No matter how good a company is, what really matters, says Robert Heller, is the perception of it in the marketplace - only excellence provides even a partial guarantee of permanence.
The swallowing of Forte by Granada carries some uncomfortable warnings for corporate managements. By most standards, Forte is a 'good' company: not in the sense of outperforming the market, either in the share price or its businesses, but in that of offering reasonable goods and services, looking after its people reasonably well, and being adequately managed.
But good is not good enough, and outperformance is the only acceptable standard. This applies in the marketplace, where, according to Xerox research, customers rating quality as excellent are six times more likely to repurchase than those who merely think it good. In the stock market, and in the associated market for corporate control, only excellence provides even a partial guarantee of permanence.
Forte, along with Tesco, Thorn and Granada itself, was the product of driving entrepreneurs who started in business before the second world war and capitalised on the consumer booms of the peace. All four experienced alarming lurches after the master's hand was slowly withdrawn and the next generation took over. The degree of subsequent excellence depended, not only on the changing of the guard, but on the changing of the company - how radically the next generation was prepared to depart from the founder's legacy.
But excellence, either in the customer's or the investor's eye, is a matter of perception. Increasingly, the corporates are being judged - and are even asking to be judged - by the criterion of 'creating shareholder value'. Sophisticated approaches have been applied to this standard, which has replaced earlier, related guiding stars like annual increase in earnings per share and return on capital. But in the end, shareholder value reduces to an elemental simplicity: the share price.
The variation on this theme known as Market Value Added (MVA) makes the point. American consultants Stern Stewart add together all the capital raised over time (in equity and borrowings), make a few technical adjustments, and subtract the result from the current market value of equity and debt.
The star managements, led by those of General Electric and Coca-Cola, are those whose market value (again, predominantly the share price) has risen most in relation to the capital employed.
The MVA calculation is precisely that which portfolio managers, from Mercury Asset Management downwards, use in measuring their gains. Their only concern is that their investments should be worth more - and the more the merrier. If a particular share doesn't make them merry, the major investors have four options: stick with the wretched thing (more in hope than in anger), sell in the market, apply pressure on management, or (like MAM with Forte) sell in the market for corporate control.
When equities are booming, the last alternative becomes more attractive.
A relative leader like Granada can afford to offer a nifty premium over the market price, and the City's left hand (lending millions or billions) will ensure that its right hand (investing them) makes its profit. More than likely, this explains the paradox that merger booms always coincide with strong equity markets - though logic insists that acquisitions are better made when prices are low.
But do these elegant financial manoeuvres have any connection with real-life management? Anomalies abound. Any good manager aims to exceed the cost of capital by a whopping margin. Chrysler's return of 30.7% compares with a capital cost of 13.2%. Yet, according to Fortune, its MVA swung by $6 billion from positive to negative in a year - which explains why big investor Kirk Kerkorian has been making management's life miserable.
The other way round, Hewlett-Packard has been earning three percentage points less than its cost of capital: yet its MVA is vast, at $11 billion.
Both companies are reputedly the best-managed in their businesses. But the market perception of HP is simply much more favourable than that of Chrysler and cars.
Exactly the same was true of Granada and Forte. What could and should the latter have done to shift perceptions?
The answers apply to all companies. First, find out what those perceptions really are. Most top managements are ignorant of what their customers, employees, suppliers, shareholders and even their own upper executives think of their experiences with the company. Generally, the internal view is inflated: Forte's arrogant approach to the US market, for example, failed to impress either the competition or the customers.
Second, take perceptions seriously and shift them in your favour. Like BAT before it, Forte was hustled into strategic changes that, if desirable, should have been executed long before, and, if undesirable, shouldn't have been proposed. By tracking perceptions and matching them to imperatives, managements can avoid fates like Forte's.
The third lesson is that continuity can only be achieved by discontinuity, and that attack is the best means of defence. This won't make life comfortable for top managements. But, as the Forte affair shows, comfort is a luxury that managers can no longer afford.