Book extract: Determined to Win – My father and me (lessons in business)

Christchurch businessman Sir Robert Stewart is best known as the founder of Skope Industries, set up when he was 25 with a loan from his father, Sir Robertson Stewart. But Sir Robert has had many other interests, including his involvement in the oprganising of the 1974 Commonwealth Games, medical research and racing cars, yachts and power boats. In this extract from Determined to Win, he describes the perils of public companies and family relationships in business 

My father and me (lessons in business)

It was in 1999 when both of us were holidaying in the Marlborough Sounds, that my father [Sir Robertson Stewart] telephoned me soon after New Year’s Day and asked to meet. This request was so rare it was an event to be remembered and I thought, at long last, perhaps he just wanted to talk about things. As I sat beside him on the wharf seat in front of his boat shed with his beloved launch, Goldair, in front of us, he asked me to help with a problem he couldn’t solve. I was so taken aback, I would have agreed to anything.

He told me that some of the executives who had been involved in the aborted privatisation bid almost a decade earlier had spoken to him close to Christmas Eve. They were threatening to resign from PDL en masse unless he gave them a controlling interest by passing over a number of his shares, which they would pay for later when they could afford them. They confirmed this with a written ultimatum, which I read. He was to pass control of the company to them by 1 February 1999.

From their point of view, it may well have been a reasonable request given my father was in his mid-eighties at the time. From his point of view, he was astonished that the very people making this ultimatum were the ones he had nurtured and put ahead of myself and Mark Stewart, my half-brother. After some thought, I said that our family shareholdings combined meant the family controlled over 60 per cent of PDL’s stock. My father was very much aware I always kept around 10 per cent of PDL stock because no-one could take the company over without me or my family becoming a player. You need that 10 per cent in the takeover bid to stop compulsory acquisition. In addition, no-one knew whether I was wealthy enough to stand in the market at the same time as the takeover company and buy another 10 per cent of the stock, which would have stymied any potential bid. At the very least, my shareholding put me in a superior position to negotiate with the takeover company to buy any of PDL’s assets that fitted neatly with SKOPE Industries.

I told my father he had three options. One option was to let the executives resign from PDL and I would run the company, sell off the parts that weren’t functioning properly and give him a position in it (which would be something like president for life), or find a way to buy him out if that was his wish.

I said the second option was to make Mark Stewart the managing director, because the management didn’t look on him as a threat, as they did me, and he could perhaps manage to retain the chief designer. Or third, we could ask Mark to get on a plane and go to Europe the next day to see whether he could find a suitable buyer to purchase our 60 per cent.
Given my father had a controlling interest in the company, he had the ultimate say on whether the shares were sold or not. In my opinion, the three options I gave him meant that whatever decision he made, the

executives would have to leave the company because they had made their play and lost.

My father knew I had to be involved in the sale because he guessed I could stand in the market and take the legal maximum of a 20 per cent shareholding which would take the Stewart family shareholding to around 75 per cent. However you looked at it, and given his age, PDL would never be the same and I thought, if he sold, he would leave his wife and their two children very well off.

My father commented that the shares were only worth $2 or $3 or whatever the figure was at the time. I said I thought we could sell them for $16 each. He didn’t think it was possible but nevertheless I knew that a touch of greed is not a bad thing in this type of decision-making. I didn’t believe we would get $16 either, but it was a good starting point for a negotiation.
All of the options were viable and, an hour later, he decided to sell his life’s work and ask Mark to go to Europe. I explained that before I could do anything I needed the blessing of Barbara. Some of the shares were hers

and it would be inappropriate not to include her in the decision-making process. He also thought he needed to call Paul Mortlock, who was at his holiday home in Charteris Bay, and ask if it was legal for Mark to act for the family while still a PDL executive and director. Fortunately Paul Mortlock was home and agreed that Mark could do it.

An hour later and back down on the wharf again, but this time with our wives, we kicked the issue around with the knowledge that Paul believed it was perfectly legal for a member of the family to sell the stock. Together, we agreed to sell our 60 per cent control of PDL at the target figure of $16. Mark was called and he agreed to go, flying out the next day and, subsequently, negotiations began that ultimately led to Schneider Electric buying all the shares from the family at $12 each in 2001.

The executives, who had earlier threatened to resign and who were later written up in the media as participants in the failed boardroom coup that had effectively triggered the sale of the Stewart family shares, left the company with significant severance payments. It was quoted in The Press newspaper that Don Sollitt, former chairman and managing director, was paid $1.6 million in management fees, severance pay and share sale proceeds. That turned out to be to the advantage of my brother Peter, who knew Don very well and was aware Don wanted to expand his own deer farm that adjoined one of Peter’s farms near the Rakaia Gorge.
Peter was a pioneer in deer farming and his deer herd had a fantastic reputation as one of the best in New Zealand. Peter wanted to retire from deer farming, and when news of the severance pay reached him he called Don. They met at Peter’s farm where, over a few drinks, Don agreed to buy Peter’s adjoining farm and a large portion of the herd. There was a powerful business logic in merging the two farms.

Don was well known for doing deals on the spot. During negotiations he would take a table napkin, or anything else you could write on, and set out the deal and sign it and then get the other side to countersign it, completing the arrangement. With a flourish, I am told, he did the same with Peter. However, when settlement time came, Don appeared to my brother to be less than enthusiastic about continuing. But he stuck by his handwritten document and presumably used some of his severance pay to buy the farm and herd with another partner. A few years later, in 2003, Don Sollitt would be fighting off bankruptcy as several of his companies were placed in receivership or liquidation by creditors.

Mark Stewart was appointed as chief executive and PDL’s profit rose rapidly under his leadership because he has an extremely disciplined approach to financing and business management. In 2001, Schneider Electric finally stood in the market and, using a Dunedin-based share brokerage run by Sir Eion Edgar, started mopping up PDL shares in large quantities.
A number of players entered the market. Don Sollitt had a very close relationship with the managing director of Clipsal and I was not surprised when they stood in the market and started bidding strongly and the shares rose dramatically. Some months later, Schneider purchased Clipsal, which they claimed was their original target to dominate the Australasian market, and so they had achieved their goal.

I was embarrassed during the process of the share purchasing when friends called me up and asked whether they should hold or sell because the PDL share prices were rising rapidly. The best answer I could give them was that I wasn’t involved in the management of PDL, so had no inside knowledge, but I was not selling my shares yet because I felt the price could go up. I would always say I had no certainty of when was the right time to sell.

The family had a floor price for the shareholding, in the event they finally sold to Schneider, but not the final price, which would be determined by the market. In the main, even though I could not advise my friends either way, most were pleased to sell into a rising market.

I went and saw John Robertson’s successor, Chris Weir, who is another wonderful lawyer and asked him whether I could buy shares myself, knowing that we would sell them eventually. He gave me a written legal opinion that there was absolutely no reason why I could not buy shares because I hadn’t been a director of PDL in recent times and had no insider knowledge on what PDL was doing financially.

He pointed out that I knew the family was going to sell the shares subject to the floor price being exceeded but, in his expert opinion, I could buy more shares if I wished to. Of course, it would have been different had I been a director or executive of the company. However, he added a codicil to his advice and it was similar to John Robertson’s advice years before. He thought there might be one problem. I had an excellent reputation both in the city and abroad as being a man of honour, so to speak. On that basis, if I stood in the market, I would be seen to be doing the wrong thing even though it was perfectly legal. I took his advice and never bought a share but did watch many other players in the marketplace do so.

I finally signed the documents covering Barbara’s and my family’s shares in Dubai, where I was working on a major contract deal with Dubai Refreshments who, at the time, were my most important and aggressive customers outside of Australasia. Most nights I worked on the documents because of the time difference and kept sending them back to New Zealand until I was satisfied my family were properly protected.
In late 2001 the Stewart family cut their last links with PDL Industries when Schneider took control of the company and I was flattered when Mark Stewart paid tribute to me in the news media for my daily advice during the takeover chess game. I asked my father before he died if he was sad to see his life’s work, in the form of the PDL factories, being demolished to make way for a large office block complex. He replied he hadn’t been to see it and there was no room in his life to look back.

My family and I exited PDL with enough money to pay off some debts at SKOPE and put the company in a very strong position. It also gave me the opportunity to build a house out of the old shearing shed we owned in Queenstown. It was my ambition to turn it into a beautiful home for when I retired; a goal which I had hoped would be achieved when I first bought the cottage and shearing shed 35 years previously.

The lesson I learnt is that when investing in a public company that is important to me long-term, you should try to be close to being a 10 per cent shareholder. In a private company, I would always be sure to own 51 per cent or more. I would never give a personal guarantee to the bank unless I owned over 51 per cent, because I could lose everything without being able to influence the outcome.
In the event a personal guarantee is given, it should always be limited to a dollar figure and set to expire when the level of agreed debt with the bank is repaid. Most banks will take a personal guarantee and never give it back, arguing that you might need it again and it saves in document legal fees.

Another lesson I learnt is that if shares are being purchased or sold or there is the potential to take another company over, it becomes critical to only discuss these issues in secure surroundings. I now know that, in certain countries where negotiations are critical, the practice of using mobile phones once and throwing them away is not uncommon. Directors have a very real responsibility not to allow information to influence share prices before a formal announcement is made.

© Copyright. Reprinted with permission from Determined to Win, published by Random House New Zealand