‘Would you but a used car from this man?’ asked a famous anti-Nixon campaign in the States. Now I’ve another question: ‘Would you buy a company that sells used cars to high-credit risk customers?’. Not I, forsooth. That sounds about as safe as going round putting out fires in ammunition dumps. But that is precisely what a firm called Provident Financial did when it bought Yes Car at the end of 2002.
Provident improvidently spent an initial £58 million on this time-bomb, which has now exploded in the buyer’s hands. Efforts to find a company sucker enough to buy the bauble predictably came to naught, and Yes Car duly folded, for a total pre-tax loss of £141 million, four months after a BBC undercover investigation found that ‘customers are lied to, inspections on cars are not properly carried out, and some potentially dangerous cars are sold with serious faults’.
Assuming that there’s nothing more to this grisly story than meets the eye, how do companies lay (or buy) such bad eggs? Both as a commentator and company director, I’ve seen enough failures at close hand to identify the main infections. The first is that acquisition looks like such an easy and fast way to grow. So despite surveys by the score which show that at least half of all takeover deals fail, the leading executives search for targets and invest both time and ego in the hunt until they spot a promising kill.
In rejecting such a proposition, the board is both telling its leading executive lights that they have been wasting their time and implicitly criticising them - and possibly making them seem small in the eyes of the other parties involved. I recall one case where none of the non-execs fancied a purchase in an unrelated business. The execs went away, evidently cross, but reappeared at the next meeting with the same proposition, at a lower prices. The non-execs were no happier with this deal, but felt unable to slap down the execs a second time.
The execs thought in much the same way as Provident Financial, whose board was ‘delighted to welcome the management team’ at Yes Car, which had grown very rapidly. But if the BBC reporters could so readily find such gross evidence of mismanagement, what happened to the ‘due diligence’ which Provident was obliged to apply? Did anyone talk to customers and employees, or sample the Yes Car actualities anonymously - the ‘mystery shopper’ technique? What about competitors, past whom Yes Car sped in its short life? What did they think?
Provident’s main interest in Yes Car lay in boosting profits from the credit side, where the buyer, specialising in downmarket personal finance, reckoned to know the small loans business backwards. That may have given the management comfort. Plainly, such knowledge has some value. But no industry is so transparent as car manufacture, despite which company after company has made terrible decisions - like Ford buying Jaguar or Daimler-Benz swallowing Chrysler. The bidder typically sees the opportunity and the kudos of the buy, and doesn’t stop to count the defects and the full cost.
If any problems are uncovered, anyway, won’t their own superior management right the wrongs in a trice? No, in most cases it won’t, partly because the managerial superiority is in the prejudiced eyes of the beholding bidder. BMW’s mighty flop in buying and then mismanaging Rover is an awful, costly warning. As with Yes Car, another dubious form of takeover insurance is to tie a portion of the price to later performance. So the acquired management pulls out all the stops to make the year two target - but in year three finds itself paying out large sums to complete the purchase of an unprofitable business.
There’s no way to escape the consequences of a bad business takeover.
