have succumbed, but that was not on offer, even after a 10p-a-share increase.

Since no-one believed he would be trying to buy DFS unless it had sound prospects, they resented his attitude that he no longer wanted to share them with investors, many of whom were long-term holders of the stock.

Backing entrepreneurs is not like putting cash into a FTSE stalwart.

No matter the size of their stake in the business, the founders never stop regarding it as their own. This often works to the advantage of outside investors - owner-drivers tend to set ambitious destinations. The downside is that they are used to having their own way.

It's a problem with which institutional investors struggle. They go along with the National Association of Pension Funds and the Association of British Insurers in the call for strict adherence to the latest fashion in corporate governance, but they know that as far as their own investors are concerned, results count. Pidgley and Kirkham have delivered on that front. So has Alan Sugar, another entrepreneur not always keen to work for outside shareholders.

In 1992, Sugar tried to buy back the two-thirds of Amstrad that he'd sold. Investors rejected his 30p a share offer. Sugar is not the smoothest character to parade before City analysts, but he knows how to sell, having started his business from the back of a van, and he knows how to buy.

If he had bought Amstrad at 30p a share he would have had a bargain, for today the shares trade at more than £2.

No matter how proprietorial they may feel, shrewd business people such as these do not pay generously for ownership. Kirkham has argued that DFS needs restructuring and that this is best done away from the public arena, but investors are right to suspect that if he is prepared to offer a price for the company, it is because he believes it will soon be worth much more than that. If he is really feeling so demotivated that he would consider walking away from a business of which his family owns a tenth, perhaps he should have tried to negotiate a Pidgley-style compromise to encourage him to get out of bed in the morning.

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