LONDON — Life has not been easy in London's financial community since last October's "Big Bang" signaled a new, rough-and-tumble era of deregulation.
During the first week of trading, computer breakdowns cast doubts over the London Stock Exchange's new electronic dealing system and sent fits of panic through the square mile of London's business center known as the City.
No sooner were the computer bugs eliminated than a rash of highly publicized insider trading scandals jarred dealers and raised questions about the effectiveness of London's gentlemanly system of self-regulation in the more cutthroat atmosphere of deregulation.
But these traumas pale in comparison to the damage inflicted by the scandal now swirling around Arthur Guinness & Sons PLC, the British beverage and retailing company, and its bitterly fought $3.9-billion battle for control of a prestigious Scotch whisky producer, Distillers Co. Ltd., early last year.
Revelations that senior Guinness executives and their financial advisers from the City's most respected banking and securities institutions had engaged in a highly questionable, and possibly illegal, operation to boost the value of Guinness stock at the height of the takeover fight have rocked Europe's largest, most important financial market.
The scandal has also embarrassed Prime Minister Margaret Thatcher's government, which has championed self-regulation, and has unleashed powerful new pressures for more stringent controls of the City's markets.
Last Friday, the Panel on Takeovers and Mergers, which oversees the conduct of acquisitions on the London market, announced that those controlling more than 1% of a company involved in a takeover bid must disclose any dealings during the takeover period. The move is a significant tightening from the previous 5% minimum.
At the same time, the Stock Exchange declared that it would automatically investigate sharp, unexplained movements of share price in any company involved in a hostile takeover bid.
Many believe that stiffer measures could follow as a result of the scandal.
"If practitioners do not respect the system, we shall have little choice but to replace it with one incorporating statutory powers of enforcement and statutory sanctions," warned the governor of the Bank of England, Robin Leigh-Pemberton, in a recent speech to Scottish bankers.
The so-called Guinness Affair has already been called the biggest scandal in a generation and, as new revelations tumble out daily, the prospect of criminal prosecutions becomes increasingly likely.
So far, the Guinness Affair has:
- Led to a dramatic series of resignations, including those of the high-flying Guinness chairman, Ernest Saunders; Christopher Reeves, the chief executive of a leading London investment bank, Morgan Grenfell; Lord Spens, head of corporate finance at the Henry Ansbacher investment bank, and Sir Jack Lyons, a key adviser to the British arm of the Boston-based management consultant Bain & Co.
- Triggered a stiff warning from the Bank of England to about 25 of the City's biggest investment banks telling them to review their corporate finance controls and putting senior executives on notice that they will be held responsible for wrongdoings.
- Dampened City enthusiasm for the large-scale takeovers that have helped to keep London a strong bull market during the past two years. Last month, for example, the industrial conglomerate BTR quietly dropped its $1.8-billion bid for Pilkington Bros., a glass manufacturer.
- Caused the Thatcher government to sharpen its stance on regulatory controls in order to counter accusations that its soft policies have allowed the City to go crooked.
"This is a watershed in the way mergers are conducted," predicted Michael Marks, managing director of Smith New Court International, a London securities house. "The City will have to tighten the rules."
Added Sir Martin Jacomb, chairman of Barclays de Zoete Wedd, the investment banking arm of Barclays Bank: "The Guinness Affair shows that one must recognize (that) the trend to professionalism has taken a more decisive turn. The regulatory structure will have to respond to that."
The origins of the scandal are traced to a $2.4-billion hostile bid made in December, 1985, by the food retailer Argyll Group for Distillers, the producer of Johnnie Walker, Black & White and Dewars scotches.
Dismissing Argyll as a canned-peas-and-potato pusher that knew nothing of the whisky business, Distillers sought out Guinness as a white knight. Saunders, the Guinness chairman, quickly organized a bid of $3.5 billion, and one of the most bitterly contested battles in recent City history was under way.
For Saunders, a highly successful manager who had transformed Guinness from a struggling company into an aggressive market leader during his five years as chairman, the chance to win Distillers seemed the grandest prize of all, a catch that would more than double the size of Guinness' existing empire.
Assembled 'War Cabinet'