The Golden Phoenix


British cars, specifically British cars made by the mass of car makers who became British Leyland, are our stock in trade. The history of British Leyland has more twists and turns than Eastenders, particularly in its final days under The Phoenix Four. 
So when news stories began appearing this week about Messrs Beale, Towers et al I was immediately interested. I'll be honest, I've always bought the line that the famous four feathered their own nests and hung the workers out to dry. This view was largely based on media reports and local anecdotes, for example about the sale of Studley Castle, the former BL management centre located a few miles from the Great Escape site. Like most people I have never had the time to peruse the 800 page Government report into MG Rover's collapse. 
Now, thanks to a link on a Facebook group, I have. Not every word, I have to admit, but most of it. I have sacrificed a considerable amount of my already depleted brain cells to bring you a summary of what The Phoenix Four actually got up to. So here it is a bitesized analysis of what killed MG Rover split into the main topic areas.

Sale by BMW
When Beemer decided to bail it sold the good bit - Land Rover - very easily, leaving it with the less desirable rump of MG and Rover. Everybody, including the Government, knew that this business was not viable in its current form, due to inefficient factories and ancient products.  So either it would have to be drastically slimmed down or partnered with a suitable cash-rich car maker.  This is why BMW provided a £500m 'dowry' to the Phoenix consortium to take the problem off their hands. 

The BMW deal seems to have been concluded very quickly, particularly compared to the slow pace of the SAIC JV. This seems to suggest a lack of due diligence with BMW rather than a criticism of SAIC.  Quite why it all had to happen so quickly is unclear but certainly issues like a business plan and the pension shortfall don't seem to have received serious analysis by the Consortium. BMW gave Towers and his partners £500m to offload the English Patient - whether your plans are short or long term, that dowry alone feels pretty persuasive.



The Phoenix Four
The saviours of British Leyland were:

John Towers - former managing director of Rover
Peter Beale - finance director who previously worked for a Rover dealer in Stratford 
Nick Stephenson - engineer who was a former director of Rover/BMW
John Edwards - ran a Rover dealership in Stratford

Towers and Beale are generally acknowledged as well equipped for the roles they played in the business. Stephenson and Edwards, according to the Government report, were competent in their specialist fields but were pushed well beyond their competences and comfort zone.

Business Structure
From the start the structure of the Phoenix Four deal should have raised alarm bells. The four formed a limited partnership and set up a business called Techtronic. Techtronic 'bought' MG Rover and received the loan from BMW. By design or coincidence this structure enabled the directors to distance their financial liability and risk from the actual business they had bought - and keep the cash outside the floundering car company. In effect Techtronic lent money to MG Rover (which had to be paid back) and earns interest on the loan. This arrangement generated a surplus which was fed back to the limited partnership. So whatever happened at MG Rover, careful management of funds at Techtronic would enable the directors to benefit from surpluses created by interest on the invested BMW loan and on loans to MG Rover. It didn't matter if the BMW loan was run down and MG Rover defaulted - short term they would gain, receiving funds that didn't need to be paid back. 

The Risks Taken by The Phoenix Four
The four directors made much at the time of the purchase of their personal risk - and repeated this line after the collapse. However, the Government report finds that this simply wasn't true - there was no personal risk. According to the directors they stumped up seed cash required to fund the bid and underwrote legal fees. In fact they each put in £60,000 and did not underwrite legal fees. In the circumstances while £60k is a significant sum, taken against the windfall of interest on £500m it was hardly a risk. Similarly, immediately on signing the deal the directors awarded themselves £1m 'reward' to be paid by MG Rover. Instead of paying themselves this money they opted to take 'loan notes' - while this kept cash in MG Rover it also earns the directors even more money as interest accrued to them on these notes. They called in the loan during their tenure. 

Director Remuneration
We all expect the people at the top to look after themselves. The Phoenix Four did this quite well. Each was paid well in excess of the salaries paid to directors of other UK car companies including Ford. Their combined bonus packages were in some cases double comparable firms. None of the directors except Towers had ever earned salaries even close to the sums they claimed. Yet apparently they complained that they were being underpaid. The four directors were able to agree their remuneration between them - there wereno external checks or approval required. 

Director Bonuses
Throughout its ownership by The Phoenix Four MG Rover's finances were on the slide. It sold less cars and made less money year on year. To survive it sold assets and worked through the BMW dowry. Despite this the directors awarded themselves bonuses of around £20m. Even in a company like MG Rover directors have to justify the basis on which bonuses are awarded and so they did this by using 'milestones' like car sales and progress with various Joint Venture projects. Except these claims never stacked up - whilst car sales floundered and JVs stagnated the directors funnelled millions in the form of 'bonuses' into an offshore pension fund directly from MG Rover funds - well out of reach of the administrator. So, the directors earnt money via Techtronic and directly via MG Rover. 

MG Capital
The latest news stories concern the disposal of MG Capital by the receiver. This has resulted in another cash bonus for The Phoenix Four. They have argued that they risked their own personal assets to buy MG Capital and therefore they should benefit. Except, according to the Government report, they didn't.  They used the loan notes that they awarded themselves to underwrite loans obtained to fund the purchase. As the loans were awarded from MG Rover funds, a decision proposed and agreed only by the directors, this can hardly be said to be a risk - if something went wrong they ultimately had access to a £500m pot that would pay the loans. The MG Capital deal was similarly hugely favourable to them that any short term 'risk' was far outweighed by the benefit. For their individual 'investments' of a few hundred thousand pounds in MG Capital, each director appears to have received several million pounds.

Were the directors committed to MG Rover?
I think it would be churlish to suggest that the four simply took the deal for short term gain. They definitely worked extremely hard to make the business work and throughout their tenure many good decisions were made - rejuvenating the MG brand on mainstream cars being an obvious master stroke. They pursued the essential joint venture relentlessly although somewhat cackhandedly. But they knew saving MG Rover was a risky prospect, so they made sure that whatever happened they would also gain if it failed. 

The Joint Venture
There was a very real prospect of MG Rover being sold to the Chinese. The deal failed because of MG Rover's parlous finances. The JV was led by Nick Stephenson who is criticised in the Government report for being out of his depth. The SAIC project suffered from poor communication leading to unnecessary delays, which in turn it more spotlight on the finances. It seems obvious from the report that Towers and Beale, arguably the most experienced senior directors, had little direct involvement in the negotiations. This was left to Stephenson and a consultant called Dr Li. The arms-length approach taken by Beale and Towers, who in interviews quoted by the report claim little knowledge of the detail of the deal, seems the oddest part of this tale. Sure, they had an ailing business to run so a project manager was required. But when the success of the deal was the single over-riding objective of the partnership and the only route to long term stability, was it wise for the most experienced directors to stand back, only stepping in right at the end? Stephenson seemed to be so comfortable in the role that he gave the Chinese a last ditch ultimatum without consulting anyone else. 
This odd state of affairs meant that the JV project proceeded quite haphazardly from MG Rover's side and Stephenson had a lot of free reign. For instance, he was in a relationship with Dr Li, MG Rover's specialist consultant on the project. She received a huge consultancy fee from MG Rover - far exceeding any fees she got from previous clients - ad well as six figure 'success' bonuses for achieving various milestones. There is a lot of debate around what she actually contributed. But it is fact, according to the report, that her bonuses were agreed by Stephenson and, in each case, paid on the same day they were agreed - at a time when MG Rover couldn't pay its main suppliers. 
The JV negotiations dragged on and MG Rover's finances headed south. The deal failed because SAIC didn't want to take on these risks and debts, none of which The Phoenix Four was able to adequately explain away. 
The failure of the JV must in part be due to the absence of a Plan B. With hindsight MG Rover's parlous finances were always going to put the deal at risk and the longer the deal was delayed the bigger this problem would become. The directors don't seem to have had a contingency plan - either because they didn't realise how bad things were (quite likely) or because they were simply fire fighting (also seems likely). MG Rover tried to raise funds by selling assets but this could only ever be fiddling around the margins. In my limited opinion the directors should have approached the Government much earlier to highlight their problems and request assistance to underwrite the deal. 

The Government
A lot of flak was thrown at the Labour Government for failing to assist MG Rover and save the deal. It seems likely that when Towers et al bought MG Rover the Government realised it was a lost cause. Funding the company's continued survival was felt to be an expensive option compared to providing regional assistance if it failed. The company's structure - which effectively funnelled cash to the directors as explained above - may also have created resistance to any Government loan. However, closer communication between the Government and company from the start might have helped speed up the Chinese deal - and flagged up the risk of failure caused by MG Rover's poor cash position. 

The Chinese
The various deals and agreements entered into and the sale of different assets and intellectual property to various Chinese companies is confusing and, ultimately, not that relevant to the main issue. Which is that SAIC clearly intended to buy MG Rover. It was the British company that caused the deal to collapse, not SAIC. As the deal dragged on - as these things tend to - SAIC realised that its exposure to risk and debt was increasing. In MG Rover it had a rather shifty co-conspirator which proved rather adept at providing half-truths and indulging in smoke and mirrors when it came to supplying information. It is reasonable to suggest that SAIC had a Plan B - namely that dragging dealings out made MG Rover weaker and therefore cheaper. But I think SAIC would have preferred to buy MG Rover as a going concern - the company's collapse and the loss of key talent surely wasn't desirable. SAIC did pick over the bones when the receiver was called in but it arguably failed to get what it really wanted - the technical know-how and quick access to the European market. The report makes clear that SAIC was patient despite being messed around. 

The Workers
Forget all the history of worker-employer dissent at BL, by the time the Phoenix Four arrived the staff were remarkably committed to the MG Rover ship. They had suffered through several false dawns and the arrival of Towers et al felt like the company was back in the hands of people who cared. People, if you will, 'like us.' And who could blame them - in the Longbridge area many families had worked at the factory for generations - 'the Rover' was in their blood. For me this makes what The Phoenix Four did all the more disreputable. Sure, they wanted to save MG Rover. But unlike the workers they had a Plan B. I think that fall back doomed the company from the start - when you know you'll be a millionaire whatever happens, why bother trying to be a mega millionaire? 

The Pension Fund
In contrast to the burgeoning pension fund for the directors, the employee fund was in a bad way - apparently around £400m short of its liabilities. Little is actually made of this in the report but I suspect this problem alone would have been enough to push the Chinese deal over the abyss. Why buy a company riddled with such liabilities and without an obvious upside? The pension problem was a ticking time bomb that should have been addressed as part of the BMW sale. This pension deficit simply got worse and worse under Towers and co, with little or no effort to resolve it. Whether this is indicative of their short term plans or naivety, who knows. 



Could MG Rover have survived? 
When BMW offloaded the remains of BL few seriously expected it to survive. MG Rover was a mass manufacturer with a tiny output compared to its rivals. Its products were outdated, with nothing new in the pipeline, it's manufacturing was outdated and it was underfunded, even with the BMW dowry. While Land Rover and Jaguar were arguably in the same place at the same time, they were niche makers with clear strengths in their chosen areas - canny investment would enable them to build on that good start. Only MG could be said to have something similar - but with only one aging product and a ropey reputation. Rover as a brand was dead in the water after years of nailing the Trident to everything from superminis to Hondas. 
Even partnering MG Rover to a Chinese company feels like a doomed endeavour. Whatever the value of the brands, MG Rover needed so much investment in all areas of the business that it would surely have been better to buy the best bits, lure the talent and start afresh. Against a backdrop of contracting European car volumes and over-capacity, any investment in MG Rover has to feel misguided. 
That said, MG Rover could have survived, I think. A small capacity specialist company based around the MG brand and informally partnered with a major manufacturer for engines and components could have worked. BMW's success with the MINI perhaps shows how this could have been done. 
While this would have saved few jobs and lost Longbridge, it may have avoided the slow death experienced by the workers and the loss of their pension pot. 

Whatever could have happened, it doesn't overshadow what did happen. The media loves pantomime baddies and while it would be wrong to see The Phoenix Four as simply bad, they don't come out of the MG Rover fiasco covered in glory. I don't deny that the directors of private firms are concerned first and foremost with themselves. This is how capitalism works. The problem in their case is the extent to which they protected themselves from risk, and managed their own interests, at the expense of the risk and interests of the company and its workers. A failing company, for instance, cannot afford to pay its directors more than directors of comparable, more successful, businesses. And the morality of siphoning off millions of pounds for personal gain when the same company cannot meet its pension obligations is also dubious. Both these things may be legal, but that doesn't necessarily make them right. 

Unlike Governments, directors of private companies are not democratically accountable. What The Phoenix Four did wasn't illegal, so they've kept their millions. They may even feel it was justifiable due to the 'risks' they took. But none of that detracts from that simple fact that a cash-strapped company does not benefit from draining large sums of cash to a few directors, contributing to its failure. That is The Phoenix Four's legacy. 

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www.greatescapecars.co.uk

This post represents my own views based on a reading of the Government report into the collapse of MG Rover. Due to the complexity of the issues and the length of the report I am happy to stand corrected on any of the issues or answer any questions. 




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