Are institutional investors influence over publicly listed companies over-stepping the mark?

Abstract

The beginning of the industrial revolution created new opportunities as well as problems for the business enterprises of that era in that there were a limited number of individuals as well as investors who could finance the large sums of capital needed to underwrite the vast scale of equipment, resources and expansion required. In order to capitalize upon the numerous opportunities which were presenting themselves as well as avoid being overexposed in any one venture, financial markets rose as a means for several investors to join in sharing the risks as well as the financial investment. The beginnings of the preceding, financial markets, started in Europe to finance the industrial revolution as well as the expansionist policies of the British empire (eCommercenow, 2005).

Today’s financial markets are the medium for the processing of various business financial transactions ranging from new issues to stock trading. Through the issuance of shares as well as financial reporting and public disclosure businesses are able to raise capital to finance new plant and equipment, expansion, research and development along with other purposes to increase sales, market share and bottom line performance. The ability to raise capital does come with certain expectations on the part of shareholders who hold a stake in the performance of the company, thus its directors and management must produce bottom line results. This measure of influence afforded by stock regulations and shareholder representation in the affairs of the company through annual shareholder meetings and voting on the Board creates interesting scenarios. Shareholders are able to review management’s performance and as such can question various aspects at the shareholders meeting. Substandard performances have seen directors and executives removed from their positions, as well as serving to fuel takeover bids by investment companies who advise shareholders that they can receive a better return under their management. The reverse of this scenario also occurs. When the company has done and/or is doing well, the accumulation of assets, cash and other related positive financial aspects serve as attractive bait for various investment companies to seek to take over operations.
In the United States, the quintessential corporate investment firm is Kohlberg, Kravis Roberts (KKR), known for their utilization of the leveraged buyout (LBO) through the creation of limited partnerships to take control of corporations. Known for their leveraged buyout of RJR Nabisco, Gillette, Safeway, Borden and other companies (kkr, 2005), they have acquired the reputation as corporate raiders. Known as an investment holding company, Guinness Peat Group Plc focus on acquiring positions in as well as owning public companies engaged in various industry sectors. This case study shall examine the offer by Guinness Peat for De Vere Group Plc focusing upon the reasons resulting in the offer as well as the factors contributing to same.

Chapter 1 – Case Study, Guinness Peat Plc / De Vere Group Plc

1.1 The Climate
The events leading up to the offer by Guinness Peat Plc for De Vere Group Plc find themselves rooted in the overall climate of global as well as the British stock markets preceding 2004 when the indicated offer was tendered. 2001 saw a recession grip the United States economy that affected a drastic reduction in growth in developed as well as developing countries throughout the globe(nyu.2005). The pattern of global bull and bear markets during the prior decade had seen its fortunes tied to the economic and stock market performances of the United States and Japan as the principle regional economic engines in the Americas and Asia. The unification effects of the European Union and the adoption of the euro as a singular measure of currency would not go into affect until January 1, 2002 (euro.com, 2005), thus Europe’s influence on global markets in 2001 was still fragmented, with Germany being the most consistent performer. Koutmos (1995) and Bae et al (1994) postulated that events, such as corporate news, job data, positive and negative developments, that transpired in the market in the United States are rapidly transmitted throughout the globe and help to influence global market performance.

The preceding is a result of the dominance of the United States market in trading volume as well as being the most influential source and producer of information. The attacks on the World Trade Center in New York city, as well as subsequent commercial airliner attacks in Washington D.C. and Virginia, impacted global economies further intensifying the recession that had started in March of that year. The preceding view of the United States as a driver of global economies is also shared by Masih et al (2001) whose empirical evidence confirmed that price leadership in U.S. markets influences global economics and stock market indices. This market sensitivity to news from the United States creates a climate whereby international investors tend to overreact to news transmitted from this source, and be less concerned with news from other regions (Becker et al, 1995).

The foregoing, along with a summary of subsequent years leading up to the 2004 offer by Guinness Peat, helps to chart the mood and climate for shareholders and investors that created the atmosphere for the preceding. The recovery in 2002 was one that showed a growth in output, but not jobs, and thus was considered ‘weak’ by economists. And stock markets were further affected by the accounting scandals in the United States involving Enron, Worldcom and other Blue Chip firms. These contributed to a loss of confidence by investors and saw the London FTSE fall 24 percent from its May 2002 peak (Middle East Survey, 2002). The Bear market that had gripped global economies was in its third year and represented the longest consecutive period of declining stocks in the United States since 1939 through 1941 (Taylor, 2002). The foregoing also affected stock markets as well as economies in every major developed and developing country throughout the globe.

It is important to understand the conditions that contributed to the long running Bear market as these events would later influence Guinness Peat Plc in its analysis of De Vere Group Plc and the need to place a major deal in its investment portfolio after some lean IPO and stock performance years. The Bear market run was driven in 2000 through 2002 by the following factors (Taylor, 2002):

1. The Technology Bubble burst and there was an overvaluation of the stock market in other sectors as well.
2. 2001’s recession along with the slow pace of the recovery that gripped most the major developed economies, as well as most developing economies.
3. Investor loss of confidence in analysts, companies, CEO’s and Wall Street in general as a result of scandals and corporate wrongdoing.
4. The threat of terrorism, war and varied geopolitical concerns became headline topics with scant resolution in terms of solving or resolving the fundamental causes or proponents.

The significance of the preceding events manifested themselves in:

1. The biggest bankruptcies in history as Enron with $63 billion, was followed by Global Crossings at $25 billion, along with Kmart with $17 billion, and a host of other companies, not to mention the prior dot.com shakeup which was still affecting various industries.
2. The Sarbanes – Oxley Act of 2002 was a sobering reminder of the potential for corporate financial reporting as evidenced by the indicated bankruptcies that preceded its passage. It was enacted to instill renewed investor confidence in the market as a result of new laws enacted to control the potential for white-collar crime with severe penalties.
3. Governmental Actions
The weakness in economies throughout 2002 caused the United States Federal Reserve to attempt to restore confidence by cutting interest rates by 50 basis points on November 6, 2002 in conjunction with a similar action by the European Central Bank which occurred on December 5, 2002. The heavy U.S. trade deficit as well as United States overspending on its budget kept markets from rebounding and created the environment whereby the U.S. dollar declined.

Each of the preceding contributed to a stagnated U.S. market and a resulting weakness in major global markets thus aiding the long Bear run. It is important to understand the aspects that drove the markets down over the three year period of 2000 through 2002 as this will help to explain investor and shareholder sentiment in the United Kingdom during 2004 as well as the management rationales for Guinness Peat’s De Vere offer. Taylor (2002) indicated that there were four factors to keep in mind regarding the poor performance of financial markets and economies during 2000 through 2002, In order for the Bear market to come to an end, Taylor (2002) stated that two or more of the indicated factors had to change:

1. Stock prices needed to fall, or corporate earning needed to rise in order to eliminate stock overvaluation in the market,
2. America’s economy needed to recover and begin expanding,
3. confidence needed to be regained by investors in the integrity of the stock market, and
4. The various geopolitical threats and concerns resulting from terrorism needed to be brought under control.

2003 saw a modest recovery in the stock market and global economies taking hold. Part of the optimism was attributed to the ending of the war in Iraq, but more telling were the improved earnings reports from companies and increased dividend yields which helped to pull investor money out of bonds and back to stocks (Boland, 2003). Sellers (2004) indicated that the strength of the market recovery in 2003 was not to be found in the major indices, but in a broad look at how the average non blue chip stocks performed during that year. Sellers (2004) indicated that 5,201 of the Morningstar index of 5,999 stocks (87%) recorded stock price gains. The preceding, along with a 26% gain in the Standard & Poor’s 500 index where fully 92% of all the stocks recorded an increase in year end stock prices signaled across the board economic strength. For the year the NASDAQ composite increased by 50%, the Dow Jones industrial average recorded a 25% gain, and the Russell 2000 increased by 45% for its best year its 25-year existence.(Norris, 2004) These developments in the American financial markets aided as well as coincided with recoveries in other countries. The tracking of financial market and economic performance in the United States during the preceding periods, 2001 through 2003, is important as global markets are influenced by developments in the American economy. The indication of market conditions in the United States closely mirrored developments in the United Kingdom thus signaling an end to the longest running Bear market in history. It is important to note that as a result of trade, and other economic variables, that the British recovery lagged approximately three to five months behind the recovery in the United States.

The market shakeouts recorded as a result of the recession, scandals, Sarbanes – Oxley Act of 2002, and governmental actions helped to restore market stability and the resulting investor confidence. The preceding summary of global stock markets and economic conditions represents important background information in understanding the attractiveness of De Vere Group Plc to Guinness Peat Plc in terms of its Partial Cash Offer in 2004. The financial misreporting and other glowing corporate and industry predictions that marked the foundations of the Bear market signaled a return to equity and asset barometers as indices of corporate strength and performance and this is the corporate financial area that Guinness Peat concentrated on in its appeal to De Vere shareholders.

Chapter 2 – The Takeover Attempt

2.1 The Makings of An Attractive Takeover Target
To understand the reasons as to Guinness Peat’s interest in De Vere Group Plc, one must be cognizant of the workings of public companies and the environment in which they operate. These factors were present, from an historical as well as contemporary standpoint, when Guinness Peat made the internal determination to proceed with its Partial Cash Offer for De Vere Group Plc. In order to understand the context of such decisions by an investment company, such as Guinness Peat, evaluating which potential target to seek and for what reasons, along with an understanding of what might have been considered as the rationale(s) for making such an offer shall be explored.

Founded in 1801 (Wikipedia, 2005), the London Stock Exchange is the conduit via which public companies interact with financial markets. In the United Kingdom the exchange is the watchdog over the rules and regulations governing publicly traded companies, unlike the system in the United States where the Securities and Exchange Commission as separate and autonomous government agency oversees rules and regulations. In 2001 the United Kingdom enacted the Financial Services Agency (FSA) (Carriere et al, 2002) which combines all prior United Kingdom agencies having oversight concerning securities matters under one umbrella. The role of this agency might one day encompass a regulatory position that might be similar to the United States Securities and Exchange Commission, however at this time it operates as an independent agency “…that regulates the financial services industry in the United Kingdom”. (FSA, 2005) The FSA has been provided with a broad array of rule making as well as investigative and enforcement powers to enable it to meet the four statutory objectives set forth for its existence (FSA,2001):

1. Market Confidence – to maintain investor confidence in the financial system,
2. Public Awareness – to promote a clear understanding of the financial system to the general public,
3. Consumer Protection – to secure an appropriate measure of protection for the public, and
4. Reduction of Financial Crime – to reduce the extent for which it is possible to utilize a commercial enterprise for an end that is connected with the commission of a financial crime.

The extent to which the London Stock Exchange is revered can be found in the fact that the countries of continental Europe have modeled their capital markets on the British system.(Carrie et al, 2002) Guinness Peat, under Sir Ron Brierley, aspires to a reputation as “…the Warren Buffett of the South Pacific…” (Sharechat, 2001) and thus the firm has acquired a reputation as a corporate raider. While the term itself sounds somewhat ominous the actual practice (corporate raid), is a viable financial strategy. A corporate raid is when an investment company (usually the initiator of such events) seeks a hostile takeover of a public company whereby the assets of the acquired company are sold off in pieces and the prices such a liquidation of the entities within that business produce exceed what was paid. As a result, the acquired company in most cases no longer continues to operate. The term “hostile” is utilized in this instance as Guinness Peat’s offer for De Vere Group Plc was targeted at shareholders to cause them to vote in favor of the Partial Cash Offer.

The effect of corporate raiders in terms of the economy as well as the shareholders of the companies involved is still a source for wide debate. There are proponents who believe that corporate raids constitute a damaging activity for shareholders and the economy in that they cause and create large-scale economic disruption of activity, not only for the affected company, but for the companies that do business with it as well. It is pointed out that the closing of factories, branches or business outlets create levels of unemployment for those workers whose jobs disappear as a result. On the other side of the coin there are proponents who believe that the existence of corporate raiders help to cleanse the market of companies where management has been lax in managing assets. An example of the preceding is when a company has large assets and a low stock price. In such an instance company management should seek higher stock pricing thus increasing investor confidence and providing shareholders with either dividends or the opportunity to trade shares and derive a profit. As a result some argue that corporate raiders serve to prevent business managers from become complacent and thus find means to redistribute assets (capital) from lower performing sectors of the economy to more productive sectors. There are those who point to the fact that the existence of raiders is a factor as to why the market performance of companies based in the United States during the 1990’s exceeded those in Germany and Japan where corporate raiding is not permitted. The maximization of shareholder value is one of the responsibilities of management in seeing to the interests of the company’s shareholders, as well as the company itself. (Mayer, 1999)

The recession climate that gripped capital markets and global economies from 2000 through the beginnings of 2003 created a lot of anxiety on the part of shareholders as well as investment firms in that the opportunities to yield profitable outcomes had diminished to scant few opportunities. The recession period followed one of the longest running Bull markets, 1989 through 1999, which saw the dot.com, technology and telecom revolutions. The pent up desire to return to the profit making of that era could have been a factor in Guinness Peat’s De Vere offer. In order to equate if this, or other factors are the reasons behind this event, an analysis of both De Vere Group Plc and Guinness Peat Plc is in order. The preceding will examine these companies during 2000 through 2004 in order to gain a perspective on their operations, profitability and other factors, as these areas had an impact on the Offer of Guinness Peat in 2004.

2.2 De Vere Group Plc
Trading on the London Stock Exchange as De Vere Group Plc (DVR), the company engages in operating in both the hotel and health / fitness sectors, two areas that the company sees as growth oriented. This focus was arrived at in 1999 when the company opted to transform its core business as a diversified leisure group to the current corporate positioning. The preceding shift in direction was under taken to maximize shareholder value and entailed management shifting resources, administrative systems and personnel from the tenanted as well as managed pub businesses. The tenanted division, which consisted of the Inn Partnership, was sold for £370 million in January of 1999, and the managed division, Greenalls Pubs and Restaurants, was sold for £1.14 billion in December of 1999. Management utilized a portion of the proceeds from these sales to return £529 million to the company’s shareholders by a special dividend and capital payment, while £392 million was utilized to pay off debt. The structured company was changed from Greenalls Group to De Vere Group in 2000. The preceding sale of the indicated business entities signaled management’s intention to completely divest itself of all Tavern and drinks wholesaling businesses. This was accomplished by the end of February 2001 when 17 depots were sold and the remaining units closed.

The present company, De Vere Group Plc,, consists of two hotel brands, De Vere Hotels and Village Hotels & Leisure Clubs, as well as a separate health and fitness brand titled Greens. In addition to the preceding, De Vere also owns a small sized white spirits company called G&J Greenall (Drinks Business Review, 2005). De Vere Hotels are the company’s upscale market chain that consists of 21 locations. Targeted at the corporate and leisure markets these hotels have conference and a broad array of leisure facilities, including golf clubs. De Vere’s mid-range hotel division consists of 14 Village Leisure Hotels that contain health and fitness facilities. The De Vere brand name has enjoyed public acceptance in its positioning and this has permitted the company to leverage this awareness to create De Vere Resort Ownership, which are lucrative timeshare lodges are the company’s resort properties. These lodges are currently situated in three locations:

1. Cameron House, Loch Lomond,
2. Slaley Hall, Northumbria
3. Belton Woods, Lincolnshire

The Greens brand consists of stand-alone health and fitness facilities that are targeted at the premium segment of the market. This division’s consumer strategy focuses on the adult segment of the population and also appeals to families. There are 15 Greens each comprising approximately 40,000 square feet of space equipped with gyms, steam rooms, spas, saunas, pools and facilities for aerobics. De Vere’s G&J Greenall division manufacturers spirits under its own brand name, Greenalls Original and Daresbury Q, as well as manufacturing premium brands for Bacardi International (Bombay Gin and Bombay Sapphire). It is the performance of the company in preceding years that generated the interest of Guinness Peat in tendering its Partial Cash Offer. As such, the years succeeding the 1999 management refocus hold the answers to this question.

2.2.1 2000
The effects of the shift in corporate operations undertook by management in 1999 were revealed in the company’s Annual Report statements. The Chief Executive’s Operating Review summarized the financial position, in comparison to 1999, as follows:

Table 1 - 1999 – 2000 Comparisons – De Vere Group Plc.
(De Vere Annual Report, 2000)
2000
Turnover 1999
Turnover 2000
Pre-tax
Profit 1999
Pre-tax
Profit
£478.4m £899m £37.9m £91.9m

While the figures indicate a sharp decline from 1999 figures, they also reflect the loss of revenues from divestiture as well as the £529 million which was paid to company shareholders via a special dividend as well as the £392 million that was used to pay company debt. The resulting leaner company was therefore able to concentrate its energies on the new direction with a better looking balance sheet in terms of debt ratios and thus attractiveness to finance new operations from the cash derived from the sale of divisions. Although the overall revenue declined, as a result of the sale of operations and the fact that the sale of business divisions contributed just eight weeks of earnings, the company’s revenues from those businesses it retained showed an increase of 13.5 percent to £232.5 million, compared against £204.9 million reported for 1999. The new health and fitness divisions increased their revenues by 15.2 percent to £206.6 million from £179.2 million, and this combined with the core hotel operations returned a profit of 15 percent, or £15.5 million. (De Vere, 2000)

It is interesting to note that De Vere actually functioned in a similar manner to a corporate raider when it changed the course of its business strategy by selling off existing operations to invest and enter what management deemed more profitable business sectors. De Vere’s entry into the health and fitness sector focused on the inherent weakness in this growing segment which was dominated by smaller local and regional operators. The unified nature of its market positioning under a large public company added luster to its entry as the company focused on upscale market imaging and demographics. Its Greens division profited from this positioning in terms of what the public perceived as quality management decisions that were overseeing this middle market demographic entry. The facilities are new, well planned and not lacking in the latest equipment and techniques. The ability of the company to focus economic clout on facilities and equipment provided consumers with a unified and identifiable brand it could trust. The preceding resulted in a membership roster of 78,000 in the De Vere Hotel, Village Leisure and Greens divisions.

2.2.2 2001
The company’s move to hotels and health and leisure facilities represented the acquisition of real estate which the company either developed through the construction of new facilities or purchased via existing operations such as the Cavendish Hotel for £60 million which it purchased in December of 2000. These build outs and acquisitions have the effect of strengthening the company’s balance sheet from the gain of developed properties as well as the revenue derived from these operations. In addition, memberships generate a continuous revenue stream as well as a base for marketing promotions and other activities. The company’s upscale market approach left its core business less susceptible to economic swings as a result of the relative demographic stability of the upper income profile. The company increased the number of hotel rooms under the De Vere brand to 4,303 units, representing a 10.8% increase, and generated an operating profit of £49.7 million as opposed to the £46.5. 2001 represented the company’s first full year under its new operating structure and core businesses (De Vere, 2001). The company considered a sale of its Greens division, however the events of September 11th in the United States caused the Board to rethink its position in light of the looming economic uncertainty. The global economic slowdown that followed flattened the company’s earnings and slowed the development of new facilities as well as market expansion in a tight travel and entertainment sector.

Table 2 - De Vere Group Plc Operating Highlights 2001
(De Vere Annual Report. 2001)
2001
£m 2000
£m % change
Turnover 273.8 232.5 +17.7%
Operating Profit 49.7 46.5 +7.1%

2.2.3 2002
The company managed to fair quite well in 2002 with strong performances throughout the Group’s divisions in its upscale market niche. One example is the increase of 1.4% and 0.7% in the company’s De Vere Hotel and Village Hotels & Leisure Clubs, respectively. The preceding compares against industry declines of 2.9% in the country’s provincial market. (De Vere, 2002) The foregoing attests to management’s decision to target the upper income segment of the market in a defensive move against market downturns, and as a marketing move at higher profits due to disposable incomes. The preceding helped both of the company’s hotel brands to outperform the market. The company’s positioning and long-standing sponsorship of the Ryder Cup positioned it in the premium category further adding to the brand’s worth. In the tough climate that impacted the business as well as consumer travel and leisure markets in 2002 as a result of the aftermath of 9/11, the De Vere Group still managed to grow by 1.8% in a receding market.

More importantly the company’s stock share price managed to maintain a steady moderate upward swing during the global recession earning it the reputation as a stellar performer. The soundness of the company’s decision to build of new facilities along with acquisitions of existing upscale hotel properties saw the value of its tangible assets rise to £848.473 million, and with investments standing at 6.804 million the De Vere Group’s fixed assets totaled £855.277 million.

Table 3 - De Vere Group Plc Operating Highlights 2002
(De Vere Annual Report.2002)
2002
£m 2001
£m % change
Turnover 293.9 273.8 +7.3%
Operating Profit 51.9 49.7 +4.2%

2.2.4 2003
At the end of 2003 the De Vere Group had 21 De Vere Hotels representing 3,310 rooms, an increase over the 2002-year end total of 3,298. More impressively, the preceding was accomplished in a receding market. The value of the company’s fixed assets increased from £855.277 to £869.214, with tangible assets rising to £859.114 (from £848.473), and investments increasing to £10.100 from £6.804.(De Vere, 2003) 2003 saw the company’s stock price leave its hover between 500 and 400 ranges and move into the solid 600 category at year end. The stock performance demonstrated public confidence in the progress of the company, as well as the steady progression of successful openings and operating results in a tough industry sector. The company accepted the resignation of Paul Dermody who stepped down from the role of Chief Executive, a role which he occupied for three and a half years after forty years of service with the company. Carl Leaver was appointed to his post from Whitbread Plc where he was the Managing Director for Travel Inn as well as a prior position of Operations Director for Marriott’s Country Club golf resort hotels. (De Vere, 2003)

Table 4 - De Vere Group Plc Operating Highlights 2003
(De Vere Annual Report.2003)
2003
£m 2002
£m % change
Turnover 312.2 293.9 +6.2%
Operating Profit 54.7 51.9 +5.4%

2.2.5 2004
2004 saw a strengthening of the hotel market in the United Kingdom after three years of decline or stagnant growth. The strengthening of the travel and leisure segment of the market permitted the company to increase the average room rates by 2.0% to £84.81 (De Vere, 2004). The effectiveness of De Vere’s market positioning in the upscale segment of the market (demographics), along with the consumer perception of superior service and an effective marketing campaign were the underlying reasons attributed to the foregoing. The preceding was demonstrated by the 80% occupancy rate at the acquired De Vere Cavendish hotel, which was purchased in 2001. The foregoing improvements in occupancy rates included the Village Hotels and Leisure Clubs which demonstrated occupancy rates of 80% compared to the industry average of 67.8%, with an increase, on average, of 5.1% in room rates to £55.10 (De Vere.2004). Fixed assets totaled £860.817m, against £859.114m recorded in 2003, and investments accounted for £10,243m compared with £10.100m in 2003, for a total of £871,060 for 2004 (£869.214 for 2003). (De Vere, 2004)

2004 marked the year that Guinness Peat Plc tendered its offer for 25% of the company’s issued share capital which was soundly rejected by the shareholders of which just 0.55% voted in favor. (Bloomberg, 2004) An examination of the De Vere’s asset, earnings and stock price points to a company that had successfully implemented a new direction in its core business and positioned itself in the upscale hotel and leisure industry categories. After just four short years the company had earned a stellar reputation for quality and service and had grown to 21 De Vere hotels and 13 Village Hotels & Leisure Clubs. Membership sales at Greens totaled 68,400 individuals and this division had turned profitable in 2003. G&J Greenall increased sales by 6.9% to £28.8 and signed a new agreement with Bacardi International through 2012 with a higher margin clause. In all instances the company either met or exceeded its goals and returned shareholder confidence in achieving results in adverse market conditions marked by 2000 through 2003.

Guinness Peat’s Partial Cash Offer for 25% of De Vere’s issued share capital represents an occurrence where the nuances of the offer require close examination as to Guinness’ intent.

Table 5 - De Vere Group Plc Operating Highlights 2004
(De Vere Annual Report.2004)
2004
£m 2003
£m % change
Turnover 321.8 312.2 +3.1%
Operating Profit 57.6 54.7 +5.4%

2.3 Guinness Peat Plc

2.3.1 Background on the Company
Although headquartered in London, the Guinness Peat Group Plc is one of New Zealand’s premier companies, listed on the London, Australian and New Zealand stock exchanges. With a market capitalization of £690.9 million the company has the financial resources to fund its investment strategies, which include holdings in financial services, manufacturing (thread and foods), building as well as raw materials (aluminum).(GPG, 2005) Its holdings are primarily in Europe as well as Australia and the company’s small but experienced core of executives operate with a hands on attitude. The company is known for its selective investment strategy which it makes mostly in public companies. The preceding is for the purpose of enhancing share value through the influence of shareholders as well as announcements and topics at the acquired company’s meetings.

Sir Ron Brierley is known as an ‘active investor’ and some tend to label Guinness Peat as a corporate raider, however, he explains his strategy as akin to an entrepreneur who “…stirs things up and adds value.” (Sharechat,2001) Labeled as the “Warren Buffett of down under” (Sharechat, 2001) Sir Brierley’s firm, Guinness Peat, has not performed nearly was well as his namesake whose yearly performance for 36 years has averaged 23.5%.(Sharechat, 2001) However, Guinness Peat has outperformed the capital markets wherever it has investment interests over the past nine years. When Sir Brierley took over the company in 1991 it totaled £40 million ($60 million) in shareholder funds, a figure that now totals $1 billion. Sir Brierley has an active investor following of approximately 25,000 individuals who have stuck with his strategies almost from the beginning, thus providing the company with the clout it needs when the right deal presents itself. Lacking debt Guinness Peat is a sound investment company, further proven by Sir Brierley who takes no salary or fee’s. Rather, Sir Brierley is the single largest shareholder in Guinness Peat and states that his interests are the same as the other shareholders, thus he strives to achieve gains on their behalf. In the past Guinness Peat tended to sit on its investments, engineering strategy and market changes to steer companies down more profitable paths. This hands on style has been somewhat modified under present circumstances as Sir Brierley has stated that when one notices that the company’s strategy is changing “…go sell your stock quick.” (Sharechat,2001) He explains the preceding as protecting his investors and the company in that they minimize the downside, and by having investments spread across a number of industry sectors that Guinness is not over positioned in any one deal, thus if they do make a mistake the company will still be in a strong position.

The preceding overview of Guinness Peat and Sir Brierley provides an understanding of the corporate philosophy and will be helpful in analyzing the De Vere Group offer. A company, as well as its leader’s reputation, is forged in past deals and how they ultimately faired in terms of investor and shareholder results. Prior to the De Vere offer, Guinness Peat reaped a large dose of negative publicity as well as a tarnished public and industry image. The company held a 16% interest in Inchcape, an international automobile dealer in the United Kingdom. The British press called Guinness a ‘…troublemaker…” (Sharechat, 2001) when the company made demands that Inchcape be sold off and $343 million returned to shareholders. The furor in the press resulted from Guinness having stakes in other vehicle dealers, namely Ryland, Perry and Quicks. It was argued that these companies could possibly benefit from the sell off of Inchcape’s dealerships thus seemingly representing a conflict of interest.

Table 6 - Guinness Peat Group Plc Holdings 2002
(hemscottinvestment analysis, 2002)

Company Sector Holding
(%) Market
Cap
(£) Price
(p) Div
Yield
(%) PE Forecast
EPS
Growth
% Discount
To Net
Assets
(%)
Coats Textiles 21.3 356 50.5 6 10 na 43
Dawson
Intl. Clothing 29.9 43 42 na 420 na 20
De Vere Hotels 8.3 387 348 3.2 13 6 29
Gowrings Restaurants
& Car
Dealers 11 10 108 4.6 8.5 41 35
Nationwide
Accident Car Repair
Services 20.7 22 83.5 4.1 14 na 47
Quicks Car Dealer 21 39 96.5 5.2 11 10 20
Ryland Car Dealer 26.3 27 92.5 6 10 na 2
Stylo Clothing
Retail 12.6 18 29.5 na 17 na 72
Tops
Estates Property 4.7 81 180 2 12 17 54

And the preceding example is not an isolated case. The company is known as a share activist in the United Kingdom by attempting to halt the Deutsche Borse merger (Sharechat, 2001). Although the company has a less than 1% stake in the London Stock Exchange, it flexes its muscles in a manner that exceeds its clout as well as welcome. The British financial circles are well aware of the company’s bloody battle with Coats Viyella. Guinness’ 12% holding in this company was leveraged to remove the board in favor of individuals more aligned with its thinking. The company also angered the British public by staging three raids on the family owned Young Brewery. Its 7.8% stake was utilized, as in other cases, to force management to either hear and or adopt some of its demands. These actions, while possibly in the interests of Guinness’ shareholders, has tarnished the company’s reputation and thus tends to set management as well as shareholders on their heels when Guinness becomes involved.

2.3.2 The Guinness Peat Offer
In March of 2004 Guinness Peat made a “partial cash offer to acquire 28.5 million shares of De Vere…” (Guinness Peat, 2004) based upon the following reasons as contained in Guinness’ Offer document:

1. The cash offer entailed 415 pence per share, which at the time of the offer represented a premium on the stock closing of 22 March 2004 at 408 pence of 1.7%.
2. As a 35% shareholder Guinness indicated that it would seek to utilize a more progressive and dynamic strategy to result in a release of the substantial value it indicated is hidden in the current corporate structure.
3. The company stated that it would seek to accomplish the preceding by selling off the De Vere Hotel Division to yield the highest potential for its value which Guinness believed was occurring at that point in time.
4. That Guinness Peat would oversee the preceding developments through its management.
5. Guinness indicated that in order for the Offer to be successful that:
a. Over 50% of the De Vere shareholders with voting rights need to approve the Offer
b. And that the indicated acceptances would entail a minimum of 28.5 million shares

The Guinness Partial Cash Offer stated that in the De Vere 2003 Annual Report that the company set this division’s net asset value at around £552 million. Guinness indicated that this figure included the liabilities of the De Vere Group headquarters which stood at £26.2 million. Guinness indicated that this accounting methodology masked the asset value of the hotel group and represented an asset that could be sold off with the proceeds returned to shareholders. Guinness indicated in its Offer that the De Vere Hotel division was actually worth more as a private business in that the average price fetched by sale is 10.1 times the EV/EBITDA, as opposed to the market valuation of 8.7. The Offer also indicated that De Vere had under performed, in terms of share price appreciation, the hotel and leisure industry segment and that management’s strategies were not yielding maximum return on fixed assets.

De Vere did not respond to the preceding Offer thus prompting Guinness Peat to extend a “Final Partial Cash Offer to acquire 28.5 million shares of De Vere Group Plc” on 8 June 2004. (Guinness Peat, 2004) This “Final Partial Offer…” stated that: (Guinness Peat, 2004)

1. De Vere’s Board record of maximizing shareholder value has not been borne out by its record.
2. The De Vere’s Board has not disclosed a proper valuation of the De Vere Hotel division free of outside debt.
3. The De Vere Hotel division has been seriously undervalued in terms of share price and that the present Board has not implemented corrective actions to address this shortcoming.
4. And finally, that the De Vere Board refuses to address maximizing value for shareholders.

This “Final Partial Offer…” recommended the following corrective measures as the plan to correct the foregoing: (Guinness Peat, 2004)

1. Dispose of the De Vere Hotel division at a price in excess of £550 million (before transaction costs),
2. to avail the company (De Vere) of the present low interest rate which would help to structure such a sale,
3. to return a substantial portion of the proceeds from such a sale (De Vere Hotel division), to the company shareholders,
4. to ensure that in the future the De Vere Board utilizes a shareholder beneficial approach to operations.

Throughout the Partial Cash Offer’s extended by Guinness Peat, the same issue was tackled, a sell off of the De Vere Hotels division which has been under reported as a result of the company's headquarters debt being assigned in that segment of the financial reports. Guinness stressed in its Final Partial Offer that it was not seeking control of De Vere, simply to release undervalued assets to the benefit of shareholders through clear fiscal reporting and advantages for sale that exist in the present market. Guinness increased its share price offer to 430 pence which represented a premium of 5.4% over the 22 March 2004 closing price of 408 pence. The Final Partial Cash Offer was also rejected by De Vere shareholders as just 0.55% replied to the affirmative.

2.3.4 Guinness Peat Offer Analysis
GPG’s (Guinness Peat) Partial Cash Offer was based on its interpretation of De Vere’s financial reports that indicated the De Vere Group headquarters debt of £26.2 million is why the Division’s asset valuation for its hotels was only £550 million. Guinness proposed shifting this debt thus freeing up the conditions for sale in a post recession market where the potential bidding for these premium properties would be driven to their true market value. The other assumptions utilized by Guinness Peat in proceeding with such an offer entailed their analysis that competitor firms would be eager to both rid themselves of De Vere in their competitive sector, but also strengthen their own positions through the acquisition of premium performing properties.

Guinness Peat’s Partial Cash Offer did not address the manner in which the £26.2 million in headquarters debt will be structured, as well as the fact that this debt would represent a burden on the remaining performing divisions as the percentage of debt to revenues would increase dramatically. Said change in the debt to earnings ratios would drive De Vere’s stock downwards under the reduced divisional format and further limit the company’s ability to fund acquisitions for existing divisions or new opportunities. The Guinness Partial Cash Offer also failed to address that the sell off of De Vere’s flagship brand name would erode the prestige of its remaining brands thus resulting in a further deterioration of their brand image and how this would impact upon the remaining division’s ability to compete in a market which the company itself would have made stronger via a sale to key competitors.

The Guinness Peat Partial Cash Offer also contained some striking advantages for GPG in that it would be able to gain control over this segment of De Vere’s assets and the dispensing of the sale proceeds thus regaining its Offer price plus profit in a relatively short span of time. The preceding, when coupled with the negative publicity that Guinness received in the British press for its handling of the Inchcape automotive dealership, Deutsche Borse merger with the London Stock Exchange, Coast Viyella boardroom blood bath and the three attacks on Young Brewery, created a climate of distrust on the ultimate motives of GPG. Guinness Peat’s actions of 2004 could be gleaned from earlier resolutions to the De Vere Board in 11 January of 2001 when the company held its 10 percent stake. The following resolution was submitted to De Vere by Blake Nixon, the United Kingdom Executive Director for Guinness Peat. It proposed the following to be addressed at the upcoming annual meeting: (GPG, 2001)

1. The return of up to £50 million to shareholders via an off market tender offer for a total of up to 15% of the company’s issued capital at a price limit of £3.00 a share,
2. To spin off Village Leisure and Greens as a separate public company,

Nixon stated that the Board of De Vere had not done enough to maximize share value. Ultimately, Guinness Peat’s Partial Cash Offer did not impress De Vere shareholders in terms of its proposition or its share price offer. Further, the preceding broad operating and financial considerations were not addressed and presented a concern to those investors who had or would not have recovered their initial share price investments from the sale distribution plan offered by Guinness Peat. As indicated, the remaining entity would be a substantially reduced company and the debt to earnings ratio would further dilute the market share price. This end result would have provided De Vere shareholders with an immediate cash compensation, but left them with a weakened company in a strengthening market. Guinness Peat’s Partial Cash Offer did not specify the distribution terms and leaves one to think that based upon past history that GPG would recoup all of its initial investment in De Vere as well as reap the proportionate share of cash from the De Vere Hotel division sale for a handsome profit. The short-term benefit of this proposal did not appeal to the majority of De Vere shareholders for these as well as other reasons.

Chapter 3 – Literature Review

Stakeholders
Rahman and Jorg (2003) state that the “…importance of the relationships…companies have with stakeholders…” go beyond the historical understanding of this term. They bring into the stakeholder / company relationship the viewpoint that it is more than monetary, it also entails trust and a commitment to objectives that best serve the interest of the company and therefore its stakeholders as well. The word itself, stakeholder, was first utilized by Marion Doscher (Stewart et al, 1963) as described in a report to business subscribers. Since that time, the concept of a company’s stakeholders has evolved and become defined to mean those individuals and groups which the company has “…unfair non-contractual effects.” (Kelly et al,1997) British Prime Minister Tony Blair said that “We need to build a relationship of trust not just within a firm but within society…” (Blair, 1996). Today’s understanding of stakeholders focuses on the relationship that companies have with this group. Rather than viewed as individuals and or groups to be managed, today’s corporate thinking see them as a “…network-based, relational and process-oriented view of company / stakeholder engagement…” (Rahman et al, 2003) Rahman and Jorg (2003) further expand upon the preceding by stating that the modern day relationship between the company and its stakeholders, is based upon “… mutuality, interdependence and power.” (Rahman et al, 2003)

The competitive nature of today’s business environment has created a climate whereby corporations operate in multiple countries, thus making their actions, performance and behaviors visible to broad groups of individuals and institutions. Williamson (1993) indicated that trust in business is actually a matter of calculation, based upon self-interest as well as consideration for others, as well as one’s own reputation. Rahman et al (2003) bring up the point that operating a company in the interest of stakeholders can be inviting trouble as differing groups compete for control and thus there would not be a clear indication of which group has priority. In the instance of the Guinness Peat ‘Partial Cash Offer’, Sternberg (1994) argues that operating a company in this manner “…provides no guidance…as to how competing interests are to be ranked or reconciled…”(Sternberg, 1994) And while the word ‘stakeholders’ refers to anyone that has a stake in the well being of a company, in the context of the Guinness Peat Offer for De Vere, what one is really referring to are shareholders, as stakeholders do not identify those who actually put up funds for their ‘stake’ in the company’s operations (Dunlap, 1996). Thus, in the context of this paper, stakeholders is a term that reminds business managers to be mindful of those groups and individuals who have a financial stake in the corporation. The preceding also means that those suppliers, employees and non-financial stakeholders also need to be considered in the context of business decisions and how these groups and individual will be affected by business decisions as well. (Rahman et al, 2003)

Corporate Governance
Shleifer and Vishny (1997) provide some clarity concerning what is corporate governance as they define it as “…the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment…”(Shleifer et al, 1997). Rahman and Jorg (2003) state that corporate governance concerns itself with holding a balance between social and economic goals as well as between communal and individual goals. The framework (corporate governance) encourages the efficient use of resources and also requires the managing of these resources. Bavly (1999) furthers the preceding by stating that “Just as every social structure has its own accountability system, in the classic market economy a company is held responsible in the marketplace.”(Bavly, 1999) He goes on to add that one of the obligations of corporate governance is providing information to enable the shareholders of a company to understand how the capital they have invested is and has been put to use, as well as the financial standing of the company in terms of these resources. Carriere et al, (2002) point out that concern regarding corporate governance has seen almost every European country issue some type of Corporate Governance Code in a two year span beginning in 2000. Carriere et al, (2002) indicate that the preceding has been caused by the fact that investors have placed emphasis on being able to scrutinize the practice of companies as well as those groups comprising their interests.

This so called opening of the inner books on whom the company does business with in financial as well as other fiscal matter provides investors with a picture of the potential entanglements and other unseen arrangements that could affect decisions and actions. This was the point that Guinness Peat referred to in their Partial Cash Offer, the assignment of headquarters debt against the De Vere Hotel division asset sheet. The failings of various American corporations, Enron for $63 billion, Global Crossings at $25 billion and others, has caused this (corporate governance) to become an important area of focus (Taylor, 2002). Bakan (2004) stated that there tends to be a basic “…amorality…” Bakan (2004) inherent in competing in the business arena and as such corporations sometimes act in this manner. The area of corporate governance holds management accountable for its performance and management of the company, as well as the “…the proper use of executive power…” (Bavly, 1999) The scandals and bankruptcies experienced by the market during the past few years has strengthened the resolve of the general public, and government(s) to make corporations accountable through adequate disclosure of information that if withheld, could mask the rationale behind important decisions.

Company Ownership
The case study of Guinness Peat’s Partial Cash Offer for De Vere brings into question the make up of what individuals, companies, institutions and special interests hold stock in the company and their potential agendas. Guinness, as an investment company, has and had demonstrated its tendency to acquire a representative share of a company, usually between 7 and 20% depending upon the share price and number of outstanding units, and then present its agenda to shareholders through various means. Mr. Nixon of Guinness Peat did this in 2001, when he submitted a resolution to the De Vere board seeking that the following be put forth at the annual shareholder’s meeting:

This preceded the Partial Cash Offer to acquire 25% of the issued capital shares for the purpose of selling of the De Vere Hotel division, which was unsuccessful. In truth, Guinness Peat actually sabotaged its own efforts as a result of prior dealing in the United Kingdom where the question of its ownership affiliations were called into question on its deal to attempt selling off dealerships under Inchcape. The British press found that Guinness’s ownership of competing companies Ryland, Quicks and Gowrings indicated a potential conflict of interest and this, plus battles with Coats Viyella and Young Brewery were negative corporate events which tarnished GPG’s reputation and tended to label it as a corporate raider. The rules and regulations regarding disclosure of ownership provides the investing public with the opportunity to see what affiliations are present and who owns what. This important background information gives investors, both individual as well as institutional, the ability to formulate their own decisions concerning the potential effects of the preceding.

Table 6 - Guinness Peat Group Plc Holdings 2002
(hemscottinvestment analysis, 2002)

Bernstein et al (2003) point out that various stock option schemes, as well as incentives for performance provide executives with the opportunity to accumulate large blocks of stock in lieu of, or in conjunction with bonus and salary incentives. He also indicates that while there are instances of abuse, the offering of stock options can actually create a climate whereby top management fulfills operational objectives to receive these rewards, thus benefiting shareholders as well in the increased bottom line and market performance. Guinness attempted to make such a point regarding Lord Daresbury’s stake in De Vere subsidiary G&J Greenall, the division that manufacturers private label as well as contract spirits. The attempt however, did not reveal or suggest any conflict of interest in the running of De Vere, and the contributions of that division to the company’s bottom line had been positive, without the incursion of any debt.

Shareholder Powers
It is generally agreed that the system of corporate governance in the United Kingdom places shareholder interests above those of stakeholders, such as employees and creditors. Shareholders have the right to buy one or more shares in publicly traded U.K. companies through the stock exchange (eiris, 2005). As such, they are entitled to certain rights and powers, such as voting rights which effectively cause the owner to be a member of the company, as the vote entitled the owner to voice opinions on company activities. As a shareholder, one has the right to information on the company and this is usually transmitted through the company’s annual report, newsletters and mailers on new developments, press releases and through the company’s investor relations department. Taylor (2002) Ownership of shares entitles the owner to vote, attend, as well as to have the opportunity to speak at annual company shareholder meetings where one can vote in members of the Board of Directors, financial auditor and resolutions brought forward by the Board. (Gillan et al, 2002) As a voting rights shareholder one can also accept or reject the company’s annual report as well as any dividend proposed and these voting powers may be extended to other individuals via proxy, which provides them with the opportunity to vote your shares in your absence.

This participation in the affairs of the company is one of the benefits of owning stock in a public company where the rules and regulations are known. Shareholder rights include the ability to table and support various resolutions put forth by one’s self or others provided you have the support of 100 shareholders each having a minimum of £100 in value with respect to the shares held. (eiris, 2005) Said resolution along with a statement of no more than 1000 words can be presented in accordance with the company’s rules and regulations for this area. The individual weight of a shareholder is minimal, depending upon the number of shares held, and thus that individual’s financial commitment to the company, however, through the use of resolutions, proxies and a definitive plan of action, one’s individual powers can be multiplied by a group of like minded individuals to weld power. Taylor (2002)

Management Responsibilities
The well publicized abuses that occurred at WorldCom, Enron and other giant American public company scandals have brought the Boards of Directors under increasing scrutiny as it is their responsibility to oversee corporate operations, executives and adherence to legal rules and regulations in the conduct of business. Stiles (2001) states that the “…expectations of boards of directors are changing…” (Stiles, 2001) in that their roles as “…rubber stamps…” (Stiles, 2001) for management has lead to abuses. Individual as well as institutional investors have been awakened by the examples of “…malfeasance or incompetence…”(Stiles, 2001) In the United Kingdom the individual shareholder is dwarfed by institutional investors (banks, pension funds, investment firms, insurance companies, etc.) who hold 60% of the ordinary shares of United Kingdom public companies. (Stiles, 2001). Stiles (2001) puts forward that Boards exist to take an active role in the planning, research, development and follow through of significant plans, policies, decisions and activities undertaken by the company as a participatory activity, rather than the aforementioned ‘rubber stamp’ involvement. The Board is the internal governance facility that reviews, questions and seeks confirmation for management’s plans, thus providing the company, and its investors, with a watchdog that serves the best interests of the company. Stiles (2001) stated that boards have a responsibility to act as “…a control mechanism to reduce the potential divergence of interests between corporate management and shareholders.” Stiles (2001) Shleifer et al (1988) put forward examples whereby management’s lack of fundamental operating responsibilities created events whereby breaches of corporate ethics occurred. Management has its own moral as well as ethical codes via which to operate and it is their responsibility to act in the best interests of the company as well as shareholders at all times to maximize value. This is the function of upper management, as it also is of the Board.

Chapter 4 – Conclusions and Recommendations

The case study of the Guinness Peat Plc Partial Cash Offer for limited control of De Vere Group Plc with respect to the handling of divestiture of the De Vere Hotel division is an example of the manner in which institutional investors influence, impact and change corporations through their presence as well as takeovers. It is argued that investment and institutional investors help to keep the management of public corporations ‘on their toes’ with respect to achieving maximum shareholder value. (Sharechat, 2001) The role, influence and impact of institutional and investment firms in the running and operation of companies has grown as a result of the development of pension fund systems as well as cadres of investors of high net worth. (Gillan et al, 2002) These large blocks of investment money weld considerable power and target those companies where their investments will yield the best results. The target companies can either be stellar market performers, or under performers with hidden assets or sell off benefits attractive to a particular investment group.

Today’s public arena has suffered through a number of instances whereby large corporations have either mismanaged assets or worst, mislead the public concerning the state of their affairs. The burst of the dot.com and technology bubbles, along with the after shock of the September 11th attacks on New York city created a climate of relative desperation on the part of public company managers to earn a return that would support or increase the stock share price. In a recession market, those companies that are able to either maintain or increase their share prices stand to gain additional share price support through the buy in of investors liquidating from other stocks or holdings (such as bonds) (Gillan et al, 2002). The foregoing also applies to the managers of large institutional funds as well as investment firms such as Guinness Peat. Declining markets actually represent opportunities to acquire substantial blocks of a company’s issued share capital as a bargain. As these investments have an intrinsic value or opportunity which said investment firms seek to capitalize upon, their entry as a shareholder takes on increased clout as shareholders are aware of the outside economic climate and tend to seek means to further solidify their holdings.
The preceding existing shareholder value and profit concerns regarding their share positions, as well as the relative uncertainty within the market regarding future performance provides the environment to put forth resolutions for change, such as the Guinness Partial Cash Offer. The clout of an investment or institutional firm buying into a company’s stock serves to further support the price as well as provide a climate of optimism on the part of the general public as to the company’s future prospects. (Gillan et al, 2002) While the following might not be true on most cases, it must be remembered that the general public is not engaged in the day to day nuances of the market and thus tend to read that investment choices of institutional companies as potentially positive signals. As one would suspect, the preceding as well as a multitude of other factors are utilized by these types of firms to ‘pave the way’ for their entry into a particular stock, as well as for their individual agendas. The questions is, are these companies over stepping their boundaries in a market that is founded upon supply and demand principles in a financial stock acquisition environment, rather than whom has the power to upset the balance through the application of large blocks of money to swing balances in their favor.

Unfortunately, the later policy holds as much validity as the former. The system of checks and balances in a free market economy are both defined as well as obscure. Corporate managers are responsible for maximizing shareholder value, and when they permit economic conditions to impact the performance of a company in a negative manner, they are accountable to shareholders as to why. In the same context, this also holds true for all areas under their stewardship, such as financial reports, profits, and assets. Thus, management does have a measure of control with regard to what types of monies are drawn to their stock, and for what purposes. Institutional investors usually take positions to achieve growth on sound companies that have demonstrated a superior track record. Investment firms, however seek to capitalize on a short-term basis for their investments, as their strategy is immediate gains, and then settle in for resulting profits, or simply immediate gains and then opt out of future financial involvement. This predatory stance is the nature of their existence and thus strategy matrix. And while differing investment firms conduct their businesses in differing manners, with respect to the methodologies employed, their core rationales remain the same.
The enactment of the Sarbanes-Oxley Act of 2002 is one of the counter measures that will and does keep managers aware of the pitfalls of miss reporting financial information and thus tightening the climate for investment firm influence through heightened corporate operations in all quarters. Guinness Peat’s case study provided a rounded approach on these defined as well as obscure aspects in that the Partial Cash Offer was based upon what Guinness claimed was underperformance in the market sector, as well as financial reporting that hid the value of certain assets. The premise, in theory, held promise, but the actual facts and execution were less than stellar. The £26.2 million that Guinness indicated De Vere was utilizing to under valued its De Vere Hotels division which reported its assets as £552 million. As the indicated sum represents an amount less than 8%, its significance in terms of cash ratio is doubtful. Further, Guinness provides the unsupported assumption that the value of this asset would be substantially higher in the private sector thus fetching a price in excess of the combined total of £578.2 million (£26.2 million for debt and £552 million for the De Vere Hotel division asset value). In addition, the Partial Cash Offer on the part of Guinness did not address how the new reduced size De Vere would appear to financial analyst’s as a result of the increased income to debt ratio given the divestiture of the company’s largest revenue streams (the De Vere Hotel division).

The assumptions, while not borne out by the methodology, provide and example of how the innate checks and balances of the free enterprise system generates the appropriate conclusion in most instances. This is not to say that institutional and or investment companies are a negative influence on market behavior, or that they act in a manner that belies the best interests of the whole. The free market system relies upon the ability of its component, people, to adjust to new ways of doing business that is brought about by challenges and opportunities as they present themselves.

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