Graduates from the crash of '87

“Wood Mac say the market’s down 140 points!” It was about a quarter past nine in the morning of Monday 19 October 1987 and City share salesmen, investment analysts and – especially – market-makers felt their blood run cold. The Stock Exchange wouldn’t start calculating the FTSE-100 index for another 20 minutes or so, but the blood-red share prices on the “Topic” screens offered enough evidence that things were going to go horribly wrong that day. Wall Street had slumped more than 108 points on Friday – though a few brave souls argued that, in percentage terms, there were more than 90 trading days in Wall Street history that had been worse, so there was no need to panic.

But the number-crunchers at Wood Mackenzie had calculated that the price falls recorded in London so far that morning were worse than anything that had ever been seen before.

There was little trading – nobody was buying, everybody was waiting for a convincing rebound in the market, not a “dead cat bounce” (“Just because a dead cat bounces doesn’t mean it’s not dead,” goes the somewhat gruesome City phrase to describe an upward blip in a falling market). No, forget a rebound; let’s just see where it stops. If it stops.

Any hope that the markets would stop falling vanished when, shortly after one o’clock, Reuters announced that the US had launched an attack against two Iranian oil platforms. “Normally I’d take that as quite bullish for the market,” one BZW dealer was quoted as saying in The Times. “But knowing the Americans, they’ll probably miss and hit Cairo.” Meanwhile, gold leapt $23 to $490 an ounce.

A week later, battered and bruised stockbrokers and fund managers surveyed the wreckage. “It’s like Pam Ewing has just woken up,” said one equity salesman referring to the TV soap of the day. “And Bobby Ewing is still dead.”

Did any of this matter? Did it really matter? The fact that the FTSE-100 index is now about three times its post-crash low suggests that it didn’t. Even though it took another five years for the index to rise (permanently?) above the 2,443 pre-crash peak, achieved in July 1987, the strength of the market since then suggests that no lasting damage has been done. In 1987 itself, the 100-share index even managed to finish the year some 35 points higher than at the start.

But on Black Monday London fell 250 points and Wall Street crashed by 508; Black Tuesday saw London fall another 250 points. Surely the loss of one-fifth of the value of corporate Britain – #100bn in 48 hours – was one of the most significant and memorable events in business history.

David Inns, who was FD at Bass at the time, confesses: “To be quite honest with you, I can’t even remember where I was on the day. I have a funny feeling I was out of the country.” Another FD protested to us, “Do you really think we can remember much about what happened 10 years and two jobs ago?”

Clive Strowger, the now-retired FD at Grand Metropolitan, remembers exactly where he was. “I was in Boston at the time making a presentation to (fund management group) Fidelity on the GrandMet story,” he recalls. “There were about 10 people at my presentation and by the time I finished there were 10 completely different people there. They were rushing in and out, reacting to the crisis.” Meanwhile, his company’s shares were on their way to a two-day fall of 21.7%.

Nigel Ellis was the FD at property group Hammerson at the time. He remembers “expecting some adjustment” in share prices – “but like everyone else I was horrified at the extent of it”. Hammerson shares slipped a relatively modest 16.9% over the two days.

English China Clays’ former FD, Robert Carlton-Porter, was more sanguine: “Essentially you saw an over-excessive correction which really was to be anticipated because a large amount of it was self-induced by the changes in the market itself,” Carlton-Porter says with reference to the Big Bang deregulation of City sharedealing practices a year earlier.

The crash had virtually no effect on English China Clays, even though its shares tumbled by 17.1% in two days. “We were basically looking at our plans, we were operating globally at the time. We didn’t have at that time any sort of rights issue or major acquisition pending, so it was not an issue. You stoically went on and hoped the dear fellows sorted themselves out,” Carlton-Porter says. “I was more worried about the pension plan impact,” he claims.

Antony Hichens, who was FD at Consolidated Gold Fields, explains, however, that that was a misplaced fear: “Those responsible for pensions had a quick frisson of concern – and then, of course, we remembered that our pension funds were valued on their prospective dividends and so this didn’t change anything. Only a depression would have affected that.”

Those who remember the crash best were, predictably enough, the ones who were engaged in acquisitions or rights issues at the time. Michael Julien, who was then finance director at Guinness in the immediate post-Saunders era, remembers the day very well – and not just because Guinness slumped more than 26%. The brewing giant was in the midst of selling its Martins newsagent chain for #250m. “Completion date was literally the day after the crash,” Julien recalls. “The most wonderful thing was – to the eternal credit of the financiers and backers involved in buying Martins – the cheque arrived in spite of the crash. In fact, one of the investors in that consortium was Rupert Murdoch. It says something for them. They might have been able to pull the deal. It was so exceptional.”

John Jackson was the FD at Hillsdown Holdings at the time. The company had recently completed a large debt-finance acquisition in Canada, and was about to launch a “disguised” rights issue. The plan was to make an all-share takeover bid for an investment trust. This would give Hillsdown a portfolio that it could liquidate to repay its debts.

But Jackson recalls the Friday even more clearly than the crash itself: “On the Friday we had a final meeting of all the parties (to the deal), so I had to leave home very early in the morning. I couldn’t understand why everybody in the streets around my home seemed to be chopping up trees.

I had slept like a log through the storm. So, I drove into the City and it was only at 11 o’clock that I realised that everybody else had stayed in bed.

“Of course when the Monday arrived, it wasn’t a surprise because we were all aware with the (108 point) crash on Wall Street on Friday night, that things were going to be pretty black on the Monday.” The deal had to be scrapped as Hillsdown’s shares fell more than 21%.

At Unilever, Niall FitzGerald (then FD, now chairman) was relieved at the timing of the crash: the company had made a massive acquisition earlier in the year, Cheeseborough-Ponds, and had just completed the sale of its chemicals business in September. He remembers feeling vindicated – “I’d been one of the few people who thought the market had got out of hand” – and stunned, as Unilever shares fell almost 24%: “Oh my God, how far is this going to go?”

The crash also disrupted the largest privatisation and the largest equity issue the City had ever seen. On the Thursday before the crash, abseilers whizzed down the eastern side of Britannic House, BP’s 1960s-era corporate headquarters near London’s Moorgate, unveiling a banner that launched the fixed price offer at 330p a share. That night, the hurricane that Michael Fish didn’t believe in hit London and the southeast, preventing most City workers from getting to their offices. Trading was suspended for the day, so it would be Monday before the City could give its verdict on the #7.2bn offer.

On the day of the crash, BP’s share price fell 11p below the 330p offer price. By the close of play on the Tuesday, it was 285p. The underwriters were extremely worried, and started running to the Treasury claiming “Force majeure”. Nigel Lawson, then Chancellor of the Exchequer and the man who was trying to raise #5.7bn by selling the last of the government’s shareholding in BP, argued that there was no point in spending taxpayers’ money on underwriting fees if the sub-underwriters were just going to walk away from their contract. Some sub-underwriters, on the other hand, claimed that an #18,000 underwriting fee was scant reward for having to stump up #100m for unwanted stock.

Unfortunately for the underwriters, most (not all) investors weren’t so foolish as to think that it was worth applying for shares at 330p each – relieving the underwriters of their onerous burden – rather than buying them in the stockmarket 15% cheaper.

(The man who held the title of managing director in charge of finance, David Simon, could not speak to Financial Director, unfortunately. Now, as Lord Simon, he is a government minister, recently embroiled in a squabbly little fracas relating to his ownership of BP shares. “He has completely cut himself off from BP,” one of his government minders told us, “and that extends to any discussion of what may or may not have happened at BP 10 years ago.”)

BP’s sub-underwriters may have been caught out, but former Fisons FD Roy Thomas says he expected the crash to happen. “The market was terribly overheated at the time and it needed some sort of correction,” he says.

Fisons shares “corrected” themselves by 27%.

Hillsdown’s John Jackson argues that, by its very nature, a crash cannot be predicted. “One thing I remember at the time were a lot of very ‘wise’ men all claiming that they’d foreseen the crash and sold all their shares, and so forth. One of those gentleman in particular was Robert Maxwell,” he recalls. “I think the only one who got it right was Jimmy Goldsmith.”

Some FDs say that they looked to turn the crash into an opportunity.

“We immediately went about planning for share buybacks,” Julien says.

“I think Guinness was one of the first companies in the country to implement a share buyback program. It gave us the power to go into the market and effectively buy in our shares at prices we thought were ridiculously low.

It was an example of where the company could put its money where its mouth is and say, ‘No. We think this is overdone.'”

“I went through all the companies where the share price had fallen to see if there were any that Hammerson could have taken over,” says Ellis.

“I didn’t find anything.”

Strowger adds that GrandMet “looked more critically at potential takeover targets” on the back of the “reassessment of values” prompted by the crash.

“It’s difficult to say whether companies were bought as a result of the crash. Certainly, when we launched our bid for Pillsbury it was subsequent to that. I would say the crash may well have affected the perception of what value was and whether we could add value.” He is one of a number of FDs who think the crash did have some wider-ranging impact on how corporate finance deals were looked at, valued and executed. “The fundamental difference after the crash was that investors and companies looking at potential acquisitions looked much more at the cashflow implications,” Strowger argues. “It introduced a certain nervousness about accounting, particularly in the UK, and about false perceptions of value.

“I think ‘value’ is an important word in all of this. Certainly, as FD, when we were looking at acquisitions we concentrated on the cashflow aspects of anything we looked at from there on. It concentrated our minds and caused us to think very carefully about how to value things.”

John Jackson is more emphatic: he is in no doubt that the crash affected the way companies such as Hillsdown were valued: “The crash certainly had a long-term impact on both our thinking and the way the shareholders or would-be shareholders perceived an acquisitive company such as ours,” he says. “Certainly – not immediately after the crash but within two years – it became considerably more difficult to do the sort of acquisitions that we had been making our trademark.”

Antony Hichens disagrees: “The crash certainly scarred the investment community, but I don’t think it has had a lasting impact on the way the industrial community thinks about its risks and its prospects. We saw it as a overreaction to stockmarket fears. It didn’t really alter my way of looking at the world or the way that I ran my responsibilities within Consolidated Gold Fields.”

Neither does Nigel Stapleton, the former FD at Reed International (whose shares fell a massive 29.3%) and now the joint chairman of Reed Elsevier, believe there was any lasting impact on corporate deals. “We had always been pretty conservative in terms of how far we would stretch in terms of debt.”

Donald MacKeith was the FD at Land Securities when the crash hit. He says that his company learned its lessons back in the slump of the early 1970s. “We got a lot of flack through the early 1980s for being fuddy-duddy,” he says. “When the crash came, we were actually better positioned than many people.” Land Securities slid gently by just 18%.

In fact, the contrast with the 1972-74 bear market could not be more stark. “The 1987 collapse was quite a minor affair,” argues Hichens.

“It wasn’t like the great crash of 1974, which was combined with rip-roaring inflation and a colossal depression.”

So can it happen again? The economic conditions are certainly different today. Back then, a boom was seemingly out of control, while international imbalances fuelled worries about US interest rates. But whether governments learned anything from the crash is another question. “I think it gave them a slightly higher awareness of the importance of money flows,” says Unilever’s FitzGerald. “But nothing, I would say, had a lasting effect.” In fact, he thinks another crash could be about to happen at any moment, because the market is driven by the weight of investment money and the lack of alternative investments – “Property is only just recovering and people are a bit leery of bonds. There’s just too much liquidity around.”

Carlton-Porter disagrees: “It’s very difficult to see the same instances coming through that you would have seen in 1987. What you have got now is a much more structured and organised market. It will be a damn sight better when they get a single regulating body in place.”

“Memories is short,” says Michael Wood, who was the FD at Burton Group back in 1987. “Any lessons that might have been learned from the crash are fading. People rely on booms, but don’t know when to sell.”

At Unilever, FitzGerald says that the crash has failed to leave any lasting impression. “You can hardly find it as a blip on any long-term graph you see now,” he says. “It was a very big deal on the day, in that week and in that month. After that, it began to fade.”

Carlton-Porter sums up the irrelevance of the crash this way: “It was a bit like when we had the oil crisis a few years before. The sudden rise of oil price affected almost everything – it affected companies very tangibly in terms of day-to-day management. I think the crash brought in a degree of control. I don’t think it lasted long because at that particular time you had spectacular success and spectacular failures,” he says. “Memories are fairly short. We have a whole set of management who haven’t seen the crash at all. They’re looking for their own crashes.”

Our tables on pages 24, 25 and 27 show that only two dozen people who were FTSE-100 finance directors at the time of the crash still have director-level positions at FTSE-100 companies. Hillsdown’s Jackson comments: “Crashes are caused by the combined efforts of people who, on balance, have not lived through crashes previously. As every generation goes through the banking system, through the finance system, through the corporate sector, the older ones with the experience eventually disappear and don’t impart the benefit of their advice on to their younger colleagues.”

While the City slid again on Black Tuesday, The Times carried a chillingly familiar-sounding alibi from the Met Office that had failed to predict Thursday night’s hurricane: “There was no hurricane,” a spokesman said.

“A hurricane can last for hours. These were intense gusts of short duration.”

Nobody really believed him, of course, but he was almost certainly right.