by Sugar, Alan
It was clear to me that Amstrad would eventually be completely excluded from BSkyB’s plans. This was compounded by the fact that complaints had been lodged with the European Community about the importation of set-top boxes from the Far East (which up until then had been duty-free) with demands that they should now have duty applied to them at the rate of 14 per cent. This, if imposed, would make us uncompetitive. The complaints were stimulated by one of our former sub-contractors on set-top boxes, Technosat, a manufacturer established in old East Germany. They got the hump when we decided to take the work away and make the stuff in China and they went on a crusade, complaining to the European Community and getting the attention of some high-level people in Brussels.
Thomson and Pace, our competitors, were making stuff in Hungary, so it didn’t bother them, though producing units in Hungary was a false economy itself, because assembly costs were much higher, yet the quality was lower than we were achieving in China. On top of that, certain key components still had to be imported from the Far East and duty had to be paid on them.
The success of Amstrad stemmed from using a reliable sub-contractor, Picotronics in China, for years. Once you get a smoothly running production line, all you need to do is concentrate on reducing the bill of materials, hence we were able to make good margins of around £20m per year on set-top boxes.
Bigshots Pace had paraded themselves as the great technological geniuses in set-top boxes, yet they were continually losing money or just about scraping through. They’d embarked on trying to supply the American market and had encountered massive delays. When their product was finally ready to ship to the USA, it was vastly overpriced and so they had to reduce their price dramatically. Their cash pile had virtually gone, since they’d stockpiled the entire inventory.
Large companies like Samsung don’t see making a profit as important. When you have fully integrated organisations such as these, which have other divisions making electronic components, then as far as they’re concerned, orders for finished products are just icing on the cake. After all, the other divisions are making a big profit supplying components for the product, so extra profit on finished goods is not paramount. To a certain extent, Thomson was the same, as they still had a lot of interests in microchip manufacturing. Amstrad, of course, didn’t make components. Not only did we have to buy them, in some cases we bought them from Samsung- and Thomson-owned organisations.
Even though we were fighting for orders all the time, Amstrad was still a good and profitable company. However, I knew there was only one way to safeguard its future. I arranged a meeting with James Murdoch and put a proposition to him, laying my cards on the table. I told him that most of our £20m profit was coming from BSkyB. If, hypothetically, BSkyB were to take over Amstrad, all that margin would flow straight through to him and there’d also be a great opportunity for BSkyB to eventually place all their orders with Amstrad and ultimately reduce their price. I finished off by saying, ‘I’m now sixty years old. I’ve got a loyal nucleus of around a hundred people who rely on me to provide them with employment. They’re a great team of people, but the burden of looking after them for evermore is starting to worry me.’
Then I pulled out what I considered my final trump card. I said that while I was fully aware that he was in charge of the business, he just might want to run the idea past his dad and pass him a message that I wanted to bow out gracefully from the electronics business. I was keen to emphasise that I wanted a win-win situation for my staff and, from a commercial point of view, BSkyB would eventually save a fortune on set-top box procurement. If there were any loyalty left in this world, Rupert would understand my position.
From every angle I looked at it, it was a great idea, but to be perfectly frank I didn’t feel confident anything would come of it. To my surprise, James called me back a couple of days later to say they were interested and would like to take it a little further. Then he added that he would be discussing it in confidence with the senior executives at BSkyB, to see whether they thought it was a good idea. When I heard this, I thought it would be the kiss of death for the deal.
Robin Crossley was a technical consultant for BSkyB. He’d been there a long time and was quite friendly with me – he was about the only one there who remembered my involvement in the early days. Robin called me to discuss the matter and we had a good chat. He was a straightforward kind of fellow and after a while I felt he was onside. He told me of some of the disasters occurring with other manufacturers. This was quite heart-warming because up till then no one at BSkyB had ever mentioned problems with the other makers. Sometimes we’d find out on the grapevine when, for example, Pace shipped a whole load of set-top boxes containing a faulty component and had to rework them all, or had let them down badly on deliveries. I prided myself that Amstrad was always bang on time. Anyway, Robin got the rationale behind BSkyB taking over Amstrad and told me he’d recommend it as ‘not being a bad idea’.
I don’t know to this day whether this was a bit of internal play-acting on James Murdoch’s part or whether Rupert had told him do it, but this process was repeated a few times over until all his senior staff had discussed the idea with me. I had several conversations explaining the rationale to people like Brian Sullivan, the marketing director, and Alun Webber, the chief technology man.
Webber saw the logic of it, but was concerned about relying on just one factory. ‘What would happen if the factory burnt down?’ was the argument. I explained a very simple principle in electronic manufacturing. While some of the big companies used two manufacturers in their supply chain, it was all academic because both manufacturers used the same components. So the problem was not if my factory burnt down; the problem would be if one of the suppliers of a key component in the set-top box was suddenly unable to supply it, then every factory would shut down. In fact, the unavailability of a component costing just 10p could stop all the factories making finished products. This was something the Harvard Business School manual hadn’t taught them. They’d seen the big picture of using two manufacturers as insurance for continuity of supply, but had completely ignored the fact that both needed customised components unique to BSkyB! The fact is, if they wanted to duplicate anything, it should be the component supplier, not the final assembly plant.
I think my message allayed his fears. To ease them further, I suggested that there were lots of other sub-contractor factories we could use in China and if it made them happy, we could easily set up a second production line at a completely different location, so that in the event of an earthquake, fire or typhoon, at least one of them would be running. I think that satisfied him in the end.
Eventually, the staff at BSkyB signed on to the idea and they moved on to the due diligence phase, checking Amstrad’s financial records and the engineering and development department, as well as visiting the factory to see how we had set everything up. I had learned a very big lesson from previous attempts at selling companies, in particular with Psion. At the time, I was seen by Psion to be all over the details, following every enquiry they made. It must have come across as if I were worried that some secret would come out, which of course I wasn’t. I must have looked desperate. Now I knew it was time for me to step right back and allow the due diligence process to go ahead without me poking my nose in. I just let my people get on with it and asked them to keep me informed, minute by minute, as to what was going on.
Simon hosted a delegation to fly to Hong Kong and then on to China to see the factory. We told Picotronics what was happening and how important it was that we showed them an efficient and streamlined organisation. It wasn’t as if we had to fake anything up – they were extremely efficient and streamlined – but it was worth telling them what the exercise was about.
When BSkyB investigated the logistics of how Amstrad purchased its components with such a slim team of people, they were astonished. We were advised that Pace had thirty people in the purchasing department – we had two. We also had just two people in the shipping depa
rtment. They couldn’t believe what a well-oiled machine we were.
It became clear to them how we were able to make the profits we had, compared to the likes of Pace. I explained to Alun Webber that, having spent forty years in the electronics industry, I knew what rang the bells of the component suppliers: quantity. Pace and others would never place an order for large quantities of components to cover a contract given by BSkyB. Instead, they figured that giving out the orders month by month would allow them to continually negotiate the price down. We would do the complete opposite. If BSkyB gave us an order for half a million pieces, we would go and negotiate an irrevocable half-a-million order with all the components suppliers and tell them it was guaranteed. Pace thought they were being clever with their strategy, but clearly they weren’t.
Component manufacturers are realistic people. They consider that an order is what they know they will have to ship on a firm basis. For example, to them, an order for 50,000 with a promise to buy another 50,000 next month is not worth the paper it’s printed on. On the other hand, an Amstrad firm order for 500,000 with a delivery schedule for 50,000 a month over ten months – now that’s what rings their bells and that’s how we got them to come up with the right price. I told BSkyB that each and every time they released an order to us, we would go into bat in this way with our component manufacturers. I also explained that at the same time we would secure the currency, so we’d not be exposed by any variation of the US dollar against the pound.
All in all, they were very impressed and shortly afterwards I received a call from James Murdoch telling me the due diligence had gone well and there were no serious issues. He would be sending me a letter that day making a firm offer for the company.
The offer was for £130m. As we were both public companies, we had to involve investment bankers, lawyers and accountants to come up with an offer document to be sent to BSkyB’s shareholders.
BSkyB’s chief accountant called me to ask which set of advisers we’d be using and how much did we think they’d be charging. He told me that the team he’d put together was going to cost in the region of £1m in fees. I told him there was no chance we’d be spending that sort of money from our side – I would get the whole lot done, including Herbert Smith’s, Deloitte’s and Rothschild’s fees, for around £400,000. That was my target. He didn’t believe I would be able to pull it off. Half jokingly, I said, ‘If you want, let me loose on your advisers and I’ll get the thing done for you at the same price!’
The deal was done. The offer document was sent out in August 2007. It relied upon the acceptance of Amstrad’s shareholders to take up the deal, which was very much a formality, as the offer they’d made was very fair. Our shareholders had a lot to be grateful for – a year or so earlier, Amstrad had amassed so much cash from its profits over previous years, we redistributed about £50m back to the shareholders. Now, on top of that windfall, they had this new offer. Of course, I too would be a recipient, by way of my 30 per cent shareholding.
The deal went through and was consummated by September. It was then that I announced to all the Amstrad staff that BSkyB had successfully acquired the company. As far as I was concerned, I had secured their future. I told them that a new wave of management would be coming in, but I had agreed to stay with the company for at least a year to ensure its smooth and gradual transition.
It was quite a sad day really. It was emotional to finally be giving up the reins of my child, Amstrad. But it was the wise and correct thing to do, as the writing was very, very clearly on the wall. Had I not made that move, I fear Amstrad would have been totally pushed out of BSkyB’s plans, resulting in the company going down the pan – not because it wasn’t a good company, but because it had no ideas other than set-top boxes.
Plus, I was tired of hustling.
Rupert Murdoch rang me the day after the deal went unconditional. I thought it was a strange phone call. He said, ‘Thank you very much, Alan, for the deal.’
I was a bit taken aback. ‘What do you mean, Rupert?’
‘I just mean, thank you very much. You’ve done me a great favour and I really appreciate it.’
‘No, Rupert, I’m the one who should be thanking you. You’ve done me a great favour.’
I think it was his way of letting me know that my little throwaway line to James Murdoch a few months back had been the catalyst to make this deal happen. It was Rupert’s final gesture, as payback for the effort I’d contributed to BSkyB’s fantastic success story. In the end, good old-fashioned loyalty did kick in.
*
Alun Webber became the managing director of Amstrad and asked me to assist him during the changeover, which of course I did. He needed to understand the operations of the company and think about how it would go forward. There were regular meetings held at BSkyB’s headquarters in Isleworth. At one particular meeting, when we were discussing products, I expressed my surprise (now I no longer had any axe to grind) at how Amstrad had been excluded from HD products. Now we were all one family, I told them they had nothing to lose by letting me know how much they were paying for HD set-top boxes. I’d already heard a figure through the grapevine and had been shocked. Ian Saward and I had done a back-of-a-fag-packet calculation and convinced ourselves that, if we were given the go-ahead, we could produce an HD box for around £70 less!
I remember that meeting very well. Brian Sullivan, the marketing director, was going on about how the transition of Amstrad to BSkyB had to be done slowly and delicately. They’d decided that BSkyB would concentrate on HD with the other suppliers, while Amstrad would continue with the lower technology Sky+ and non-PVR Digiboxes.
I interrupted his flow and said, ‘With all due respect, now you’ve acquired Amstrad, you need to exploit what we’re good at. I have to tell you, we could produce this HD box seventy pounds cheaper than you’re paying for it.’
There was a stunned silence in the room.
‘Seventy pounds?!’ he exclaimed. ‘How much are we paying?’ he asked one of his staff. They told him.
‘How can Amstrad do it for seventy pounds less?’ There were more bemused looks. Are you sure, Sir Alan, you could make them for that price?’
‘Brian, I’m not normally wrong. I say again, I have no axe to grind other than the prosperity of Amstrad and BSkyB going forward. Give or take a fiver, we can make them at that price, including all the royalties you have to pay and our labour costs. Everything.’
I continued, ‘Remember, Brian, under the old circumstances, Amstrad would be asking you to pay more because we’d need to make our profit, but now you own the company, there’s no Amstrad margin – you get the benefit of the low price.’
Brian was shocked. He immediately initiated a plan whereby Amstrad would produce the HD box and, to this day, they continue to produce large volumes of them. In fact, they have now produced a second-generation unit.
BSkyB got their value out of the Amstrad acquisition. I warned them many times, ‘If you keep the team mean and lean and let them be autonomous, you’ll reap the benefit. But the day you try to integrate them into the massive BSkyB machine and lose control of who does what and start apportioning the costs of your engineering department to Amstrad’s, the whole acquisition is going to be a waste of time. You’ll lose sight of the true costs and the benefit of making the stuff yourself I don’t think they grasped this.
The point I was making was that when you acquire a company, you tend to look into whether there’s any duplication. You don’t, for example, need two accounts departments or two logistics and delivery departments. Normally, you’d merge them together to benefit from economy of scale. The danger with this is that you would then never pin down what the Amstrad manufacturing division actually costs. Under such a scheme, if an accountant were asked in a year or so whether it was viable for BSkyB to be in the manufacturing business, they could come up with arguments – by apportioning costs of the accounting or engineering departments external to the actual Amstrad unit incorrectly – which woul
d make the proposition look stupid. Such an accountant might then conclude that BSkyB should revert to buying from people like Pace or Samsung.
Regrettably, after I left, they did carry out a certain degree of rationalisation and some things moved to head office. Not that it’s any of my business, but by not keeping Amstrad as a separate entity and putting up with a bit of duplication in certain areas, they would lose sight of the benefit of this great deal.
Having spent so many years in business, there are times when I see things so clearly – both advantages and pitfalls. Very often it isn’t a case of knowing what to do; it’s knowing what not to do. I get frustrated when I see people going down the wrong path despite my advice to the contrary. I’ve come to the conclusion that it’s like telling children not to touch a hot kettle – they will only learn and understand why once they do it. There was no better example of this than when, despite my warning them not to set up production in Romania, they did just that shortly after I sold Amstrad to them. That particular lesson took two years for them to learn and, sadly, everything played out exactly as I’d predicted. I guess I must come over as too heavy-handed or too cocky when I say these things. But it was their misfortune that they chose to ignore me.
Nowadays, the Amstrad name is no longer used. I asked BSkyB’s CEO, Jeremy Darroch, whether there was any possibility of letting me have it back, just for old times’ sake – maybe my grandchildren might want to do something with it in years to come. Apparently, James Murdoch didn’t like the idea. It’s a shame, but I can’t complain really – they bought the company. So I guess the Amstrad name will just die out as one of those old brand names of the past.