APRIL 12, 1973
The Slater Walker Formula
AN ADDRESS BY James D. Slater, F.C.A.,
CHAIRMAN, SLATER, WALKER SECURITIES LIMITED, LONDON, ENGLAND
CHAIRMAN The President,
Joseph H. Potts
Mr. Slater-let me say at the outset that, although you may be a bit of an enigma, we are all delighted that you are not a stubborn nor a difficult person to get along with. If such was not the case we would have been forced to add to the normal but generous stipend which we offer to our guest speakers-consisting of a free meal at the Royal York Hotelto the extent of some 50,000 pounds and flying in your own black leather chair.
For the benefit of those of you who do not appreciate the relevance of those remarks, I hasten to explain that it was our guest today who is generally regarded as having saved the Bobby Fisher-Boris Spassky Chess Match last summer by adding 50,000 pounds to the prize money.
Indeed his incredible success may well be explained in chess terminology by reason of his oft repeated reliance on opening "Pawn to King Four". I won't attempt to explain the significance of that move for two reasons. In the first place, it would take too long and in the second place I really don't understand it myself having first learned of it last night in a discussion with my eldest son.
I had occasion to review recently the financial statements of Slater Walker Securities Limited for the year ended December 31, 1972 and noted that profits before taxes but after deducting minority interests and transfers to inner reserves, amounted to 17 million 573 pounds, which was subject to taxes totalling 5 million 397 pounds-a not inconsiderable sum.
This brought to mind the story told in the British House of Commons by Richard Sheridan in or about the year 1800 when William Pitt was Prime Minister. Sheridan was criticizing the burdens imposed on the people by the Tories who were then in power.
The story as related by Sheridan goes as follows:
"There was a man named Patterson who had a shop in Manchester and had painted on his cart 'Pitt and Patterson.' As it was known that Patterson had no partner in his business, he was asked why he put the name of Pitt on his cart, since the latter had no share in the business. According to Sheridan, the apocryphal tradesman replied, 'Ah, he has indeed no share in the business, but a very large share in the profits of it.' "
Mr. Slater, last Thursday we were privileged to hear an address by a most remarkable young Canadian author and poet-Margaret Atwood. During the course of her remarks, she turned to me and said, "I did forget to ask you which empire this Club represents."
I didn't attempt to answer her at the time, but as you will appreciate we no longer represent the Empire which existed when the Club was founded some 70 years ago. People often suggest that we should change the name of the Club on the grounds that it is an anachronism. We steadfastly refuse to accept all such suggestions. The Empire Club is an integral part of the fabric and history of Canada. We would no more change our name than we would stand idly by and watch the destruction of a building of equal historical significance. We are proud of our name because we are proud of our Club and we are proud of our Club because during its 70 years of existence it has given the citizens of Toronto and of Canada the opportunity to hear men and women of distinction, such as yourself. Sir, you do us a great honour in coming to address us today.
And speaking of empires, I can't help but think how appropriate it is for you to speak to The Empire Club since you, and your colleagues, have created a new empire, indeed several empires, over the course of a very few years.
Our guest was selected as Business Man of the Year in 1973 by the Investors' Review but he is many people's idea of the Businessman not so much of the year as of the decade.
In the space of eight years, Mr. Slater has turned a mere 2,000 pounds of savings into an investment banking complex which today is valued at over 220 million pounds and is one of the largest 100 companies in the U.K.
Mr. Slater served two years in the Army as a gunner and lance bombadier following which he became articled to a firm of London chartered accountants. By 1953 he was a qualified accountant and took up a position with a group of metal finishing companies.
He did so well that he was made a general manager. In 1955 he became secretary of Park Royal Vehicles Ltd., and in 1959 he was appointed director of A.E.C. Ltd.
He was only 30 years old and showing the ability that was to take him zooming up into the millionaire class.
His next appointment in 1963 was the one that first brought him into the public eye. He was made deputy sales director of the Leyland Motor Corporation under Sir Donald Stokes.
In 1964 he began his financial career in earnest when he acquiredwith a group of associates-a substantial interest in a public company, H. Lotery and Company Ltd.
They changed the name of the company to Slater, Walker Securities Ltd., and Mr. Slater was made chairman and managing director.
He has made an immense impact on British business, on the whole of business philosophy and in overseas markets. Yet, he does not give the impression of being extraordinary.
As one observer noted
"He has no obvious great faults, does not chew the carpet in rages, bawl out his minions, indulged himself by playing with his considerable power as other business magnates have done."
He is in fact puritanical in his tastes. He does not smoke (not even cigars), prefers plain food, drinks very little, if at all, and keeps the temperature of his office and the next door boardroom 10 degrees below that of the rest of the building. It would appear that he prefers to create his own heat.
He has said-
"I personally believe that capitalism as it now is, won't survive unless it becomes more socially responsible.
"In this country it won't survive unless it picks up the tab on critical industries that are dying. If people who have expertise don't use their talents to save these industries then thousands of people will be unemployed and the country will suffer.
"It is critically important that people like me don't just make money. I am now personally searching for the best contribution in the industrial malaise that we have."
Ladies and Gentlemen-I don't always suggest a topic to our guest speaker but in this instance, I asked Mr. Slater to talk to us about the way in which Slater Walker was founded and how it has grown to its present size. He was good enough to accept my suggestion and it is now my great pleasure to ask him to speak to us on "The Slater Walker Formula".
MR. JAMES D. SLATER:
Mr. Chairman, Ladies and Gentlemen, I am honoured to have been invited to speak to you today. Mr. Potts has asked me to talk about Slater Walker and I hope you are going to find our story an interesting one. As you may know, in some countries the words "Slater Walker" are synonymous with the word "takeover". Now I would like to make it quite clear at the beginning that we have never taken over another company! We always merge with them. Now it's extremely important to understand the distinction between a takeover and a merger and to do that I think you have to go back to the parable of the chicken and the pig.
The chicken said to the pig one day "I think there is a great future in ham and eggs. I think you and I should get together. We should have a merger." And the pig who was a cautious animal said "I would like to think it over. I'll let you know about your merger proposal in the morning." The pig thought it over and the next morning said to the chicken "I've thought over your merger proposal and I don't like it. You can go on laying eggs day after day but to produce the ham I get carved up. " And the chicken said "I know -that's why I'm calling it a merger. "
To revert to the story of Slater Walker itself, it all began really in April 1964. At that time I had been working for Leyland Motors for about ten years, having previously qualified as an accountant. I had a fascinating job working as deputy to Lord Stokes who is now Chairman of British Leyland Motor Corporation. In the previous few years though, I had become interested in investment as a hobby. I had found that there were certain shares on the UK Stock Exchange which had well below average price earnings ratios, but in spite of that had very good records of increasing earnings. They were, in fact, due for a status change. These relatively neglected shares often had astonishing increases in share prices and I evolved a system of investment in them. I started with my savings which were $5,000 and in the two years 1962 and 1963, with the help of bank borrowings of $20,000 I turned that $5,000 into $125,000. Now at this stage I was still doing my job at Leyland but there was developing an inevitable conflict of interest. I found that when Donald Stokes said to me "I'd like you to go to Finland, we are having trouble with our distributor there. Would you get on a plane and go tomorrow?" I'd think to myself "Now, I've got an open position in these eight shares, and the results of two of them are coming out in a few days' time." It was becoming very difficult for me to leave the country which meant that I could not do justice to my job. So in fairness to Leyland I left the company on a very amicable basis in April 1964.
Shortly afterwards I met a Conservative MP named Peter Walker at a dinner following a series of articles in The Evening News about young businessmen, in which we had both been featured. The meeting was an important one and was the start of a very happy partnership. Peter Walker was an excellent adviser during the formative years of the company but now of course he is very much full time in politics.
A few months after our meeting Peter Walker and 1, together with some bankers, formed a syndicate to buy control of a quoted property company called H. Lotery. Its main asset was the long lease of a property which we sold at a substantial profit. We were then left with what might best be called a "cash company". I injected into that company my investment advisory business. This had grown almost inadvertently because, in addition to running my own affairs, I had started to advise my friends on a free of charge basis-but when I left Leyland I made them business associates! This became a profitable business and when I injected it into H. Lotery we re-named the company Stater Walker which was subsequently changed to Slater, Walker Securities.
The share price then went up very substantially in anticipation of future growth. I then found a small but very interesting asset situation which was a company named Thomas Brown, a firm of wholesale grocers in Australia. Using Slater Walker shares, we acquired Thomas Brown, reorganized it and redeployed the assets. We then bought another company, and then another, and so on. From 1964 to 1968 Slater Walker grew enormously. There was a bull market in the U.K., and whereas the capitalization of the company when I bought into H. Lotery was $3.7 million, by 1968 it had risen to about $280 million and it was by then a vast diverse industrial conglomerate. I denied it at the time, but looking back on it, that was what it was!
However, by 1968, and particularly in America, the word conglomerate was becoming bad news, and rightly so in many ways, because there are very few well-run conglomerates. They are the exception rather than the rule and it definitely needs a genius to run one well. So we had a good think about the situation and we decided as a Board to divest ourselves of our various industrial interests and to concentrate our activities in five main areas. These areas were banking, investment, insurance, property and overseas interests. Now banking, investment, insurance and property all have some very attractive features in common. They all interlink, they are all financial, they are all expanding areas, they are not labour intensive, and they will all benefit substantially from Britain's entry into the Common Market.
As I have said, from 1964 to 1968 we were busy building a diverse conglomerate. From 1968 to 1971 we were divesting ourselves of our industrial interest and in parallel to that putting our money and effort into banking, investment, insurance, property and overseas. Now the sale of 500 different companies is no easy task and we had to tackle it in several different ways. The main method was the satellite of associated company concept. This was where we sold a firm we owned into a public company, usually a small one, for shares in that public company. We installed as Chief Executive a very able young man, who in some cases had been trained by us. We kept a substantial stake in that company and it became an active banking client of ours. This concept was quite new when we first used it but it is becoming more popular now. It had three great advantages. First of all it helped us in our programme of divesting ourselves of a subsidiary company by the sale of our interest. Secondly it created an active banking client, and thirdly it enabled us to offer excellent positions and exciting opportunities in these client companies to people from our central team. Many of these men are very able and ambitious and would have wanted to leave us to build their own businesses anyway, so it enabled us to have a continuing stake in their talents as opposed to losing them altogether.
One excellent example I can give is a company called Ralli International. One of our most able executives, Malcolm Horsman, wanted to leave Stater Walker and set up on his own. We therefore helped him to take control of Ralli International and Slater Walker took a substantial stake in it. Last year Slater Walker initiated an agreed merger with Bowater and Malcolm Horsman is now its Deputy Chairman and Managing Director. Bowater cum Ralli is now capitalized at over $500 million and is already a very powerful international company in its own right. Needless to say, Slater Walker has enjoyed excellent capital appreciation on its Ralli International shares and in their new form they remain an excellent long term investment.
Another method we adopted was to float off the majority interest in a company to the public, forming in effect a new public company. For example, we had bought three separate listed companies in the rubber manufacturing business which we put together as a group. We improved their profits substantially by rationalization and streamlining and then, under the name of Allied Polymer Group, we floated them off to the public, again retaining a substantial stake. The shares in this company have since then continued to appreciate in value.
The third method was the straightforward and conventional sale of a company to a willing buyer. A good example of this was Dollond & Aitchison which was the leading firm of optical retailers and manufacturers in Britain. Here again, we had formed a group, having bought two other companies of a similar nature, put them all together and considerably improved profits. We then sold the group for cash to a tobacco company which was seeking to diversify outside the tobacco industry.
It was very hard work, selling off all these diverse interests during this three-year period, and in parallel building up in the chosen areas of banking, investment, insurance, property and overseas. It is a major challenge for any company to achieve a complete change of direction. Looking at our position now, we are, in investment banking terms, obtaining a significant share of the corporate finance business available in Britain. We are very well established in investment management where the outside funds under our control are now in excess of $600 million. As far as property is concerned, we now have, with our stakes in various quoted property companies, plus direct investment in certain properties themselves in London and other European centres, an aggregate portfolio of $300 million. In insurance, we have a composite company, a general life company and an industrial life company. We cover all aspects of insurance and this sector is going from strength to strength. That sums up the U.K. story.
We have, of course, also been very busy overseas. In Australia, which was our first overseas venture, we have a company which is now capitalized at $65 million. It was very successful at first but we ran into management problems about two years ago. The company has now been reorganized and seems well based for future expansion. In South Africa our company has been an unqualified success. From a base market capitalization of $2 million, with acquisitions and organic growth, the company has now grown to $140 million. Our stake in that company is now just over 30%.
In this country, from a very small base, Robert Smith has done an excellent job in establishing Slater Walker of Canada which is now capitalized at over $50 million. In the Far East we have, during the past year, developed substantial companies in both Hong Kong and Singapore, with an aggregate market capitalization of $270 million. Last year's prime objective was Europe where we did not have a significant presence. We now have listed companies in Belgium, Holland, France and Germany with an aggregate capitalization of $70 million and an excellent base for future expansion. This year's objectives are the United States and Brazil.
In every country overseas we welcome local investor participation, and for this reason always obtain a substantial shareholding in a listed company. As a result of acquisitions our percentage shareholding is gradually diluted and we usually aim to retain a shareholding of 25% to 30% when a company is fully matured. We encourage strong local autonomy with local management ultimately only consulting us on major policy changes. In this way we hope to blend into the local scene as opposed to being looked upon as foreign invaders!
Taking into account both its U.K. and overseas activities, Slater Walker Securities today can probably best be described as an international investment bank with strong property and insurance interests. Our gross assets are in excess of $1,100M. The company is now capitalised at over $400M and is well backed by the fundamentals. Since 1964 shareholders have enjoyed capital appreciation of 1,350%, during which time the stockmarket as a whole has appreciated only 30%.
A question I am often asked is how it is that Slater Walker has expanded so fast in so many different countries. What is the secret? I have given a lot of thought to this and whilst there is no "secret", I think it is fair to say that we have developed a_ company style and spirit which is common wherever we have been successful. I have tried to identify and define what it is that constitutes our particular approach in the hope that it will be of interest to you. Probably none of the ingredients on its own is peculiar to Slater Walker, but I believe that all the points taken together constitute the uniqueness of our company style.
First of all we have an outward-looking international approach to business. We are not only interested in what is happening in the U.K. (which is perhaps just as well at present!). We are keenly interested in overseas opportunities. I think I can best illustrate this approach by confirming that we have at present more overseas listed companies in which we have a substantial stake than any other British company, and perhaps any other company in the world.
Secondly, we have in general backed relatively young, professional qualified people in positions of greater responsibility than they would probably have been given in a more conventional and longer-established company. We have also motivated these young men very highly. We have share option schemes so that they participate in that way, and they also have significant personal stakes, often bought on borrowed money. It helps concentrate their minds! The other advantage of this is of course that it gives a complete identity of interest with shareholders. In other words, our managers will only succeed financially themselves if the general investing public profits as well.
An important feature of our corporate philosophy is to cut losses and back winners. A company is often worth a great deal more for its profitable parts if, for example, its only loss-maker is sold for a relatively nominal figure. It is important to have the moral courage to cut a loss-maker even if it means admitting that a recent purchase was a mistake.
Another thing we regard as very important is administrative speed and precision. I do not like Minutes to record at great length the views of each person present at a Meeting. Minutes should say who is going to do what by when so that there is no doubt about where responsibility for action lies. We have a tightly-knit central control with well-defined powers delegated to each profit centre, and effective lines of communication. We pride ourselves on our speed of decision-making, and are always looking for new ways of improving our administrative efficiency.
It is of course essential to have strong financial control. We have monthly figures and we compare results with monthly budgets and, most important of all, analyse and if necessary do something about, major variances. I know this is common and accepted business practice but I have mentioned it because it is so very important.
One of the most important features is that we have a money-making approach to business. Profitability is after all the measure of efficiency and it is essential to concentrate on making money as well as on making things. There is no point in making things without making money. A lot of people become so dedicated to their industry and their product that they regard it as a vocation. The fact that they are meant to make money for their shareholders and indeed for their country often escapes them.
I think a good example of unrealistic dedication to an industry emerged at the first Board meeting which I attended of a company we had just taken over. I will keep the name out of it to protect the guilty! I asked about a subscription of $40,000 to a trade association which was on the agenda.
One of the directors said he was Chairman of the Association and another was the General Manager. I then ascertained that most of our competitors except our main one, subscribed to the Association on a turnover basis.
I asked what our turnover was in relation to the whole, and they told me that we were two-thirds of the industry, that our main competitor was about a sixth, and all the rest together were the other sixth. So here we were paying most of the bill.
"What does it do, this association?" I asked hopefully, "Does it help control selling prices or something like that?"
"Oh no," they said, "the whole idea is to pool research facilities. "
I probed further. "Well, what have they got that we haven't got?"
"Well, it doesn't work like that" the directors said-and they told me about a complicated piece of equipment which we had and our competitors were allowed to share by virtue of being members of the Association.
Here we were paying $40,000 per annum for the privilege of sharing a unique and costly piece of equipment with the rest of our competitors. When I put it like that to them, they did agree that it needed re-thinking! It was a classic example of bad thinking which had not been reasoned through in a moneymaking way.
Now we come to what I would call stock-market orientation This really means being aware of one's share price and the underlying fundamental values and appreciating the importance of timing. It means knowing when is the right time to use shares, when to use loan stocks and when to use cash. It also means having an awareness of the importance of good communications, frank and full disclosure to the press, and ensuring that investors are kept fully informed about the company at all times.
We have always attached great importance to the systematic build-up of assets per share in parallel to the build-up in earnings. Many of our earlier acquisitions were asset-orientated for this reason. With the exception of service businesses, it is the assets which provide the base and the fuel for future earnings and this is why it is so important for any management to ensure that their company's assets are keeping in step with earnings increases.
We have also always ensured that our cash position is very strong. This is in a sense a form of insurance policy which I have always found to be a great comfort. In the last analysis, if one's company was to run into trouble, a strong cash position would be a great help in getting out of it.
When I was much younger I was fortunate enough to work for a man who had over his mantelpiece a four-word motto "It Cart Be Done". Those words stuck in my mind and are now a basic part of the philosophy of the company. My last point, therefore, is that we always approach problems with a positive attitude, and believe that somehow "it can be done". These days there are so many regulations and tax laws and reasons why you cannot do what you want to do. We do not accept this. We ask how we are going to do it and believe that there is always a way if one is sufficiently determined.
Quite apart from all these practical considerations, I think it is fair to say that most of our executives really enjoy what they are doing. If I was asked for a list of personal characteristics which executives of ours should have, a good sense of humour would be high up on it. It is vital for business to be fun as opposed to being a chore. For example, two years ago Robert Smith, Roland Rowe and I were negotiating here in Toronto with Alan Lambert's representatives to acquire control of Unas from the Toronto-Dominion Bank. We wanted to purchase two-thirds of the company and leave Toronto-Dominion Bank and the general public with the remaining third. It was therefore essential to impress them that we were bright fellows and worth backing. We came to the stage of calculating the provisional purchase consideration. The calculation was two-thirds of 283,362 multiplied by $18. I turned to my two colleagues and in clipped tones said "Check me". Each of us worked out the calculation separately, and to my acute embarrassment we came up with three different answers! Fortunately Alan Lambert's representatives thought this was most amusing and we all burst out laughing. In a sense it helped to cement the deal in human terms and I am glad to say that since then it has worked out well for all concerned.
I have tried to give you a general picture of Slater Walker Securities, and of our particular corporate style. Both the company and our way of managing it are of course continuing to change form as we go along. Where we go from here remains to be seen. Our first aim is to build an international investment banking business, and our secondary aim is to make sure that we, and everybody associated with us, will continue to enjoy doing it.
Mr. Slater was thanked on behalf of The Empire Club by Mr. Hartland M. MacDougall, a Vice-President of the Club.
MR. MAC DOUGALL:
I must say, and I think you will all understand now, that when I first met Jim Slater not so very long ago, almost two years, I was frankly astounded by the quiet, warm personality of this obviously dynamic individual who may not have admitted it at the time but certainly it could be perceived that he was out to establish at that time the biggest investment bank in the world. His tactics are above reproach as he moved ahead at an incredible pace but somehow, and we've heard today to a large extent how, consolidating his position almost after every step. In this complex age when government and other factors seem to intervene at the most inopportune moments to thwart best laid plans, it is indeed encouraging to see that with well-defined objectives, completed homework and a very strong will, success in the best way can still be achieved.
Our business community in Toronto and, indeed, in Canada I think has benefited greatly from the presence of Slater Walker of Canada and we are happy that Jim Slater saw fit to bring it to our shores. We are even more grateful that he was kind enough to come over himself today and share with us his fascinating background, views and philosophy that has led to this outstanding success.
Many thanks, Jim, from one and all.