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Abstract
This article introduces and assesses a conceptual model of institutional and corporate change. In particular it seeks to integrate strategic choice and associated corporate structure with the role of the market for corporate control (MCC) as a governance mechanism. The model is illustrated using longitudinal case studies from the British textile industry with particular reference to the acquisition policy of David Alliance as he built up the Spirella Group and then used this as a vehicle to acquire, in turn, Vantona, Carrington Viyella, Nottingham Manufacturing Company and Coats Patons. These policies are contrasted with the acquisition strategies of the Lancashire Cotton Corporation (LCC) and Courtaulds and Imperial Chemical Industries (ICI). The evidence indicates that there was no relationship between the depth of the MCC and restructuring success, but to the extent that the market lacked depth, abnormal profits accrued to market-making entrepreneurs such as Alliance. There is evidence that decentralized market-led strategies were more successful than strategies based on the integration of production for the achievement of scale economies. Successful adoption of these strategies was also based on the acquisition of financial resources through appropriate network connections and associated political lobbying channels.
Acknowledgements
Earlier versions of this article were delivered to the ABH conference, 2004, and the Pasold Conference, 2004. We would like to thank the participants for their many useful comments.
Notes
1 Miles, Lancashire Textiles; Mass and Lazonick, “The British Cotton Industry”; Singleton, Lancashire on the Scrapheap; Singleton, “The Decline of the British Cotton Industry”; Jeremy, “Survival Strategies in Lancashire Textiles”; Higgins, and Toms, “Public Subsidy and Private Divestment”; Rose, Firms, Networks and Business Values; Farnie et al., Region and Strategy in Britain and Japan; Filatotchev and Toms, “Corporate Governance, Strategy and Survival in a Declining Industry”; Toms and Filatotchev, “Corporate Governance, Business Strategy and the Dynamics of Networks.”
2 Van de Vliet, “A Ripping Yarn.”
3 Toms and Wright, “Corporate Governance, Strategy and Structure”; Toms and Wilson, “Scale, Scope and Accountability”; Toms and Filatotchev, “Corporate Governance, Business Strategy and the Dynamics of Networks”; Toms and Wright, “Divergence and Convergence within Anglo-American Corporate Governance Systems.”
4 For an empirical analysis, see Roberts, “Regulatory Response to the Rise of the Market for Corporate Control in Britain in the 1950s.” The market for corporate control is based on the premise that there is a positive correlation between managerial efficiency and the market price of the shares of a company, and that low valuations facilitate the market purchase of managerial positions. Manne, “Mergers and the Market for Corporate Control.”
5 For example, the research into the distribution of gains from mergers in the UK and the USA, see, respectively, Limmack, “Corporate Mergers and Shareholder Wealth Effects”; Jensen and Ruback, “The Market for Corporate Control: The Scientific Evidence.”
6 For a recent review of this literature, see Palich et al., “Curvilinearity in the Diversification-Performance Linkage., For an empirical UK survey see Grant et al., “Diversity, Diversification and Profitability among British Manufacturing Companies.”
7 Goold et al., Corporate-Level Strategy.
8 Hannah, The Rise of the Corporate Economy; Toms and Wright, “Corporate Governance, Strategy and Structure”; Toms and Wright, “Divergence and Convergence within Anglo-American Corporate Governance Systems.”
9 Hitt et al., “The Market for Corporate Control and Firm Innovation.”
10 Toms and Wright, “Corporate Governance, Strategy and Structure”; Toms and Wright, “Divergence and Convergence.”
11 Marshall, Principles of Economics; Kamien et al., “Research Joint Ventures and R&D Cartels.”
12 Franks and Harris, “Shareholder Wealth Effects of Corporate Takeovers”; Jensen and Ruback, “The Market for Corporate Control”; Roll, “The Hubris Hypothesis of Corporate Takeovers.”
13 Nonaka, “The Knowledge Creating Company”; Ambrosini and Bowman, “Tacit Knowledge: Some Suggestions for Operationalisation”; Levitt and March, “Organisational Learning.”
14 Teece, “Economies of Scope and the Scope of the Enterprise”; Castanias and Helfat, “Managerial Rents”; Penrose, The Theory of the Growth of the Firm; Markides and Williamson, “Related Diversification, Core Competencies and Corporate Performance”; Teece et al., “Dynamic Capabilities and Strategic Management.”
15 Toms and Filatotchev, “Corporate Governance, Business Strategy and the Dynamics of Networks.”
16 Toms, “The Supply of and Demand for Accounting Information”; Toms, “The Rise of Modern Accounting and the Fall of the Public Company.”
17 Higgins and Toms, “Financial Distress, Corporate Borrowing and Industrial Decline.”
18 Ibid.
19 Roberts, “Regulatory Response”; Littlewood, The Stock Market, 103.
20 Toms and Wright, “Corporate Governance, Strategy and Structure.”
21 ‘The weakness created in the cotton industry by the existence of a large number of small units was generally recognised, and it was appreciated that any steps which could be taken to overcome this would be of benefit to the corporation and the industry as a whole.’ LCC Board Minutes, 21 Feb. 1952.
22 Ibid. LCC Board Minutes, 25 Nov. 1955; LCC Board Minutes, 7 Dec. 1955.
23 LCC Board Minutes, 21 Feb. 1952. As it turned out, the LCC favoured the first option.
24 For example, when the Eagle Spinning Company was taken over by the LCC in 1956, J.B. Whitehead was a director of the former company for several years prior to being appointed to the LCC board as well in 1955. See Filatochev and Toms, “Corporate Governance, Strategy and Survival in a Declining Industry.”
25 LCC Board Minutes, 11 Sept. 1958.
26 LCC Board Minutes, 18 July 1957.
27 For details of these schemes, see Miles, Lancashire Textiles.
28 Higgins and Toms, “Public Subsidy and Private Divestment”.
29 “The UK Cotton Spinning Industry, August, 1962. Surplus Capacity.” LCC Board Minutes, 20 Sept. 1962. Between 1958 and 1960, cotton yarn imports increased almost threefold. Authors' calculations from Cotton Board Quarterly Statistical Review.
30 ‘The LCC divided the cotton spinning industry into seven sections which included, inter alia small combines in the American and Egyptian sectors, vertical units, and large combines apart from the LCC.’ LCC Board Minutes, 20 Sept. 1962. Evidence presented to the Board indicated that the cost of acquiring all the firms in section one would be around £11.5 million, and that the cost of acquiring 12 of the companies in section two would be approximately £11 million.
31 Clover Mill Ltd, Croft & State Spinners Ltd, A. & A. Crompton & Co. Royton Textile Corporation, Shiloh Spinners Ltd, and Jacksons (Hurstead) Ltd. LCC Board Minutes, 15 Nov. 1962.
32 Profits declined as trading conditions worsened in 1962 (CUDC; GMRCO/LCC Annual Report and Accounts); for a record of the abortive negotiations, see GMRCO/LCC, Board Minutes, 13 Dec. 1962; 11 April 1963; 16 May 1963; 17 Sept. 1963; 17 Oct. 1963.
33 FCI, pamphlet, published by the organization, March 1961, p. 4.
34 Ibid: Details of loans to the steel industry, p. 3, FCI Report and Accounts, 1947–1965, passim; condemnation of large profits in that industry vis-à-vis cotton, see Rhodes, “Government Policy and the Textile Industry,” 58.
35 Miles, “Protection of the British Textile Industry,” 191, 204; Textile Council, Cotton and Allied Textiles, 120.
36 Coopey and Clarke, 3i: Fifty Years of Investing in Industry, 8, 44–47, 94. Moreover, compared to the 1950s, the proportion of the ICFC's funds invested in textiles declined from an average of 11.2 per cent in 1950–1959 to 6.9 per cent in 1960–1969. Ibid., 410–411, Table A.16. It should also be stressed that the ICFC was largely concerned with manufacturing firms in the small and medium sized category, thereby ruling out the LCC's proposals.
37 The principal mergers/acquisitions were as follows: Courtaulds acquired the LCC and the FCDSA. ICI helped finance Viyella's takeover of Combined English Mills and the cotton textile groups of Clegg & Orr, Birtwistle, and Leigh, and was instrumental in the formation of Carrington Viyella (from the merger of Carrington & Dewhurst with Viyella International). Carrington Viyella was itself acquired by Alliance in 1983. Singleton, Lancashire on the Scrapheap, 216–228.
38 Singh, Take-overs: Their Relevance to the Stock Market and the Theory of the Firm, 20–30.
39 Hannah and Kay, Concentration in Modern Industry, 144. The five firm concentration ratio usually refers to the share of industry output (or sales) accounted for by the five largest firms. In this case without merger, the five firm concentration ratio would have decreased.
40 Cowling et al., Mergers and Economic Performance, 46–48, Table 3.2. These estimates are based on a variety of assumptions governing the treatment of: advertising expenditure as a social cost; monopoly profits after tax, and whether changes in price and output following a merger are independent of each other.
41 ‘k’ is defined as the total factor requirement per unit of output. Effectively, ‘k’ is inversely related to efficiency (the ratio of inputs to outputs). Ibid., 59.
42 Ibid., 297.
43 Ibid., 301–302.
44 Fishwick and Cornu, A Study of the Evolution of Concentration in the United Kingdom Textile Industry, 39, 196.
45 Ibid., 32–33.
46 National Economic Development Office (NEDO), Changing Needs and Relationships, 9; Zeitlin, “The Clothing Industry in Transition,” 212–216.
47 NEDO, Changing Needs and Relationships, 8–10.
48 See, for example, Ormerod, “The Decline of the UK Textile Industry.” By 2000, the British textile manufacturing industry was entirely dependent on imported yarn. Ibid., 31.
49 Ormerod, An Industrial Odyssey.
50 Pearcy, Recording an Empire: An Accounting History of Imperial Chemical Industries Limited, 302–303.
51 Calculated as the continuously compounded ratio of realized capital, divided by invested personal capital, 1956–1960.
52 Coats Viyella (hereafter CV) papers (private collection of letters and internal company documents). Rothschild to Alliance, 1 Sept. 1964; 17 Nov. 1966; 7 Nov. 1970; 11 Nov. 1970; Alliance to Rothschild, 14 Dec. 1967; 15 Nov. 1970. In fact, during the 1960s, Alliance had identified for Rothschild a sample of the best performing textile companies. Two of these companies, Stott & Smith, and W.T. Taylor were subsequently acquired by Alliance, using funds made available from the IRC and Rothschild. CV papers, Alliance to Rothschild, 19 Oct. 1962.
53 For example, Shiloh, Bleachers and Smith and Nephew. Filatotchev and Toms, “Corporate Governance.”
54 CV papers, strategy report by A.W. Ward in May, 1971.
55 The IRC was established in 1966 to ‘promote or assist the reorganisation or development of industry in the UK’. Hague and Wilkinson, The IRC: An Experiment in Industrial Intervention, 5.
56 Hansard, “Industrial Reorganisation Corporation (Investments),” 15 Nov. 1971.
57 Hague and Wilkinson, The IRC: An Experiment in Industrial Intervention, 257, 280.
58 National Archives (hereafter, NA), T326/1026, 19 March 1970, Painter to Armstrong.
59 Textile Council, Cotton and Allied Textiles, 128.
60 Ibid., 126.
61 NA, T326/1026, 13 March 1970, paper from Vintner to Maude.
62 NA, T326/1026, “Summary: Financial Assistance for the Lancashire Textile Industry,” 13 March 1970. It was estimated that the benefit to the Exchequer and the balance of payments from this change would be £6–9 million and £12–15 million, respectively. Ibid.
63 Ibid.
64 NA, T326/1026, “Financial Assistance to the Lancashire Textile Industry,” Investment Incentives, 13 March 1970.
65 NA, T326/1026, Wilson to Maude and Mountfield, 3 April 1970.
66 NA, T326/1026, Painter to Armstrong, 19 March 1970.
67 NA, T326/1026, “Financial Assistance to the Lancashire Textile Industry,” Investment Incentives, 13 March 1970. For similar statements see, for example, NA, T326/1026, “Summary: Financial Assistance to the Lancashire Textile Industry,” 13 March 1970; ibid., Maude to Pinter, 16 March, 1970; ibid., “Note of a Meeting at the Treasury,” 18 March 1970; ibid., “IRC Finance for the Lancashire Textile Industry: Paymaster-General's letter of 24 April,” 12 May 1970.
68 NA, T326/1026, Cracknell to Painter, 13 April 1970.
69 NA, T326/1026, “Note of a Meeting at the Treasury,” 18 March 1970.
70 Ibid.
71 Ibid.
72 NA, T326/1026, Vinter to Maude, 13 March 1970; Financial Assistance to the Lancashire Textile Industry, 13 March 1970; Painter to Armstrong, 19 March 1970.
73 NA, T326/1026, Meeting at the Treasury, 18 March 1970.
74 NA, T326/1026, Painter to Armstrong, 19 March 1970; Painter to Pliatzky, 16 April 1970.
75 NA, T326/1026, Painter to Armstrong 19 March, 1970; Meeting at the Treasury 18 March, 1970.
76 NA, T326/1026, “Assistance to the Textile Industry,” 24 March 1970; “Financial Assistance for the Cotton Textile Industry,” 13 April 1970; Painter to Pliatzky, 16 April 1970; Letter to Diamond, 24 April 1970; Pliatzky to Gedling and Mountfield, 12 May 1970; “IRC Finance for the Lancashire Textile Industry,” 19 May 1970.
77 NA, T224/2264, Annual Report and Accounts of the IRC for the year 1970–1971, 8.
78 Ibid.
79 NA, T326/1348, 11 March 1971.
80 CV papers, Draft press release for publication, 30 Dec. 1970.
81 Guardian, 30 Dec.1970; Draft press release, Spirella Group Ltd/ Horrockses-Dorcas, CV papers; Daily Telegraph, 5 June 1970.
82 Financial Times, 28 Jan. 1970; Spirella Group Ltd, letter to ordinary shareholders, 28 Feb. 1970. Rothschild acted as adviser to Alliance on this restructuring. Ibid.
83 Manchester Evening News, 11 July 1975, 18.
84 Calculated from Fishwick and Cornu, A Study of the Evolution of Concentration in the United Kingdom Textile Industry, 219–220.
85 The rankings are based on sales figures for 1973. Ibid., 216. Contemporary estimates indicate that the combined group was the UK's biggest producer, Manchester Evening News, 11 July. 1975, 18.
86 Guardian, 23 Dec. 1982. Other cash-rich companies, such as Dawsons and NMC, were unwilling to diversify out of knitwear. Observer, 17 Oct. 1982.
87 Textile Weekly, Sept. 1982.
88 Financial Times, 15 Oct. 1982.
89 Times, 5 Aug. 1982; Daily Telegraph, 16 Oct. 1982; Guardian, 16 Oct. 1982; Times, 19 Oct. 1982; Financial Times, 19 Oct. 1982.
90 Press announcement by N.M. Rothschild, 18 Oct. 1982.
91 Daily Telegraph, 19 Oct. 1982.
92 The sample in is not exhaustive of Alliance's takeover transactions. Those excluded are typically the private firms where data is more difficult to obtain. Given the absence of liquidity in the shares of such companies, the discount effect noted here is probably understated.
93 Press release by N.M. Rothschild, Observer, 23 June 1985.
94 Investors Chronicle, 21 June 1985.
95 Financial Times, 11 Feb. 1986; Times, 11 Feb. 1986.
96 Guardian, 24 Feb. 1986; Business, June 1987, 88.
97 Robinson, “The Economics of Fashion Demand,” 395–396.
98 Draft press release, acquisition by Spirella of Horrockses and Dorcas, 30 Dec. 1970, CV papers. Horrockses also dealt extensively with mail order companies.
99 Manchester Evening News, 11 July 1975, 18.
100 Financial Times, 16 Oct. 1982.
101 Glasgow Herald, 4 July 1984.
102 Observer, 17 Oct. 1982; Times, 16 Oct. 1982.
103 Financial Times, 24 Feb. 1984.
104 Times, 18 May 1985; Sunday Times, 23 June 1985; Observer, 23 June 1985. Of interest also is that Marks & Spencer owned 3 per cent of the ordinary shares issued by NMC in 1975. Fishwick and Cornu, A Study of the Evolution of Concentration in the United Kingdom Textile Industry, 182.
105 Daily Mail, 29 Sept. 1986.
106 The Times, 18 May 1991.
107 Financial Times, 19 Oct. 1982.
108 Chandler, Scale and Scope; Lazonick, Business Organization and the Myth of the Market Economy.
109 Toms, “Windows of Opportunity”; Toms, “Rise of Modern Accounting.”
110 Zeitlin, “The Clothing Industry in Transition,” 216.
111 Markides and Williamson, “Related Diversification, Core Competencies and Corporate Performance.”
112 These features correspond to the structural factors for assessing strategic fit between parent and subsidiary as highlighted by Goold et al., Corporate-Level Strategy.
113 Jensen and Ruback, “The Market for Corporate Control.”
114 Filatotchev and Toms, “Corporate Governance, Strategy and Survival,” make a similar case using the example of Lancashire textiles in the 1960s.