Published in: 1977
Jim Slater was the British financier who in the 1960s introduced hostile takeovers in London, two decades before Icahn and Pickens were to ravage Wall Street. Through hundreds of acquisitions between 1964 and 1973, his platform Slater Walker (SW) grew from a market capitalization of £1.5m to over £225m. But the great stock market crash of 1973–1975, in combination with overly aggressive leverage, was the end of the success story.
BEST IN THE 60´S. After a few years as an accountant and controller, Slater took control of the sleepy H. Lotery & Co in 1964, at the age of 35. The company was later renamed Slater Walker. During the stock market carousel of the late 1960s, Slater was diligent in “printing” new expensive SW shares and though “paper acquisitions” exchanging them for real assets. To keep up with the high pace, the board, which in its entirety was executive, held board meetings on a weekly basis for several years. When the books were closed for the 1960s, Slater Walker was the best performing stock on the London Stock Exchange with a total return of 4,563%.
BANK OF ENGLAND SAVES THE DAY. In 1972, SW was active in banking, insurance, real estate and had holdings in hundreds of industrial companies. The market capitalization exceeded £200m and Slater planned to reach one billion within ten years. However, the stock market crash of 1973–75 (in the UK worse than the crash of the 1930s – the index plummeted 73%) put a stop to those plans. By 1975, most of the dominoes in the heavily leveraged SW (leverage at all levels – parent companies, subsidiaries and Slater as a private individual) had fallen and SW was kept alive by an emergency loan of £110m from the Bank of England.
MINUS MILLIONAIRE. Slater went from a net worth of £8m to, as he himself said, being a “minus millionaire” (net worth of -£1m). In addition, he was threatened with extradition to Singapore for a previous incentive program (hastily put together and violated local stock exchange rules) in the Singapore-listed associated company Haw Par. He eventually escaped extradition, but a former board colleague spent several years in Singapore’s Changi Prison.
BACK ON TRACK. In the late 1970s, Slater and a partner began buying up undervalued rental properties in London and for a while owned over 1,500 apartments. He then entered the salmon industry where he leased fishing rights in Scotland and in the 1980s his Salar Properties was Scotland’s largest fishing company. In the last years before his death in 2015 (86 years), he was chairman and board member of several commodity companies. In 2001, Slater’s fortune was estimated at £10m and it is reasonable to assume that he died as a wealthy man.
A FINANCIAL WIZARD. SW’s acquisitions were often combinations of newly issued ordinary shares, “loan stocks” in various variants (bonds, convertibles and preference shares) and cash. Loan stocks gave the option to “create equity” in the future by repurchasing them below par in a depressed market. He experimented with capital shares (which received all value growth) and income shares (which received all dividends). In a company on the brink of ruin, he created equity with a stroke of a pen by replacing already issued “loan stocks” with new ones but with higher returns and lower capital adequacy – and thus could rebook the capital difference between them from debt to equity. In SW, he did not want a “psychologically expensive” share (in absolute numbers) and implemented several scrip dividends (a type of split) to get the share price to Mr. Markets “mental sweetspot”.
NEVER MAKE THE FIRST BID. Slater learned that loss-making companies are usually worth very little to the owners and can often be bought for much less than you think. When a salesperson said he wanted far below what Slater judged the company to be worth, he learned the importance of never placing the first bid. With that you renounce the option that the other party’s bid is far more attractive than where you yourself planned to start.
IMPLICIT GOODWILL FOR HARD ASSETS. SW traded at several times the net asset value, which put a high implicit goodwill on the company. However, the acquisition targets were traded below the net asset value. Through non-cash acquisitions with newly printed shares, Slater was able to exchange implicit goodwill for real assets. Slater knew that the time the market would allow him to do this was limited – which is why he was a diligent blacksmith when the iron was hot. As soon as the ink had dried on an acquisition agreement, a memo was sent out about the next acquisition – often larger than the previous one.
DO NOT DILUTE YOUR CHANCE TO WEALTH. Despite SW’s enormous success, Slater’s own wealth did not follow the same curve. The explanation is spelled dilution. With a market capitalization of £2m and own holdings of 50%, an owners wealth increases to £5m if the company grows to £10m. But with a market capitalization of £100m and a holding of 1%, wealth increases to £5m if the company grows to £500m. It is much easier to make a £10m company out of a £2m company than a £500m company out of a £100m company.