7

tr) li) c
Make or Break

BBC Finglish
0,, 3.. 7(r

Bush FIouse
London
\\'c2B 4Pl1

O BIrC English 1992

All rights No part of thrs book or rclatcd audiocassettes mav be

reserved.
reproduced, stored jn a retrieval slstcm or transmittcd, in anv form or bv anv

means, elcctronic, mechanical, photocopving, recording or otherrvise'

lvithout

prior u'ritten permission from thc copvright ou'ner'

Printed in the UK bv Hollcn Strcet Press Ltd', Slough, lrK'

ISBN: 1 85497 274 X

The publishers u'ould ljkc to rhank the follou'ing for rhcir Pcrmr5slon tn
reproduce iliustrations and photographs:

Apple Computers, Associated Prcss, Coca-CoJa' Pcpsi Cola lnternational' The

Guardian, The L-.conomist, Thc ()bsr:rver' Thc Ilmbassv of the Llnited Arab
Limiratcs, The Bodv Shop, r\dam \\'il}is.

'Coca-Ctila f,nd'C()ke'arercgistcrecltrademarksqhii:hidcntifvthcsameproductoflhe
Coca-Cola ComPant'.

F,ditor: Catherine l\ddis

Deslgn: Gtcgor Arthur
 Contents

CONTEl\ TS
Introduction 4

The Launch of New Coke 5

Tapesuipt 11

The Gwinness Affair 15

TlpescriPt 21,

Apple Cornputers 25
Tapescript 31,

Alan Bond .F
J5
Tapescript 41

Anita Rod,dick & Tbe Body Sbop 45

Tapescript 51

Tbe BCCI Fraud 55

Tapescript 61.
Make or Break

INTRODUCTION
In the 80s and early 90s big business made big headlines' It
was a period in which business captured the public's
imagination as never before.

MAKE OR BREAK tells six of the most dramatic stories

from this time in a series of progtammes specially made
for students of Business English. The programmes use
extracts from interviews with many of the main
characters, as well as contemporary BBC reports from
around the world.

In this accompanying book, you'll find tapesctipts of the

stories, notes explaining some of the more difficult
language used, and a wealth of background material'

The stoties in this collection have no final ending. At the

time of writing, many of the dramas are still unfolding'
Some of them vzill still be making headlines for many
yeafs to come.

Dauid Euans

Jtne 1992

4
 Nev Coke

THE tAUI\CH OF
I[EW COKE

4:i

I.t
1
.4.

I
,

:
I

*
1

*I
!::, : :
!

I
t

*# .*-...,
&:

**'+. :'*.

oAfter 87 years
:: of
W
w:'
:,:
going at it eyeball
to eyeball, the other
fM/E:i;. .
guy just blinked.'
Roger Enrico, Pepsi-Cola's
c hi ef e x e c utiu e o.ffi c er

5
 X[ake or Break

COCA.COLA
(loca-Cola' Coke
The statue of Libertv... The stars and stripes" '
is one of the great svmbols of the US'r\' For millions of Coke
drinkers around the q'otld, it is the product rvhich sums up the
American dream. At home in the United States, it stands for the
traditional Ametica - freedom, familv life and small-town
rralues.

As the po\ver of its image shorvs, Coca-Cola \rv'as once the

r,,,orld's best marketing comPaflv It is still easilv the dominant
plaver in the global soft drinks market But in recent years' it
has found itself under increasing Pressure from its rir''al, Pepsi'

PEPSI-COLA
The science of marketing teaches that the dominant compant- in
a market never mentions its challengers' According to legend,
the word 'Pepsi' is never used at Coke's headquarters in
Atlanta, Georgia.

Pepsi has alrvat's been the industrl"s numbet tu'o and has never
had the same r.vorries. In fact, it has become a master of
comparative adr.ertising. It showed us that Pepsi u-as lounEler
than Coke , ne\\'er than Coke, more fun than Coke' It even told
us that PePsi tasted bettet.

And then, in 1985, the re u'as Ner'"' Coke '

t-
 Ner. Coke

A BRIEF HISTORY OF THE COtA WARS

1 886 John Strith Pemberton - a pharmacist from Atlanta, Cieorgia _
invents Nlerchandise 7X, the sccret recipe for Coca-Cola svrup.

1 893 Caleb D. Brabham of North Carolina starts using the name

Pepsi,Cola for his ou,n cola drink.
1919 Ernest W'oodrufl's compan\: buvs Coca-Coia for $25 million.
The influence of the \{'oodruff familv laste d unril rhe death of
Ernest's son, Robert, in 1985.

1941- 1945 US involvement in \rorld \\rar Trvo. General Eisenhorver sets

up Coke bottling plants near battle fronts to improve rroops,
morale. (loca-Cola spreads around the world.
1950-1958 Pepsi's sales increase three-fold.

1960 Coke dir.e rsifies into non-cola drinks, like Fanta and Sprite, for
the first time.
1953 The Pepsi Generation advertising campaign promotes pepsi,s
,vouthful image .

1976 Start of national US Pepsi Challenge .

1981 Roberto Goizueta take s ove r as Coke,s chairman.

1982 The launch of Diet Coke the first ever line extension using the
'Coke'name.
198t The launch of Nerv Coke

The Pepsi Generation ads pramoted Pepsi'sloathfal inage

7
NIake or Break

JACKO
Pepsi signed NIichael Jackson 2t the Peak of his fame' His
album, Thriller, sold more than 40 million coPies, to become the
world's biggest se1ler oi all time.

Jackson was paid handsomelv for his work on the

Pepsi
campaign. But he certainlv earned some danger monev' Not
onlr- did he appear u'ith u'ild animals, but r','hile filming a TV
advert, his hair caught fire and he had to be rushed to hospital
for treatment.

o
 Nerv Coke

CONSLTilIER RANKINGS
ILach American drinks around 230 litres of soft drinks a vear.
But horv do the,v choose rvhich drink to buv? Adr_ertising is a
kev factor in consumer choice. Here 's rvhat consumers thought
of the pepsi and cokc advertising campaigns in the earrv to
mid-80s.

0n a scale of 1 (high) to t0 (lou)

Coke Pepsi Main eaent of year

1987 2 3 Start of oCoke is it'

campaign

1982 , 5 Launch of Diet

Coke

1983 6 2

1984 8 2 Pepsi's Michael

Jackson campaign

7985 4 1 Launch of New

Coke

1986 1 5 Coke fights back

with'Catch the
Wave'campaign
( Source: Vid.eo Storyboard. Tests)

As vcru can see , Coca,Coia iought bacl: stronglv after the problems
of the Neu Coke Ieunch.

9
 XIake or Rreak

BUSINESS LANGUAGE
slogan a short phrase used bv advertisers to promote an idea ot
product

blind taste test a comparison between tu'o products in rvhich the tester canflot
see v'hat s/he is drinking

R€,D research and develoPment

ad, adoert short forms of 'adve rtisement'

launcb to put a nerr'' product on the market

line extension a ne.r'' product that uses afl established name

home use test market research into use of the drink in the cust()mer's home

test marketing soft drinks companies normalll' test their product bv

introducing it to a small matket before launching it nationallv

premiam pri.ce a specialiv high price

consuTner bot line a telephone line set up to re ceiYe customer's calls

goodwill the lovaltl that customers feel tou'ards an established business

cornparative advertising that compares one product with its tival

adoertising

bottling plant a factory u.here a drink is put into bottles

OTHER LANGUAGE NOTES

Afier 87 years ofgoing After 87 vears of fighting face to face in the cola
at it eyeball to eyeball, wars, the oPponent just admitted defeat
the other guy just blinhed

soft drinks non-alcoholic dtinks

cod.e-nartted. given the secret name of

American drearn the ideal r ision ,'lt I S socicrr

to ring in the ears to echo in tl-re ears after the sound has stopped

to get someone on the ran to force an opponeflt to retreat

crate a box fot transporting a number of bottles

10

I
 New Coke

TAPESCRIPT THE LAUNCH OF

NEW COKE
DE Hello and wclcome to N{ake or Break. N{v name is David F,r-ans. In this
progfamme rr,'e look at one of the bravest and most controversial
business decisions.f the 1980s - the decision t. change the formura of
the rvorid's best selling soft drink, Coca-Cola. The recipe for Coke _
code-named Nlerchandise 7X - had remained unchanged since 1gg6
and the secrecv u,hich surrounded it rvas legendarl,. Coke had manr.
imitators, but onlv Coca-Cola could claim to bc,the real thing,. C)nlv
Coke reallv rr,-as 'it'.
Behind the slogans and the music, Coca-Cola had alu,ar,s been a
highlv traditional compaflv. It stood for old familv values and small-
tou,n r\merica; for manr. it rvas the compan\i that summed up the
American dream. In contrast, Coke 's biggest rir.al, pepsi, had a far
more vouthful image. The Pepsi Generation advertising campaigns of
the 60s and carlv 70s had positloned Pepsi as the drink of the y,oung
and fashionable. Littlc br, little thc adverrs had helped the c.mpany to
eat au,a! at Coca-Cola's dominant market p.sition. But despite this, in
the earlv 70s Coke w-as still out selling Pepsi b.v t*,o bottles to one.
It rvas the launch of a brilliant nerv campaign in 1976 rvhich realll.
worried the coke management. In these nerv pepsi advertisements,
members of the public u,ere invited to take a blind taste test c.mparing
Pepsi to Coke. It u,as called the Pepsr Challenge.

Pepsi ad vi'endv here tells me that she likes cola but she d.esn't rike pepsi-cola.
Is that right? That's right, ves. I see, rvould vou likc to do .ur pepsi
Challenge for us? Give it a trv. Alright, iust taste those t*,o colas and
tell me u,hich one v.u prefer. You prefer rhat .ne. \\,e11, lift it up
\X'endv and let's see u'hich one 1:es'ys chosen. Ooohl Take the pepsi
Challenge - ler vour taste decide.

DE Again and again, the adverts sho*,ed consumers choosing the slightlv
sweeter taste of Pepsi over the traditional taste of Coke. r\nd, bv the
earlv 80s, market research rvas proving that more and more Americans
were switching fr.m (loke to Pepsi, because thev reallv believed that it
tasted better. So, u'hen Roberto Goizueta took or.er as chairman of
Coca-(}rla in 1981, he found that his companr,,s main product rr,-as
facing serious problems. True, (loke \r'as still the biggest selling
American soft drink, but for horv much longer? Goizueta clearlr, had
to find an ans\\,'er to the Pepsi Challenge.

Then, u.hile researching formulac for Coke,s neu, cliet drink,

Goizueta's R&D people madc an intriguing discoverv. Bob

11
 \Iake or Break

\\''ilkinson, Coca-(-ola's head of corporate affairs for northern Europe,

explains u,hat happened.
.Wilkinson:
In the course of that tesearch u'e found a neu' cola flavour complex,
$.hich u,e found in internal taste test panels u'as preferable to the
original (loca-Cola that u'e'd been using tor 95 rears.

DE: Coulcl this nev' formulation reallv be an alternarive to the legendarv

Xlerchandise 7X recipe? Roberto Goizueta asked his matket
researchers to look tnto public rezction to the nelr,'drink' Over a
period o[ 3 yeats 200,000 peoPle sampled the neu' Coke formula in a
$4m market research project. NIote than half of them expressed a clear
preietence in its far.our. Perhaps Goizueta reallv had found the \\'a\I to
beat the Pcpsi Challenge.
Rut in the earlv 80s, things rr,'cre changing at Pepsi, too ln 1983,

John Sculle,v left the companv to join Apple Computers and

Roger
L,nrico became Pepsi's nev' chief executive officer. F'nrico decided
that, after run ofseveral 1ears, the Pepsi Challenge messaEJe rvas clear
a
enough. \Xrhat Pepsi needed v'as advettising r'r'ith more Youth and
more glamour. So, in 84, Pepsi launched an advertising campaign
featuring pop superstar, N{ichael Jackson, then at the r-erv peak ofhis
iame. Pepsi's UI{ marketing director, Chris Radiord, talks about the
thinking behind this move .

Radford: c)ur association with Nlichael is built on his entertainment value and
the fact that... the fact that he's a star that's sold 40 million copies of
Thriller and Bad looks on track to beat that, xnd entertains modern
t outh in the most livelv and dvnamic and ene rgetic \\'av that I think " I
rhink r,,u could u'ish to expericnce.
DE: The advertising campaign u,as a rvild success. So, in the mind of the
American public, Pepsi was flo\v not onll'the better tasting cola drink,
it u,,as aiso the one rvith the backing of the rvorld's number ofle Pop
star. Coca-Cola clearlv needed to respond to Pepsi's aggressive new
initiative. Goizueta knew he had to hit back u.ith something dramatic.
In the next part of the ptogramme $'e look at Coca-Cola's response'
1985 u,'as to be the most dramatic vear ever in the historv of the cola
rvars. Pepsi,s nev, advertising campaign had clearlv raised the stakes.
Evervone u,as waiting for Coke to strike back. Here, a BBC report
sums up the position.

BBC report: Both companies do billions of dollars' business around the world and
in most markets it's agreed Coke remains the leader. But back home in
the United States, Coke's market share has been dropping u'hile
Pepsi's has gone up.

t2

t-
 New Coke
DE with the results of the market research for the nev/ coke formula on
his desk, afld the sound of the Michael Jackson ads ringing in his ears,
Roberto Gointeta took the decision to launch New Coke. New Coke
could have been a simple line extension - in other words, it could have
been sold alongside the existing product. But that would have
considerably lessened its 'impact. Gointeta wanted to focus the
company's marketing energies totally on New Coke, and that meant
withdrawing old Coca-Cola from the market completely. In April
1985,99 yezrs after the first batch of Merchandise 7X was produced,
Robetto Goizueta announced that the recipe for Coca-cola had been
changed. It was, he said, 'The surest move I ever made,. Far from
being worried by their competitor,s dtamatic announcement, the
management at Pepsi were delighted. At their He in New york,
Roger Enrico celebrated by giving his entire staff the day off. pepsi,s
marketing director fot northern Europe, Drummond Hall, summed
up the feeling within the company.

Hall: Pepsi and coke have been locked in the cola wats for something like g7
years now. I think it's a turning point in those wars, we,ve at last got
coca-cola on the run. They've changed the basic formulation of one of
the world's biggest brands. I think they,ve done that because of the
significant success that Pepsi's had worldwide. I think it,s good news
for us and it's a sign of panic on Coke,s p^rtth^tthey,ve had to change.
DE: Panic is perhaps too stroflg a word to use, but there were undoubtedly
problems with the launch of New Coke. Although g4m had been spent
on market research for the new drink, it had ctearly not been thorough
enough. There had been no home use tests, nor had any test marketiflg
been done on the product. worse still, the research had totally faited to
take account of the strong sentimental appeal of Coca_Cola. Many
coke drinkers were furious that their favourite drink had been taken
awzy from them. An old coke Drinkers Association was founded and
soon it
had nearly 9,000 members. Wine metchants started buying up
crates of old Coke and selling them at premium prices. By early
June
the Coca-Cola consumer hot line was receiving 1500 calls a day
complaining about the new drink.
In an interview shottly after the launch, Coke,s head of corporate
affahs it northern Europe, Bob l7ilkinson, attempted to present the
company in a positive light.
'W'e
Wilkinson: are what we claim to be, we ate Coca-Cola, which is... which is a
product that has a special place in the minds of our consumers.
DE: The consumers didn't share his view. Market research in mid_June
showed thzt 70o/o of people didn't like New Coke and that g0o/,

13
 \lake or Break

thought the change in formula had been a bad iclea. In Julv, less than
90 dar,s after the launch of Ner',' (-oke, Goizueta gave in to public
pressufe afld brought back o1d sfi.le Coca Cola under the nzme 'Classic
Coke'. The decision to u'ithdrau' the old-stvle Coke had cost the
companv an immense amount of goodurill am()ng loval customefs.
Now the,v u'ere faced rvith the problems and the expe nse of launching
and selling tu,,o products in the same market. Figures at the end of 85
shorved rhat sales of classic and Nerv coke combined ,r''ere less than
those of o1d Coke the previous vear. In the same 12 months, Pepsi had
gfo\r,n bv more than 570 and for the first time in historv had or.ertaken
Coca-Cola to become the biggest selling soft drink in the US'

14

T
 Thc Grrinness Af f air

T HE GUII{ITESS
A FFAIR

oSaunders toas
certainly not a rrlan
to let the law get
in his u)ay.'
Daaid Euans

15
Make or Break

ERNEST SAUNDERS
oI
will not be the scapegoat. I uill prooe r,,tt.innocence.o Etnest saunilets

In the mid-80s, Ernest Saunders lvas a hero of the British

business wor1d. Aftet he became Guinness' managing director
in 1981, his turnaround strategv rescued the group from serious
trouble.

GUINNESS TURNAROUND STRATEGY

oThe increase in profits is....all o,cross the board'o Ernest Saunders

Saunders' turnatound strategv for Guinness had three main

elements.

tr I Rationalization
Saunders sold off or closed 150 of the gtoup's comPanies'

a 2 Concentration
Over fir-e vears Saunders spent {14 million on advertising the

+l group's core Product - (luinness.

3 Expansion
Saunders wanted Guinness to become one of the world's maior
drinks companies. In 1985 he spent d300 million on the Bell's
whisky company; the followin g year he went for something
much bigger - DISTILLERS'

t6
 'Ihe Guinness Aff air

THE TAKEOVER TARGBT

Distillers was
Scotland's biggest compafly
and it owned
some of the most famous
brand names in the wodd drinks market.
In 1985 its profits werc f,233 million on a turnover
of dl.3 billion. But analysts believed it could do much better

UK Market Share 1974 UK Market Share 1984:

54% 20%
DISl'ILLI.,RS
* oa
classic
British failu re'

In the it had tried to diversify into the drugs market,

1960s
but its product, Thalidomide, caused terrible deformities
in unborn babies. The company's image never fully
recovered. Its problems were made worse
by its old-fashioned management style.
The most important skill for a
Distillers director was golf.

*Tbe Dai\ Telegraph

THE RIYAL: ARGYLL

James Gulliver, the boss of the Scottish-based Argyll group,
had also spotted Distillers'potential as a takeover tatget. Argyll
was principally a supermarket group, but Gulliver had business
interests in other areas, including the drinks industry and
Manchester United Football Club. He launched his bid for
Distillers in 1985.

t7
 Make or Break

THE TAKEOYER BATTTE

'..in big taleeotser bid,s, anything goes...' Daaiil Brc'werton

Distillersshareholderswereofferedtwomethodsofpayment
for their shares

Guinnesso offer Argyll's offir

cash cash

Distillers or
of shareholders

shares shares

The value of the cash offer v'as fixed b1' the official bid
documents, but the value of the share deal u'ouid go up ()r
dourn according to the stock market valuation of the trvo rival
companies. Although Argvll made Distillers shareholders a
generous offer, Guinness beat that easilv, because its orvn share
price shot up during the takeover battle.

R
sII
280p
tr 350P

Cuinnoss shar" yrice

Hou' did Guinness manage to do this?

18

t_
 The Guinncss Aff air

Y/ITH A tITTtE HELP

FROM THEIR FRIENDS
Ioan Boesky: spent f70 million on Guinness
ond, Distillers shares
'Ivan the Tetrible'was the most successful arbitrageur on \X/all
Stteet. He drove a pink Rolls Royce and summed up his
business philosophy with the words 'Greed is all right...gteed is
healthy'. lfhen he was arrested on chatges of insider trading
Boesky told the police everything he knew about the Guinness
Affair.

Gerald. Ronson: bought around,925 million

of Guinness shares
Ronson's company, Heron, introduced the self-service petrol
station to Britain. By the mid 80s it was the second biggest
private compafly in the UI(. Ronson was paid a 'success fee'
when the Distillers takeover bid was completed, but later
returned all the money he had made on the deal.

Bank Leu: bought 9730 million of Guinness shares

Saunders had worked with Dr Arthur Furer, the chzirman of
the Swiss Bank Leu, during his time at Nestle.

Schenley Industries: bought 960 million of Guinness shares

Iuan Boeskl Guinness thanked Schenley for its help by giving it the US
distribution contracts for several leading brands of Scotch
whisky and the rights to the Dewars whisky trade mark.

THE tAY/
'..they can efrpect little tnercy frorn the courts...' Sam Jaffa
It is illegal to manipulate share prices during a takeover bid. A
compafly can't itfTate its share price by buying shares in itself
ar,d it can't ask others to buy shares on its behalf.

Ernest Saunders: Sentenced to five years in prison for his part

in the Guinness Affair. Released early because of poor health.
Gerald Ronson: Sentenced to ofle year in prison and fined
d5 million.
Ivan Boesky: Sentenced to three years in prison and fined
$100 million for crimes unconnected with the Guinness Affair.

19
X[ake or Break

THE LANGUAGE OF THE TAKEOVER

turnaloilnd strategy a plan to stop e comPanv's plofits falling and make them rise
agai n

to rationalize feotganization to increase efficiencv, usuallv bV closing or

^
selling Parts of the comPanv

to strealrttine o'
::,::::,,:'-1"iL;,'r::'.;;:i';:';l;l:;,:;ffi:l'
brand names made bv a particular
*#;:::l),Til,l'"u"cts
hostile bid an attempt to take over e compenv .r,.ithout its appror.al

fficial bid documentsthe documents stating the tetms of the offer

arbitrageur someone u,'ho speculates on shares in a comPanv before or
during a takeover bid

insider trading making an unfair profit on stock market deals b,v using
knou.ledge u'hich is not available to the public' In the USA and
the UI{, this Practicc is illegal

share support scbeme a plan to inflate a companY's share price

DTI Department of Trade and Industtv

OTHER LANGUAGE NOTES

all across the board in every area

to bug touse hidden microphones to record

conversations

onitsbehalf as its representaive

cir c urn st anc e s s ugge sti.ng adeliberatelv vague legal phrase. The 'membership'
miscondtct at Guinness i.n of Guinness is its shareholders, so the phrase refers
connection uitb its mernbershiP to wrongdoing in connectton u,-ith its shareholders

to Peroert tbe course ofjustice to interfere with the normal course of justice

sc0,pegod.t a person who is blamed for a mistake

'Wben
men are hell-bent ril'hen men are determined to win, gteed is in controi
for
oiaory, greed is in the sadd.le

20
 The Grrinness Aff air

TAPESCRIPT. TIIE GTINIESS AFFAiR

DE: The Guinne ss Affair was perhaps the greatest British financial scandal
of the 1980s. 'Ihe takeover battle for the Scottish Distillers compan\:
in'olving cluinne ss and the rir.ar Argvlr group, \vas ofle of the most
bittcr, the most expensi\,'c, and the most dishonest in recent historr.. It
ended u'ith the imprisnnment of several of the UIi's top businessmen.
In this programme, XIake or Break follou.s the stor\, of the scandal and
in particular Iooks at thc man ar its cenrre, the Guinness chairman,
Ernest Saunders.
(iuinness, oi course , is one of the UIi's oldest and most re spectable
companies and is famous rvotlclrvide for the dark black beer rvhich
bears its name. Rut u,hen frrnest Saunders took or.er as the group's
managing directnr in 1981, Guinness u'as in seri<;us rrouble. Saunde rs
resp.nded bv der-ising a ruthless turnaround srraregv tor the group. It
w-asspccracularlv successful, as he explains in this intervieu, gir.en in
January l!$zf.
Saunders: The increase in profits is, I'm gratified to sa)-, is all across the board.
But over the past t\\'-o years the managemcnt achievement is that u,e'vc
been able to significantly rationalizc the group and put up the profits at
the same time . In the trvo ),ears of m'managins directorship rve har.e
in fact disposed or closed of150 companies and brought back into the
kittv {40m. Nou, to c1o this, to resrrucrure the manegement and ro
implement the efficiencv pr()gramme s ()n rhe scale that rve have anrl p1;t
up the profits, this is, I think, thc achievement.

DE: In the earlr, \'ears of the 80s, Saunders' efforts u,ere focused on
streamlining the group's activiries. But br, the micldle of thc decade,
Guinness was readv tr> expand oflce more. In 19g5, it took over the
Bell's v-hiskv compan\i, in a deal rvorrh more than
f300m. The
iollorving r-car it *'e nr rirr something much bigger, Distille rs.
Distillers v'as Sc.tland's biggest compan\i and u,ith brand names
like Johnny w'alker rvhiskv and Gordon's Gin, it accounte d for 2r/u of
the llI('s total exports. Here, in a telephone inrervietv, Ernest
Saunders explains $,h1. (luinngss \\ras so interested in the c.mpanv.

Saund.ers: \{'e11, of course, (luinness rvith Distillers u,ill be able to have the scale
that is necessary to der.elop businesses in l.orld markets and that's
terriblv important, because rve bclieve that there probablt' won't be
more than 5 or 6 major drinks companies in the u-orld and u.e u,i1l be
onc of these.

DE: But Saunders wasn'r the onlv person interested in l)istillers. James
Gulliver, head of the Scottish-based Argr.ll supcrmarket group had

2l
 Make or Break

also spotted Distillers' Potential es a takeove r target and in December

1985 he launched a hostile bid for the companv. The subsequent battle
between Guinness and Argr,ll for control of Distillers $,.as one of the
most public and the most alJgfessive episodes in British business
historv. Each company attacked the other; verballv, in the courts, and
through advertisements in the national pfess. Thefe u.ere stories of
homes being broken inro ancl offices bugged. Rut the real battlefield
u'as the London stock market.
tsoth Argv1l and Guinness rvere offering Distillers shareholders two
methods of pavment for their shares. The,v could accept cash, or theY
could e xchange Distiilers shares fot shares in e ither ciuinness of
Arglil. The value of the cash offer for Distillers shates u'as fixed bv the
official bid documents. But of course, the value of the share deal u,ould
go up or down according to the stock market valuation of the tu'tr
companies. In other words, if the Guinness share price u-ent uP. so t()o
did the value of its offer for Distillers.
So, one obvious u.'av for Guinness to lJet control rr''ould be to ensure
that its own share price $'as kept as high as possible. But there's irne
big problem with that: it's against the lar','. Under the Companies Act
of 1985 it is illegal to manipulate share prices during a takeover bid' A
companv can't inflate its share price bv buving shares in itself and it
can't ask others to buv shares on its behalf. But this 1aw rvas not
universallv tespected, as Dal'id Brcvu'erton, Cit,Y trditor of The
Independent nev,'sPaPer exPlains.

Breu:erton: The other lessons are that in big takeovet bids anvthing goes, unless
the controls are very strict and r-erv rigid, and it is quite clear that thev
$rere not strict enough nor rigid enough at the time of the Guinness
takeor.er of Distille rs.

DE: Saundets was ce rtainlv not a man to let the 1^11' get in his u'av. Acting

in total secrec,y, he contacted his ftiends throughout the business

world and asked them to start buving shares in Guinness' In return,
thev rr''ere offered all sorts oi favours; cash pat'ments. inr-estments,
contracts. All thev had to do u'as use thei{ moneY to support the
Guinness share price until the Distillers takeover u'as completed'
Saunders'ex-boss at the Sr','iss Bank Leu bought {130m u'orth of
Guinness shares, and Schenlev Industries, an r\merican drinks
company, bought another f60m rvorth. C)thers invoh''ed includcd
Gerald Ronson, boss of Britain's second biggest compan)', and the
infamous New- York atbitrageur, h.an Boeskl'.
During the course of the Distillets takeover battle, more thatt 20ok
of Guinne ss share capital changed hands and the Guinness share price
rocketed from 280p per share to 350. 'Ihe value of the Guinness bid

22

t__
 The Guinness Aff air

$'as impossible for Argvll to match and impossible for the Distilrers
shareholders to resist. Thet. gladlv su'apped their Distillers stock for
the hugelv over-valued shares in Guinncss. In April 1986, Saunders
got the neus he'd bc.n uairinq tor.
BBC netos: \\,'ell, u-e'r,e just heard that Guinness have $'()n rheir historic battle
against the Argr,li group for control of Distillers, u,ho produce man1.
of the brand name s and drinks which \re see on our shelves.
DE: Ernest Saunders and his ream were delighted. But thev norr,- had to sav
'Thank you' ro the friends who had helped them to support rhe
Guinness sharc price during the takeor-er battle. For Gerald Ronson,
there u,as a cheque for d5m. The American companr, Schenlev
Industries, won an important distribution contract and the Ir.an
Boeskv fund in Nev- \'ork received a $100m investment from
Guinness. Nlean*,hile Saunders to.k a substantial pav rise and started
a ruthless re strucruring oi the Distillers organization. But, disaster
rvas just around the corner. In Nor.ember 86, just a feu, months after
the takeor.er, lvan Boeskr.rvas arrested in Ner.r, \'ork and charged with
insider trading. Shock u-a'es u,ent through the financial r.r,orld. ,\nd as
Ivan Boeskv talked to the police, rumours about Guinness started
trickling back across the Atlantic. Bv 1 December, those rumours had
put Guinness back in the hcadlines.
BBC neos: The Department of Trade ancl Industrv has appointed inspectors
under the Companies Act to int,estigate, and I quote, ,circumstances
sug€lesting misconduct at Guinness in connection with its member-
ship'. Guinness shares have plunged as a re sult. Guinness, as vou ma\i
recall, recentlv took over Distillers.

DE: 6 rveeks later, u,ith the DTI inr.estigation u,ell underwav, Guinness
took action against its chairman.
BBC news: The chairman and chief executi'e .f Guinness, NIr Hrnest Saunders,
has been dismissccl br, the companv's Board. lIc sto.cl aside a fe*,. davs
ago because of the investigation bv the Department of Trade and
Industrv. Nov- he's been told not to come back.
DE: For Saunders yet \l'orse was to come.
BBC nezps: The former chairman of Guinness, NIr Ernest Saundcrs, has appeared
in court in London charged rvith conspiring to pervert the course of
justice and with destror.ing and falsifving documents.

DE: After his arrest in N{av 87, legal proceedings in rhe Guinness case
dragged on for 3 )..utr. During that time L,rnest Saunders, health
deteriorated dramatically and he u,as financiallr, ruined. But despite

LJ
 \Iakc or Rreak

e\-er\thing, he u'ouldn't give up, making this dramatic statement'

Saunders: \XIhv am I the onlr' (iuinness director facing these charges? I have been
totall,v disadvantaged, I have no meilns to defend mr':self, nevertheless
I intend to prove mv innocence. I r'"'ill not be the scapegoat' I u'i11

prove mv innocence.

DE: Rut the judge and jur.t at Saunders' trial u-cre not implessed. Saunders
rvas eventuallv found guiltv, as Sam Jaifa of the BBC',s business staff
repotted at the time .

Jolfo' NIr Justicc Henrv said he rvas conr.inced F,tnest Saunders knew about
the i11ega1 share support schcme, though it probablv rvasn't his idea'
Though he didn't gain anvthing for himself 2Part from the prestige oi
taking over Distillers, he condoncd the scheme because he r"'as
determined to rr''in. NIr f ustice Henrv said, '\\then men zre hell-bent for
victory, greed is in the saddle'. Stiff sentcnces rvete, he added, a clear
rnessage t() those s'ho seek commercial advantage bv acting
dishonestlv, that thev cen exPect little mercv irom the courts'

DE: And little mercv \vas shou'n. C)n 28 ,\ugust 1990, Ernest Saunders was
suntenced t,' 5 tcars in prrs,,n.

24

I
 Apple

APPLE
COMPUTERS

ffi
ffi
,ffi
ffi
W
W!
ww

''Visionaries are constantly

looking ooer the horizon to
ton,orrou). If their oision is
on target it uill charuge the
ntarket and. they uill
prosper - eoen ifit rrleans
losing afeu battles
on the way.'
John Sculley, president and,
chief executiue officer,
Apple Computers

25
 X'Iake or Break

RESUME

John. Sculley

EDUCATION BA, Architectural Design, Bro'r"'n Universitv, 1961

,\lasLcr of Business .\dminst rat i"n.

\Vharton Business School 1963

PROFES SIONAL EXPERIENCE:

1983 to Present PRtrSIDEN'f AND CHIEF E,XE,CUTI\TE OFFICE,R' APPLE'

CONIPUTE,RS. CUPERTINO, CALIFORNIA.
N{astermindecl turnaround of companv after crash
in the
computer market at the efld of 1984'

1977 to 1983 PRESIDF,NT, PI]PSI.COLA PURC]HASE, NE.\[ YORK.

Supervised Pepsi Challenge advertising campaign' sarv Pepsi
or.ettake Coke as best-selling soft dtink in American
suPefm2f kets.

1973 to 1977 HEAD OF PE,PSI CO. FOODS INTE,RNATIONAL'

Turned an oPeration making a loss of $16m into a business
making $40m Prc-tar Pr"fit'

1970 to 1973 VICE, PRESIDE,NT OF MARKIITING, PEPSI-COLA.

Revir.ed hugelv successful Pepsi
(ieneration advertising
campaign.

MARKET RESEARCHE,R, PEP SI-COLA

1967 to 1970

NE,S7
1963 to 1957 ADVERTISING EXECUTIVE, MCCANN.ERIKSON,
YORK

26

t
 Apple

SILICON VALLEY

Horne of the hi-tech d.rearn... ...Birthploce of the cornputer age

Ma ri n Headlan ds S bte Pk.

! qec
\>
o 1 2 3 4 5 6 7 8 9 t0
EJ+=rrFl+r+
o 7 z 3 4 5 6 7 I 9 t0

SAN Berkeley
^
FRANCI

q
\ 0aly

t
$
I Pdcili
.7
San Francisco
\ Jr. o
q San Bruno
1

e
s J'l San
ii rlingame g
2
3l ! Lea ndro
o
ol
Granada San Mateo San Lorenz
$ Bay St.
Reach

City

lM oon Mt.
Bavl
=
Ai
City

Palo Alto - J set up his ne$r

Stanford Univetsity - its researchets ancl
@ computer compan.-v, Next, neat here
graduates have been central to the vallev's
Pescadorc State Ecsch

Pescaderol l
La Honda

3t.gaech

/a
Los Altos - the fitst Appie computer *,as
hete, in the Jobs' familv garage

..:.

'
SirE
4J j
San ose
!:}
,' has an impottant research laboratory here
c' ) l. _c(-n rrrncroaz_(l\j>1\2. - I ?

27
 Nlake or Brcak

APPLE'S PROBLEMS
7 Steoe .Iobs
obs uras chairman, founder and figurehead of Apple'
but
Steve J

he rvas also the source of gre2ltest c()ntlict rvithin the companv

and Jobs
Scullev asked Jobs to gir-e up his opcrational duties
later resigned'

2 Managernerlt structure
Apple's managemcnt \\'as organised on divisional lines;
each

division had its ou'n sales, marketing, product development'

staff etc. Scullev rePlaced it s'ith a functional maflagement

structure - one sales department, one marketing department'

one ptoduct c1e ve lopment department etc' for the whole
c()mPanv. It meant laving off more thafl 1000 emplovees'

3 Gross rnargin
Scu11er. hacl increased r\pple's advertising budget from $15m to
$100m but hadn't invested enough in
the companv's R&D
programme. To do so, he needed to increase Apple's
gross

margin.

SALES RU\IENUL,S -
PRODUCTION COSTS
GROSS MARGIN +
+ R&D?
ADYtrRTISING?

Scullev decided to re-position the companv and target

the

business market. This u'ould mean bigger profit margins

and

los er adr ertising costs.

t__
 Apple

IBM
IBM, known throughout the busi-
fless u/orld as 'Big Blue'; is
giant of the computer industry.
But its image is solid and respect-
able rather than innovative and
exciting. Its executives wear blue
suits and white shirts. They ded-
icate themselves to customer sef-
vice, conformity and profit.
Nobody ever got fired fot choos-
ing IBM, they say.
APPLE
!7hen Apple started tp in 1977, it
the
YS was a company of the counter-
culture. Its executives dressed in
T-shirts and jeans. Loud rock
music played in its labs and
offices. Apple aimed to shift the
focus of computers away from
institutions and onto individuals.
Fot Apple, the personal computer
u/as a set of 'wings for the mind',
for people to develop their ideas.

GROSS MARGIN

APPLE COMPUIERS:
groEE margin
Apple's success in In 85 Sculley raised
{ Gross margin
the 83i84 period as "/" of sales prices and targeted
52
concealed se.",era1 the business market.
problems. In 50
He managed to
particular, the 48 drastically improve
companv had the company's
46
neglected its gross gross margin.
margin
42

40

7983 84 85 86 87 88 89 90 97
Sources: Company repotts; Gartner Group - Yardstick

,q
llake or Break

THE LANGUAGE OF THE TURsAROLTND

sbakeout 2 slorr'clown in an industrv leading to business failure

sunrise cornpany a new comPanv using nerr'' technologl'

cbief executive the person u,ith tesponsrbilitv fot tunning an organization

officer(CEO)

distribution outlet a place from u'hich goods are sold

to Plug to pfomote

i,noentory unsold stock

saturated a market is satutated u'hen al1 the potential customers have

alreadv bought the Product

stockroorns places whete goods ate kePt

to go bust to go bankrupt

functional an organizational structute rr''hich divides a companv inttr

firandSement functions - production, marketing, etc.

gross margin revenues remaining after production costs have been Paid

to reTosition to change the image and target market of a product

compatible able to use the same Programmes 2s a c()mputer produced b,v

another compan\'

OTHER LANGUAGE NOTES

antitbesis opposite

typified rr,'as t,vpical of

ostracized ignored, excluded from normal social life

fi.gurehead the leader or public face of an organization

cdfnPus an of land r.'"'ith manv differe nt buildings on it - often used

^te;-
to describe the lavout of a universitv

30
 Apple

TAPESCRIPT. APPLE COMPUTERS

DE: Silicon \,'aller-. Home of the hi-tech dream. Birthplace of the computer
age. In the carlv 1980s this strip ofland iusr sourh ofSan Francisco \vas
compared to Florcnce at the height of the Renaissance . It was alive
u.ith nerv mone.v, neu, ideas and nerv technologv. The Vallev's \ic)uflll
entrepreneurs trulv believed that their rer.olutionar\- computers would
change the u,'or1d.
But, bv 1985, that drcam lav in ruins. ln a sensational industrv
shakeout thousands lost their jobs and hundreds of brilliant sunrise
companies $rent t() the r,,,al1. ln this programme, NIake or Break tells
the storv of Applc - a companv that made it through that slump - and
looks at the role of John Scullev, Apple's chief erecutir.e officer - the
man v,'ho made the tough clecisions rhat ensured his companv
surv ir.ed.
In the earlv 80s, Apple had been the darling of Silicon Valler,. The
companv u-as foundcd in 1,977 br, voung computer eflthusiast, Sreve
Jobs. ,.\t first, Jobs and his colleagues u.,orked our of a suburban
garage, but in less than 5 r'ears Apple had gro\vn to be one of
Ame rica's top 500 companies and bv 1983 u,-as the computer industrrr's
main challenger to IBNI, rvith a turno\.er of more than $1bn. But
success hadn't reallv changed Apple that much. It u.as still far from
being a conventional ,\merican c()rporation. Apple rvas a companv of
ideas and ideals. Its aim u,as to shift the focus of compurers au-av l.rom
institutions and onto individuais. For App1e, the personal computer
v'as 'a set of u-ings f<rr the mind' - a tool rr,,hich allorved people to
develop their ideas and realise their true potefltial. Here's Christopher
Flird, an expert in business research and inr.estigation, talking about
Ster.e Jobs and Apple's philosophr..

Hird: The thing u.,as, Ster.e Jobs had this great vision. I mean he did believe
that there should be a computer in even home . Norv at the time, of
course, that was reallv a revolutionarv idea. So it u,asn't sufficient that
he just had a good product, rvhat he also needcd to do u,as he needed tcr
have a u,a1. of selling that product and that idea to people.

DE: To achieve this aim, in 1983 Steve Jobs hired John Scullev as Apple's
chiefexecutive officer. A lot ofpeople considered him to bc a strange
choice. Scullev's brilliant career ar Pepsi-Oo1a had made him iamous as
one of America's top marketing men, but in manv rvavs he u-as the
antithesis of eve n.thing that Apple stood for. Apple u.as a company of
the Californiafl counter-culture. 'Ihe ave raEle age of its emplovees u,-as
27. Its executives dressed in T-shirts and jeans. Loud rock music

31
Make or Break

played in its labs and offices. Sculley, on the other hand, typified the
grey suits and conservative ways of East Coast corporate America.
They made an odd couple, but John Sculley and Steve Jobs worked
together to plan Apple's growth strategy. Apple adopted the
consumer marketing techniques that Sculley had employed so
skilfully during his time with Pepsi. The number of Apple's
distribution outlets was increased drarnatically, while the company's
advertising budget was raised from $15m to $100m.
John Scultey, it seemed, had arrived at iust the right time. 1983 was
an unprecedented boom year for the home computer business. Here,
John Flatman, merchandise controller of the British retailer Boots,
describes the market situation at the end of that year.

Flatman: It's been a quite extraordinary Christmas selling season for computers,
they've been about the hottest line we have. We could certainly have
sold many more of certain lines of computers if we'd been able to get
hold of sufficient stock.
DE In 1984, Sculley and Jobs planned to go one bettet. Eady that yezr,
using some of the most innovative advertising ever seen, the new
Apple Macintosh computer was launched. The BBC's Barry Norman
sent this report on its progress from the 1984 !7est Coast Computer
Fair in San Francisco.

Norrnan: Meanwhile, back to the Fair itself and to Apple's Macintosh which
completely dominates the whole exhibition. Apple are plugging their
new little portable very hard indeed, even giving away a complete
Macintosh system every day as the main pize in a series of
competitions , and a 12 ft model of the machine towers over the main
hall. By comparison with the attention given to the Macintosh stand,
poor old IBM next door looks Pructic lly ostracized.

DE: The Macintosh looked set to be rufl way success. It sold 50,000
^
units in a ni,ere 74 days and Apple's revenues to the year ending in
September iumped by a staggerirg 54o/o. Sculley and Jobs confidently
forecast a turnover of $1bn for the peak Christmas quarter and decided
to build up Apple's inventory enormously to cope with the expected
demand.
It never came. That Christmas, the home computer boom came to
an abrupt end. The market was saturated. Apple's revenues fell 30o/o
short of the $1bn target. Their stocktooms piled high with unsold
computers, the company u/as plunged into crisis. All over Silicon
Valley, firms were going bust. If Apple were to avoid the same fate,
John Sculley would have to act quickly and decisively. In particular,
he would have to confront a number of problems that Apple's huge

32
 Apple

growth in the 83/84 period had concealed. Unfortunatelr', Apple's

biggest problem u,as Scullev's friend and partner, Ster.e Jobs. Jobs
u,as chairman, founder and figurehead oi Apple, but he rvas also the
greatest source of conflict and tension u'ithin the companv. Scullev's
solution rr,'as simple: he fired him.
Next, in a drive to cut costs and increase efficiencl-, Scullev re-
structured the manage ment hierarchv along t-unctional lines and closed
3 out of the companv's (r factories. 20% of Apple 's x,orkforce lost their
jobs and hundreds of u,'orkers rvere left in tears on the company
{ campus.
Finallr', Sculley looked closelr, at Apple's profitabilit,v. Because of
x
its enormous adr.ertising budget, the companv had neglected its gross
margin - its total profits on total reyenues. Here, Christopher Hird
explains the implications of this.

Hird: In the computer business to keep ahead vou'r,e got to keep inr.esting in
research and development. Now the gross margin that Apple rvas
making rvas big enough to par, for this massir-e advertising campaign,
but it rvasn't big enough to par, for the advertising campaign and the
inve stment in research and development. So, the v lust u,eren't
protltable enough.
DE Itwas obr-ious to Scullev that the companv needed a radicallv different
marketing strategv. He decided to re-position r\pple and to targer the
business market. This rr,,ould e nable the companl. to reduce
adr-ertising and distribution costs and together u,ith higher prices,
could significafltlv improve the companv's gross margin. But for
Apple, a transition like this was not going to be eas,v, as Christopher
Hird explains.
Hird: So rvhat the r, had to do rr,'as find a u,'av of re,positioning Apple in the
business compute r market. But, of course, the thing was this didn't fit
in very rvell rvith Apple's ou.n traditions. f'hev \\,ere . a fiercell
independent companv, thev didn't like the idea that rhev would have
I
to sort of pav attefltion to u,hat the rest of the u.,orld rr,'as doing - after
I
all, the,l.'d reallv made their name br, sayinEl there's something different
l about computers - it's not just for business people, it's for something
that goes into the home. But it became absolutelv cleat that if ther.
were going to survive thev had to makc a business computer, rvhich
was, of course, a big market and a grou,ing market and if vou make a
business computer, it's got to be compatible v'ith the people rr,'ho
dominate the industrl, - ItsM.

DE: Apple had to change their approach in other u,ays, too. Business users
were different from home computer enthusiasts. Thev rveren't going

.).)
NTake or Brcak

to be impressed bv mere technologv. Thel' wanted comPuters that

\!'ould urork for them, save them moner', solYc their problems. So,
Apple's strategv was not s() much to se1l computers as t() sell solutions
to problems. The most famous examPle of this \\'as the Apple N{ac
desktop publishing s),stem. \\,'hen it v'as launched, it cost just $12,000.
The pricc oi a conr-entional st stem offering the same facilities?
$250,000. Apple had obvioush founcl a clear u-inner.
Positive results from John Scullev's conttovetsial decisions were
quick to start coming thtough. Bv 1987, Apple N{acs v''ere selling at a
rate of 50,000 a month and the companv's share price \vas more that 3
times higher than in the dark davs of 1985.
Bv dramaticailv changing the direction and the character of the
company, John Scullev hacl ensured that Apple survived and could
continue to be IRM's most seri()us comPetitor in the S500bn \\'otld
computer mafket.

34
 Alan Bond

AtAl\ BOI{D

rE&

'I set rnyself a goal -

I'd m,ake a rnillion
by the tirne I uas 27.
II
And I d,id..' fli

AIan Bond

JJ

L I
Make or Break

THE AMERICA'S CUP

\\'hen the r^cht Ailrtralid lI wc>n the America's Cup in 1983, its
o\\,ner, Alan Bond, u,as hailed sporting hero. But Bond has
es a
alu,'avs been a businessman first and a sPortsmafl second' He
had invested millions of dollars in his victorl and, like anv good
businessman, he wanted to see a return on his investmenr.

tIl',

BONDY & THE BANK'S MONEY

In the mid 80s the banking svstem r,,'as au,ash w-ith monev. In
the 70s some of the biggest borrowers had been the
governments of developing countries like Nigeria and Btazll.
But b,v the mid-80s manv of the se countries could no longer
meet their repavmeflts. The tesult was that the big banks u'ere
desperatelv looking for nerr,' borrorvers. People like Alan Bond
r,,,ere onlv too happv to he1p.

With access to enormous supplies of credit, Bond,v embarked

on ofle of the biggest takeo\-er binges the u'orld has ever seen.
He gained control of hundreds of companies all round the
u,or1d, including the brev'ers, Castlemaine, and the Australian
T\r companv, Channel 9-

36
 Alan Bono

BLACK MONDAY
Black Monday. October 19th 1987. The worst lttancizlcollapse
since the Great Crash of 1.929.

r daY

oote
L.,rer

was

Bond didn't admit it at the time, but Black Monday was a

disaster for him. By buying in the pre-crash butl market he had
paid far too much for his assets.

37

I
Make or BreaL

TIlTY ROWTAI\TD & tO]VRI{O

'... the unacceptable face of capitalistn"
- Ted' Ileath, former British Prime Minister

Roland'Tinv'Rou"landisnot2manvouarguewithTheonlv
thingthat,stinvabouthimishisnickname.He,snearlvl'9m
tall and his business is the giant Lonrho empire Lonrho has
interestser.etvrr,,hereintherr'-orld'it,soneoithebiggestfood
producersinAfricaandals<lolvnsBritain,sob.rert'erne$'SPapeI.

Inoctoberlg88,AlanBondlaunchedatakeor,erbidforTinv
Ror','lancl's comPanv, but he got a verY nastv shock Rorvland
defendedhiscompanl.bvaskingBond'sbankerstheobr'ic-lus
question-'shouldvoureallvbelendingmonevtothisman?'
The ansu"er. of course, u'as 'No''

r\ Lonrho team produce d a report u'hich called Bond's

businesses.ThesouthseaBubbleofDebt,.Hewas'sothev
claimed, technicallv insolvent - in other \\'ords' bankrupt'

onebvone,Bond,sbankersbeganttlrvithdrarvtheirsupport.

JO
 Alan Bond

RISING INTEREST RATES

In the final vears ofthe 1980s, interesr rates rose dramaticallv all
round the \r.orld. Rates in Australia \vere often e\ien higher than
the ones shorr"'n here. For Alan Bond it u-as a disaster. His
interest bill u-as 9280 million in 1987, but b1. 1989 it had climbed
lo morc rhan Sl billi,'n.

I\TEREST RATES
Three-month morey market9/o
12 l,' nited States
10

6
4
t-

Ju,pan
T
Z-
,-
T
t0 Cermany
T
T-
-2-
Britain
12
10

1985 86 90

39
Make or Break

BUSII[ESS tAI{GUAGE
tycoon a rich and powerful business Persori

selfmad.e rnillionaire a millionaire who has made his money himself - he hasn't
inherited or won it
proPerty speculator someone who makes his money buying and selling land'
buildings etc'

to dioersifi to increase the number of zreas in which a company operates

to liqaidate assets to sell goods, property etc' for cash, usually in order to pay
off debts

corporate raid the sudden purchase oflatge numbers ofa company's shares

assets all things owned by a business which have z vzl:ue

to go bust to go bankruPt
cash flotu cash made by a business' normal activities

to seroice a d.ebt to make a regtlar payment to the lender

brewing making beer

market capituliza.tiontotal value of a company's shares on the stock market

casb cou':
;T?:::'"""1ffiTIJ;'*:li:i.:1T:i*:"inarowgrow'fh
the Great Crash the collapse of the financial markets irt' 7929 which led to a

builrnarhet ;:'::::':;il::':." people believe that prices will rise

(oPPosite: bear market)

OTHER LANGUAGE NOTES

to tarn sotur to go bad

to lose tnoney to lose large amounts of monev quicklv

band ooer fist

awasb overflowing, more than full

binge a short period of time in u'hich vou do something intenselv

to gioe the go-abead to give permission to start something

to keep faith to trust

40
 Alan Bond

TAPESCRIPT. AtAN BOND

DE: Hello and welcome to Make or Break. My name is David Evans. In
today's programme v/e look at the rise and fall of the Australian
tycoon, Alan Bond. A self-made millionaire, Bond has been a well-
knowh figure in the Australian business world siflce the earty 1960s, tiil

but it wasn't until 1983 that he became a famous figure on the world
stage. And then he hit the headlines not as a businessman, but as an
international sporting hero.
BBC nerss: Australia 11 is by the line and the boat goes. There it is, she wins!
Australia 11 has won the America's Cup!
DE: S7hen Alan Bond's boat, Australia II, won the America's Cup on
September 26 1983, it was hailed as one of the most extraordinary
sporting achievements of the decade. The America's Cup was no
ordinary yacht race. The New York Yacht Club had held the trophy
for an incredlble 132 years and in that time the Cup had become a
symbol of American power arid prestige. Most Australians stayed up
late into the night to watch the race on TV. When Alan Bond,s boat
crossed the finishing line, the whole nation went wild. Bond or
.-
Bondy, as Australians liked to call him - became a national hero
overnight. At a patty to celebrate the victory, the Australian prime
Minister, Bob Hawke, sent Bondy and his team this message.
Hawke: There's not many occasions when an Australian Prime Minister knows
that he can speak for every Australian, but on this occasion Bondy and
all of you there, we say 'Well done, congratulations, - I don,t think
there's been a greater moment of pride for Australia than in what
you've done.
DE: But, of course, AIan Bond was flot really a sporting hero. Bondy was
basically a businessman and he hadn't won the America,s Cup
iust for
fun. He'd invested millions of dollars in his challenge and, like any
good businessman, he v/anted to see a return on his investment. Bond
was a man who had always known exactly what he wanted and how to
get it, as he makes clear in this interview about his ezrJy yeats.

Bond I wanted to make a million before I was 27 and I started business when
I was 18. And I set myself a goal - I'd make a million by the time I was
21. And I did it.
DE: So Bond was a millionaire by the age of 21 . He \r/e nt on to make several
more millions as a property speculator in Perth during the boom years
of the 1960s. Then the crash in the property market in the early 70s
forced him to diversify his interests. He went into mining, oil

4l

i
 X{ake or Rreak

exploration and retail and had soon built up Western Australia's

biggest business emPire .

But in the vears immediatelv before the America's Cup rvin, things
had not been going so v'ell for Alan Bond. He still had a vast amount
of capital tiecl up in propertv - and the proPertY market u''as dead His
investments in the Australian retail se ctor had turfled sour and he u,as
losing money hand over fist. In Februarr, 1982 the lack of confidence
in his Bond corporation had caused its share price to fall from $2.50 to
$1.50 in a single monrh. Bv earlv 1983, Alan Bond had been forced
tcr

start liquidating his assets. C)f cours(r , the America's Cup changed all
that. Prime x,Iinister Bob Ha$,ke realised the commercial significance
of the r.ictorv almost immediateh.

Hawke: It's not just a sPorting achievement, it shou''s u'hat our technologY can
do and in economic terms it'11 be $,orrh, I think, hundreds of millions
of dollars to Australia, because the tourists u-ill come, the Americans
and other nations v'i1l come here to tfl' and \r'rest this cup off us But I
don't think the\-'re going to do it, not tor a Iong time'
DE: Bob Llau,ke imagined that the America's Cup rvould bring hundreds of
millions of dollars to Australia. Alan Rond u.as also thinking in terms
of hundreds of millions of dol1ars, but he had r.er\. different ideas

about r,,'here thev should go. After the ,'\merica's Cup Alan Bond r'"'as a
winne r in the eves of the u'orld. Suddenlv eve rvbodv wanted to do
business u'ith him.
In the mid 80s thc banking sYstem n'es au'ash with monev' Banks
rvere desperate to lend and Bondv $'as onlv too happv to bottow' \\iith
access to enormous supplies of credit, he embarked upon one of the
biggest takeover binges the \\.'orld has eYer seen. In a series of dazzling
corporate raids, he gained control of hundreds of companies all over
the u,orld. Normal banking pracrice is to lend money against assets.
That u.av, if the borrou'er g()es bust, vou liquidate the assets and the
chances are vou'11 get Your mone! back again. Rut in Alan Bond's case,
banks $,ere prepared to lend enormous sums with no mofe securitv
than a potential cash flos'. If Bond wanted to buv a companv, he
simplv presefltecl the bank r,"'ith an estimate of the casb the companv
could generate. As long as the companv's cash flou' covered the
repayments on the 1oan, Bond u'ould be given the go-ahead to take it
over. 'Ihe result u.as that Bond began to constfuct a business empire
founded on debt, in \\.'hich the onlv real securitv was the name of Alan
Bond. In the next part of the programmc \ve look at the phenomenal
grou.th of Bond's organization and examine the reasons f'tr its
eventual collapse.

42

I
 {lan Bond

BBC news: Australia seems to specialise the se davs in self made millionaires rvith
international business ambitions. The latcst is Alan Bond, u,ho took
the America's Cup for Australia last autumn, and nou- plans to expand
his interests in Britain and America.

DE: Not onlv in Britain and America, but all around the rvorld. Bond
expanded into er.crvthing he could - propertlr, leisure, retail - he even
acquired a British companl producing airships. But ar this time,
Bond's growth plans were reallr, focuse d on tw() main areas: brewing
and the media.
Breu,ing v'as particularhr attracr've to Bond, as it gave him access to
the strong cash {'lou,s he necded to service his rapidlr, rising debts. In
June 85, he launched a successful takeover bid for the giant Australian
brerver, Clastlemainc-'Ioohevs. The bid price of g1.2bn \r,as a
staggering 5 time s the market capitalization of the Bond Corp itself.
The deal rras iinanced, as eycrr br- debt. After the success of such a
breathtaking coup, ,\lan Bond's next srep should har-e becn to pause
and consolidate. But, as far as he rvas conce rned, brcu,ing u,.as no more
than a cash corr''. Castle maine lage r might bc able to service his debts,
but Bond u,as looking for something a 1itt1c more glamorous. He had
decided that the future of the Bond Corp lav in television. Bond
v-anted control ofthe airu.aves. So, in January 1987, hc pulled offhis
next successfui $1bn takeove r this time for Australia's top T\r
network, (lhannel 9. Later in the 1,ear, he added the giant ;\merican
brewer, Heileman, to the pile, at a cost of g1.5bn. The debts of the
Bond Corp greu. highet ancl higher. But unlbrtunatel,v for Bondv,
1987 was not the besr vear to be taking billion dollar risks.

Nezos reports: Therc rvas panic in rhe markets todal; er, it u,as a bloodbath...I call it
the nearest thing to a meltdr>u,n I er-er u,ant to see ...It v'as as bad a day
on the markets es there's ever bccn...S<t far a breathtaking d60bn has
been wiped off the value of stocks and shares.

DE: Black N{ondav. C)ctober the 19th 1987. The worst financial collapse
since the Great Crash of 1929. The u,orld u,as iaced rvith economic
disaster. N{anv investors v'ho had bought in the 87 bull market were
financiallv ruined. In an attempt to stabilize the markcts, the British
Chancellor of the L,xcheclue r, NIr Nigcl I-au,son, gave an interview just
a few davs after Black Nfondav.

Lauson: There's no reason r.,,.h1- confidence should be rvcak, there's certainlr,

not in Britain rvhere the British economy is r.erv sound and verv
stron[J. But I belier.e that the u.orld economv generallv, despite the
undoubted problems of the United Statcs, the v'orld economr, is in
iairlv good shape.

43

ffi
Make or Break

DE: Alan Bond was one of the few people to share Mr Lawson's optimism
at the time. Just 3 weeks after Black Monday, ^t ^rr auction at
Sothebys, New York, a world record $54m was paid fot Van Gogh's
painting lrircs. The general public didn't find out the identity of the
buyer until z year lzter, but the world's bankers knew immediately. It
was Alan Bond. Just his way of saying -'I still mean business'. Despite
the general financial gloom, Alan Bond carried on as before.
According to him, the stock market crash had simply made assets
cheaper to buy. He became more and more daring. In October 1988,
exactly a yezr after the crash, he launched a bid for the huge Lonrho
empire. This time the bid price was an amazing $2bn.
But Alan Bond's problem with the Lonrho bid was not the money'
His problem was with Lonrho's boss - English businessman Tiny
Rowland. Like Alan Bond, Tiny Rowland was a fighter, he was a man
who didn't give in. He was determined that Alan Bond's bid should
fail. Rowland's defence against the Bond takeover bid was simple.
Bond would need to borrow the money to take over Lonrho. So Tiny
Rowland asked the banks the obvious question: 'Should you teally be
lending money to this man?' The answer, of course, was 'No'.
Despite all thzt Alan Bond had said, Black Mondzy had been a
disaster for him. It had wiped $200m off the Bond Corp's market
valuation. By buying in the pre-crash bull market, he had paid far too
much for his assets - in the case of Channel 9, probably twice the
market value. On top of that Bond didn't fi:zn ge his companies well.
Castlemaine's share of the brewing market had slipped from 50o/o to
38'/o in its 4 years under his ownetship. SThy should the banks keep
faith with him?
Of course, Bond could stay aflo^t for as long as he could pay his
interest bitl. But as interest rates rose fuom 72o/o to 18o/o, so Alan
Bond's problems grew. An intetest bill of $280m tn 1987 had climbed
to more than a billion by 1989. Under pressure from Tiny Rowland,
Bond's bankers started to question the Bond Corp's financial standing.
One by one they withdrew their suppott. Sotheby's auction house
even reclaimed Van Gogh's Iriset.Bor'd had never paid the bill. The
Bond Corp announced a loss of $980m for the year 88/89 and Alan
Bond finished the decade with debts of $9.25bn. One of the biggest
debtors in the world.

44
 'l'he Bodv Shop

A I[ITA RODDICK
A ND THE
B ODY SHOP

'We don't know how

t,'
L to play by the rules.'

L Anita Roddick

45

ffi
NIake or Break

THE BODY SHOP

'I d,idn't enen knott) hous to spell the uord' Businesso' Anita Rodd'ick

Anita R<>dtlick haci almost ns fu-siness experience $'hefl she

openetl her first shop in Brighton on the south coast
ofEngland
a multinational cosmetics comPanY
in 1,97(t. Todari she runs
u,ith or.er 600 sbops in 38 countries'

U/OMEN IN BUSINESS
owhen you hanse tuo kids"if they screant'ed'
a,nd did.n't uont you to go to uork, God help you"
Anita Roililick

Roddick's rapid rise to the top has taken manl people b'v
to
sutptise - not just because of hcr unconventional apptoach
business, but also because she's a w()ll-lan'

Nlomen mzke uP 409'n oi the r"'orkforce in the \\'-est' but

in
Britain and the United States thev hold onlv 2Yu of seats on the

boards of big comPanies.

46
 The Bod,v Sho

THE BODY SHOP'S

L O S/-R I S K S T R A T E G I E S

o,..,friend,s uould con7.e

dlong and say,
'This is a good, id,ear' and, ue'd say oFind, a shop,. Anita Roddiclt,

C)nc of The Bod1, Shop's great strengths is its

flexibilitv. Anita
Roddick has alu,avs been able to experiment - and make
mistakes - bccause costs are kept dou.n. Hou, is it done?

Adaertising and packaging

Xlost cosmetics companies spend huge sums of money on
advertising ancl packaging - these costs can account for nearly
half the price of a normal bottle of perfume. Bv refusing to
advertise and using ve rv basic packaging, 'Ihe Bodr, Shop gains
2 grcar advantage {,\ er lr\ compclirors.

Franchising
This sr--stcm passcs the costs of expansion and or.erheads ofl to
s()me oflc else - the franchisec. The Bodv Shop's franchisees put
up thc m()flcv to open a ne\r,. shop, rvhile the Roddicks simpty
give them a licence to use The Rodv Shop name and suppl,v
them rvith producrs to sell. Or.erheads, iike rent anci staff
salaries, arc also the responsibilitv of the franchisee. But Anita
Roddick still keeps control.

47
XIake or Break

THE GREEN MOYEMENT

oAs The Bod,y Shop gtelot, so too did the Green tn'ooern'ent""
Daaiil Eaans

chemical
In December 1984 a gas leak at the Union Carbide
later'
plant in Bhopal, India, killed 2000 people Just 16 months
.*p1o.io. in the nuclear reactor at Chernobvl in the Sor-iet
^.
Union seflt a cloud of raclioactive fallout across \\r'estern
in
Ilutope. Accidents like these helped to focus public attentioo
rhe mid-8Us , rn 'C recn' issues'

TheGreenmo\rementisbasedaroundideasofecologv,social
responsibilifi' and local democracv lts support increased
considerablv during the 80s, and it achieved political
success

jn a number of Eurtrpean counrrrcs'

of this
The Bodv Shop u'as perfectlv placed to take advantage
image.
trend as it has alu,avs had an enr.ironmentallv-friendlv
test its
Its cosmetics are based on natutal ingredients' it doesn't
customers to
products on animals and it has alr;"'aYs encouraged
re-use their bottles and bags'

Certainlv,AnitaRoddickclaimedthemoralhighgroundat
evefy opportunlty

48
 The Bodv Shop

CAMPAIGNS

'There is ntore aalue in words...The Bod,y Shop is carnpaigning.'

Anita Roililick

According to Anita Roddick, business is about more than

profit and loss. She believes that businesses should get involved
in caring for the community and the environment.

The 'Stop the Burning' campaign was one of many Body Shop
campaigns in the 80s. It aimed to put pressure on the Brz'zlliztt
Government to save the country's rain forests.

Undoubtedly, the campaigfls have also had a commercial value

for The Body Shop. In the minds of many customers, buying
something from The Body Shop is more than just shopping; it
has become a moraT gesture.

r$K; RtA
*ilI

!ni*!!
slt{lll liN
f-tl L
ryr{iir

&

*
*w ffi

49
Make or Break

BUSINESS LANGUAGE
the City the Cit,v of London, the financial centre of the I il{

franchising 2n arraflgement in which 2 comPaflY gives someone else the

right to sell or produce its products

francbisee someone who take a franchise

ooerbead.s the fixed costs of a business such as rent, salaries etc.

recesslon a slowdown in the activitv of an economv

GRBEN LANGUACE
Green movements which trv to protect the
::X1|;illitical
environmentally- describes somethiflg which doesn't damage the environment
friendly
pollutants zuere substances which polluted the envir<)nment were ar'<lided
sbunned

Greenpeace, important environmental pressure grouPS

Friends of the Eartb

acid rain rain polluted b,v the acid produced b.v industn'

ozone taver stoPs some of the sun's harmful

:ffil:':.::r*t|;:":,lt.h
OTHER LANGUAGE NOTES
cioit rights actioist in
:":,'.',nJ:;,,::1t#:;i:i.::;:iJl:li::;i,;:rvone
tu be subservient to do what someone else wants vou to do

get our jollies off on get excited about (a colloquial expression)

Achilles point normallv calted Achilles heel - it mea.ns a weak pornt

squirt a short stream of liquid

hick unsoPhisticated

clairning tbe saying that vou are morall.v right

bigh moral ground
jargon special or technical v-ords

50

n
 -t

The Body Shop

TAPESCRIPT.
ANITA RODDICK AND THE BODY SHOP

DE: The cosmetics industry evokes a world of beauty, glamour and eternal
youth. Cosmetics compaflies spend vast sums of money promoting this
dream. It can cost over d1m just to design a bottle of perfume. It can
cost well over d5m to launch it onto the market. But one of the wodd's
most successful cosmetics companies goes completely against this
trend. It has never used advertising to ptomote its products. It doesn't
even have a marketing department. Instead, it has a resident company
anthropologist. Its products are not linked to photographs of
beautiful models, but to images of burning rain forests and Kayapo
Indians. Its maoaging director pours scorn ofl the profit motive and
talks the language of a civil rights activist from the 1960s. The
company is the British-based Body Shop; one of the pioneers of Green
consumerism. Since it started in1976, it has grown froma one-woman
business to become a multinational company, with over 600 shops in
38 countries. Its success is largely due to its founder and managing
directot, Anita Roddick, although success for Roddick is not
measured in conventional business terms, as she explains here.

Rod.dick: We don't know how to play the rules. \)7e don't know, you know.
We're not subservient to the City, we're not excited about what they
would be... $7e don't get our iollies off on looking at profits. lil/e get
our real jollies off on these campaigns. . . not campaigns so much which
I love, but which... you know, going out into these indigenous tribes,
trading with them like Christopher Columbus would, preserving their
integrity, keeping their integrity.
DE: W'ell, whatever The Body Shop's corporate objectives are, they,re
certainly not those of a normal multi-million pound cosmetics
company. But just how did an organization like The Body Shop
come to be so successful? The story starts in a typically bizane fashion.
In early 1976, Anita Roddick's husband, Gordon, decided to fulfil a
childhood ambition, to ride a horse the length of the Americas, from
Buenos Aires to New York. The trip was planned to last two years,
and, during that period, Anita Roddick needed a source of income to
support herself and her two young children. With a d40O0loan from a
bank she set up a small shop in the seaside town of Btighton. At the
time it was simply a way of surviving.
Rod.dick: My husband wanted to spend tu/o years taking a horse and travelling
from Buenos Aires to New York. Well, when you have two kids, I

51
NIake or Bre ak

guess the\i $rere 3 and 5, vou suddenlv thought, well vou kneu'that
thev u'ere vour Achilles point, vou knou.', if thev screamed and didn't
want vou to go to \\,ork, God help vou. So I l','anted a verv easily
controlled area like 9 in the clock, opened up, closed at 5. But I never
thought of it... I didn't even think... I didn't even knou'hotr'' to spell
the u,-otd'Business'. It u,'as the shop. You knolv it was... had to take
f,3OrJ a rveek to pav for the stock, pav
for the kids, vou knou', food,
mortgage, rvhatever.

DE But even at this earlv stage, The Bodv Shop's distinctive Green image
was beginning to take shape. On her travels, Roddick had u"atched
how u,omen in Third \X/orld countries used natural products like
cocoa butter or iojoba oi1 to care for their skin and hair. She was
conr.inced that she could adapt some of their ideas and so she found a
manufacturing chemist u'ho could produce a range of cosmetics base d
soleh,, on natural ingredients. At the time it u'as a highlv unusual
approach. But unfortunatel,v, when she'd met the production c()sts,
she had no monev left for bottling or packaging. She got round the
problem by impror.ising; using anv bottles she could find, and
encouraging her customers to bring them back for refills.

Roddicle ... and we used the cheapest containers. \X'e did a refi11 s\stem not
because we were (]reen but because v'e didn't have any bottles, so rve
filled up Coca-Cola bottles, anvthing - vou came in, it r"'as 10p a squirt'
So that's real1v... and all the indir-idual features we kept, rve've just
made it a bit posher now.
DE Almost bv chance, Anita Roddick found herself selling environmen-
tallv-friendly products in environmentallv-friendl,v packaging. The
real boom in Gteen consumer spending $'as stil1 several vears off, but
the shoppers of Brighton took the neu' business to their hearts. The
first Bod,v Shop u'as a roaring success and u'ithin a ferr'- months
Roddick rvas readv to opefl her second shop.
This time , the bank refused her loan application, so instead she got
the monev ftom a local garage owner, rvho demanded 5070 of the
business in return. It was one of the most sensational investments of a1l
time; b.v 1991 his original {4000 stake $'as u-orth f,140m. But u'hile
Anita Roddick prospe red, on the other side of the r','orld her husband
had run into serious difficulties. Less than a year after the start of his
journey, his horse fe11 off a cliff in Bolivia and he was forced to
abandon the ptoject. On his return to England, Gordon Roddick took
over the financial side of The Bod-r Shop's operations and started to
examine u,'avs in u'hich the comPanv could expand further' His
solution .r"'as what is now known as franchising, although at the time

52
 The Bodv Shop
the Roddicks had never heard of the word

Roddick: \X'eli, u'e didn't call it franchising, we didn't know the word. I can't tell
vou hou,- hick rve were. I mean we $/ere hick and we called it self-
financing and v/e didn't have aflv monev to open up anv more shops, so
friends lr,'ould come along and sav 'This is a good idea', and we'd sa.v,
'Yes, find a shop and we'll suppl,r- you with...'well we didn't...
er.ervbodr, had to bottle their own, and that's exactly how it started,
and then later on $re got more knorr,,ledgeable about u,ords like
franchising and u,-e called it franchising.
DE: Franchising \r''as not onlv a cheap way to expand, it was also an
excellent $'ay of keeping or.erheads to a minimum and allowing the
Roddicks to concentrate their resources on the production and
u-holesaling side of their operation. Franchisees put up the monev to
open a nerv shop, and the Roddicks simply gave them a licence to use
The Bod,v Shop name and of course, supplied them with products to
seIl. ,\nita Roddick also insisted that Bodv Shops should a1l look the
same, so crcating a strong corporarc image,
In 1978 the first Body Shop franchise opened outside the UK, in
Brussels. Bv 82, nes, Bodv Shops rvere opening around the world at a
rate of one cverv tu,o rveeks. As The Bodv Shop grew, so too did the
Green movemeflt, as \Yilliam Prior, producer of a Green mail order
catalogue explains.

Prior: Indir,iduall,v people \ilant something different. Only 10% of the

population are practising Christians, so there's no set of values that
really means an,ything anv more, and I think Greenerv is replacing
that.

DE: lTilliam Prior's claims for the Green movement are perhaps
exaggerated, but there is no doubt that it has had an impact on our
patterns of consumption. During the 1980s, artiltcial ingredients were
viewed with suspicion, waste was something to be avoided, pollutants
were shunned. The Body Shop was perfectly placed to take zdvattage
of this trend and Anita Roddick did so by claiming the moral high
ground at evety opportunity. The Body Shop ran campaigns in
coniunction with environmental groups like Gteenpeace ar.d Friends
of the Earth. Its shop windows were given over ro poster campaigns
on subiects like acid ruifl, the destruction of the ozone layer and the
burning of tropical tain forests. Undoubtedly, these campaigns had a
commercial value for The Body Shop. In the minds of many
consumers, buying a Body Shop product was more than iust
shopping: it was a Green, moral gesture. Although there were
cynics, Anita Roddick was certainly sincere in her commitment to

53
\lake or Break

Bodv Shop campaigns, as she makes clear hcre

Roddich. And the other maior message is that there is no morc value in u'ords, it
is in action. The Bodv Shop is cempaigning. \\Ie have hundreds of
companies that print 'Not Tested on Animals'. tsig deal' Vn'hrr don't
thev.. vou knou,... involve themselves in campaigning, putting moner
into literature , putting monev into reseatch? \'ou knorv that's r'"'here

the leve1 is.

DE: AllBod-v Shop franchisees rvere recluired to carrY Roddick's

campaigns, r,,,hether thev agreed u''ith them or not Rodv Shop staff
u.ere educated in social issues and encouraged ro set up c()mmunitY
projects. Her critics said that Roddick u'as acting like a tvrant,
imposing her viervs on everv()ne in the companr'' But, there u'ere
never anv complaiflts from The Bod,v Shop's shareholders' Anita
Roddick claims the mone\: men, although thev certainlv like
n.t to like
her. The tsod,v Shop $.ent public in April 8,1 $.ith an initial r.aluati()n of
According to Anita
d8m. Bv the middlc of 1991 it r','as u'orth d470m'
Roddick, it reallv u'asn't that difficult.

Roddick: You kno$,- all business is, it is not the iinancizrl language That is iargon
put thefe to intimidate. It is just buving and sclling and creating that
atmosPhere r,,'hich is fairl,v magical $'here buver and seller come
together and making a product so good that people don't mind paving
a profit fot it. Amen, that is mv entire iob.

DE Even the onset ofthe recession at the end ofthc 80s couldn't stop The
Bod,v Shop. ln 1990, rvhile total sales of cosmetics in Britain fell bv
9%, Bodv Shop's profits shot up br.: 38%, pror-ing vet apJain that Anita
Roddick and The Bodr. Shop just don't $.ork br, the same rules as the
re st of the business r','orld.

54
 BCCI

THE BCCI
FRAUD

'Honesty is rnagico.
Abdel Hasan Abedi,
founder of BCCI

55

L
 Make or Break

BCCI
BCCI. The Bank of Credit and Commerce Intetnational. Or,
according to the popular joke, the Bank of Crooks and
Criminals International.
The bank claimed to be a bank for the'Ihird \)n'orid, but its head
oifice was in London and it u,as registered in Luxembourg. On
top of that it had branches in 73 countries around the r,,,orld. Its
structure \r,as so complicated that for years n() one reallv kneu,
what it was doing. The truth was that BCCI u,as inr.olved in
probably the biggest banking fraud of all time.

Allegeilly - The insides of BCCI

I Substantial stake or
ownership lnternational Credit and
lnvestment
uw secret stake or Company Group
ownership (Cayman ls.)
Abu Dhabi
Fraudu lent transactions
to hide losses and create
fictitious income BCCI SA (Luxembourg)

7 70,6 4Tbranches. 24 in Britain.

Credit and Commerce Others in 12 countries.
American Holdings Subsidiaries in Canada
(Dutch Antilles)
and Gibraltar

Credit and Commerce lOOVo 7000,6

American lnvestment BV
BCCI Overseas (Cayman ls.)
( Hoila nd ) BCCI Holdings
( Luxembourg) 63 branches in 28 countries

First American Corp.

(Washington, DC)
29 subsidiaries and
affiliates in 28 countries
First American
Bankshares (Washington DC)

Banks in 7 American states CenTrust Savings Bank

(Miami, Florida)
lndependence Bank
(Encino, Florida) Now defunct

56

L
 BCCI

MEET THE CUSTOMERS

Manuel Noriega

Manuel Noriega
Knou.n to his enemies as 'pineapPle face', General Manuel
Noriega \\''as the dictator of Panama from 1981 to 1989. He
became a customer of BCCI in 1982 and passed millions of
dollars throu65h his accounts. The United States belier.,ed that
much of this was drug money.

In December 1989, a US force invaded Panama, overthre$/

Noriega and took him to Miami to stand trial on drugs charges.

Abu Nid.al
Abu Nidal is the leader of the F-atah Revolutionary Council, an
organization dedicated to the destruction of Israel. Police
forces around the world urant to question him about a number
of terrorist activities.
It is alleged that one ofBCCI's London branches held accounts
for him and his orgaflization The branch m nager even took
him shopping in London's fashionable Jermyn Street.

The CIA
The American Central Intelligence Agency almost certainly
held accounts with BCCI. Among other things, these may have
been used to supply funds to the Muiahideen, while it was
fighting Soviet fotces in Afghanistan.

The Colornbian drug barons

The huge sums made by organizations like the Medellin drug
cartel could not go into the banking system in the normal way.
First the mofley had to be made respectable - a process known as
laundering. In this field, BCCI could offer one of the best
services in the world.

57
Make or Break

HOS/ TO LAUNDER MONEY

F-or obvious reasofls, nobody knorr''s exactlr hou' much monev
the internationai drugs trade generates. But, undoubtedlv, it is
u'otth billions of dollars.
This is horv BCCI might har-e laundeted drugs monev in the
mid-80s.

o aCOaa
London Branch
Drug dealer Banher Money goes by cable to

a
o
Credits money to
o
a

v
Puris Branch
A drug dealer and
a bank official meet and
a
swap briefcases
o
a
lssues Certificates a
of Deposit (C.D.s) to

t;
Grand Cuyman
Drug dealer's current
Branch
accounl

t: a
Makes loan guaranteed by
o
o
a

o o .tTtL o '

58
 RCCT

THE YICTIMS
BCCI claimed to be a $20 billion bank. tsut u,hen it crashed,
r,ery |i111. of that mone! could be found. N1anv of the bank's
800,000 depositors around the rvorld lost huge sums. But the
biggest loser in the storv is undoubtedlr Abu Dhabi.

Oil from its u,ells earns the tinr,Gulf state around $12 biliion a

vear, making it onc of the richest countries in the v'orld. It

certainlr- needs to be.

Thc countrr 's ruler, Sheikh Zared, kneu, nothing of the bank's
crime s. Horvever, as the BCCI's large st shareholder, he spent a
great deal of monev trving to prevcllt the bank's collapse and
late r spent even more compcnsating its r-ictims. Some estimate
his losses to be as high as $9 billion.

The prasperous face oJ Ahr Dltahi

59
 Make or Break

THE LANGUAGE OF THE FRAUD

assets all things ourned bt, a business rvhich have a \.alue
protocol department the department of a bank that looks after important clients

laundering hiding the sources of bank deposits bv transferring the monev

though a number of accounts
treasnry department the department of a bank which manages rhe bank's orvn
finances

insi.der loans loans made bv one part of a bank to another part of it

bad loans loans v'hich caflnot be repaid

tbe futures lnarhet the market which trades contracts to buv or sell commodities,
securities, etc. in advance. For the inexperienced, it is
notoriousll. riskv
Reuters rnacbine a screendisplaving the latest financial information provide d br-
Reuters ne\I/s agency

line of credit a credit limit

collateral security given for the repavment of a loan

to haemorrhage to lose enofmous amounts

aaditors independent, qualified people v'ho check the annual accounrs
of an organization

OTHER LANGUAGE NOTES

in its heyday at its peak

bribery someone monev to persuade them to do

:[:L:::jI'#
drug baron leader of a large drug producing/dealing operarion

undercoaer operation secret in\ esrigarion

a aicious circle a problem which creates more problems, making the original
problem worse
a caoatier attittude doesn't take account or the
ll,:::::r:rT',',',:1:,";-tich
fraudulentdeoices dishonestmethods
titillating excir in51

60

T
 BCCI

TAPESCRIPT-THE BCCI FRAUD

DE: On Julv 5 1991 , the Bank of England announced the closure of the
Bank of Credit and Commerce lnternational, BCCI. It r,,,as a move that
sent shock wa\-es around the rvorld. Old-age pensioners lost their life
savings, small busine sses went bust, central governments iaced
national bankruptcv. The subse<1uent in\.estigation into BCCI's
affairs revealed criminal acti\-ities on an unimagined sca1e. In this
programme, N{ake or Break looks at one or t$ro aspects of what has
been called 'the greatest bank fraud of all time'.
The man behind RCCI rvas the Pakistani banker, Abdel Hasan
Abedi. Abedi r,"-as a mvstical, charismatic character who once told his
emplovees, 'Honesn is magic'. FIe rranted BCCI to be something more
that just another bank. He sau, it as a bridge betu,een the Third \X,'orld
and the West. It \!'as to be a N{uslim bank, a bank run according to
strict ethical principles. He even promised to donate a third of its
profits to charitv.
Abedi believed thet b.v the vear 2000, BC(II rvould be the biggest
bank in the u.orld. For a u,'hile, it looked as if that dream u'ould come
true . Here 's Sam Gu,vnne of America's Time magazine talking about
thc sca]c of BCCI's opcrarions.

GLtynne: The bank in its hevdal' had about 420 branches in 73 countries. Now
thev're dorvn to about 68 or 69 countries nou, and thev emplo.\-
thousands and thousands of people. I mean thev're a $30 billion global
bank, one of the largcst private banks in the rvorld. And in many
countries in the Third W'orld, thev're so important in that particular
ec()fl()m\i that thev hold manr', or in some cases all, of the central bank
deposits for those countries. I can think of Nigetia as one, Jamaica as
another, but there are manv. Ifthe central bank can't get their deposits
out of BCCI, then you har.e something approaching a national
bankruptc\,.

DE: BCCI's grov'th was phenomenal. In 1973, the year after it v'as
founded, its assets u,ere $200m; by 1917 thev riu-ere S2.2bn, bv the end
of 1988 more than $20bn. ln the 70s, BCCI rvas u,el1-placed to take
advantage of the explosion of oi1 rr"'ealth in the NIiddle East. N{anv of
the ner,",lv-rich oil Sheiks felt more comfortable dealing rvith a N'Iuslim
bank than rr,'ith the established banking names of the West. Abedi
certainlv used his charm to great effect and impressed manv u,ith his
grand charitable activities. But charm and charitv \vere not the only
ura\.s rhat BCCI attracted customers. In fact, in its pursuit o[ nerv
business, it rvas prepared to use r.irtuallv an\,thing, er-en prosritution,
as the BBC's Jonathan Charles reported from Karachi.

6t
Make or Break

Charles: The bustling financial district of Karachi, Pakistan's economic

powerhouse. It's here that some of BCCI's darkest secrets lie. This
area oithe city was home to the bank's protocol department. It's said
to have provided prostitutes for politicians, officials, and important
customefs, pafi of a wide-scale bribery operation.

DE BCCI's methods of looking after its clients were certainly unusual, but
then so were many of its customers. The biggest customer at one of
BCCI's London branches was rhe Palestinian terrorist leader, Abu
Nidal. The branch man ger entertained him by taking him shopping in
London's fashionable Jermyn Street. On the other side of the world,
another star customer was Panama's General Manuel Noriega. BCCI
kept him happy with 4 days of fun in Las Vegas.
The bank also found some excellent clients among the drug barons
of Colombia. In 1984, it was estimated that the Colombian town of
Medellin was earning $1.5bn per yer in drug mofley. Obviously this
couldn't go into the banking system in the normal way. First it had to
be made respectable - a process known as laundering. The BCCI
laundeting operation was one of the most sophisticated in the world.
A drug dealer could deposit his money, without any record, of course,
with the BCCI in South America. BCCI would rhen transfer the money
through a number of diffetent accounts around the world, until it
finally returned to the drug dealer's own account. In this way the
original source of the funds would be almost impossible for the
authorities to trace.
But BCCI's involvement in such shady activities was bound to raise
a few suspicions. At the very least it was considered a'curious' bank, as
the BBC's Peter Day explaifls.

Day: But then this has always been rather a curious bank. Going back to
1972, fowtded by a Pakistani, it grew extremely fast... to be...
ambitions to be one of the largest private banks in the world... er,
certainly the bank in the Third !7orld and it looks as though very eady
in the game it got into the business of maybe laundering money,
certainly it did cosy deals with dictators such as Manuel Noriega of
Patama and there have been question marks over what the bank's been
doing worldwide for some time.
DE A question mark certainly hung over the bank's profit record. Because
although money was always pouring into BCCI and although its
accounts always showed a handsome profit, in reality the bank was
making outrageous losses. One of its major loss makers was BCCI's
treasury department. Most banks hzve a treasury which, among other
things, uses the bank's money to speculate on movements in the

62
 BCCI

world's currency markets. This is a skilled and highly risky business.

Unfortunately, in the volatile environment of the early 80s, BCCI's
treasury operation proved to be a disaster, losing the bank maybe as
much as $1bn. But these enormous losses didn't appear in the bank's
balance sheet. Instead, BCCI covered them up. One of its schemes was
to set up a second treasury department. This department speculated
not with the bank's money, but with money taken from its clients'
accounts. Of course, that disappeared as well. So, to hide that loss,
BCCI had to steal yet more money from yet more customers'accouflts.
It was caught in a vicious citcle with less and less money hiding bigger
and bigger losses.
But, this wasn't the only way in which BCCI lost money. Here,Time
magazirte's Sam Gwynne tries to sum up where he thinks the bank's
mofley went.

Guynne: The Federal Reserve Bank in the United States says $1Obn is missing
from the bank, that may be Partly theft. Just, you know, you Put your
money in the bank, somebody steals it. Rather simple. It may be partly
these insider loans by which BCCI controlled various entities around
the world, many of which are now uncollectible. The third thing I
would say is probably losses from just bad loans which would cefiainly
account for some of it.

DE: In fact bad loans probably contributed quite substantially to BCCI's

losses. The bank's biggest borrowet was Gulf, a shipping group run
by the Gokal family. The Gokals had a cavalier attitude towards
money. It's said that when Abbas Gokal's son wanted to leatn about
the futures market, his fathet bought him a Reuters machine and let
him loose with $100m line of credit. The Gokals, of course, could
afford it, because they were backed by a loan of over $700m from
BCCI. In BCCI's accouflts this loan appeared as one of the bank's
assets, generating large sums of interest. But the truth was, the loan
had gone bad. The Gokals would never be able to pay it back. BCCI
used a number of other fraudulent devices to make itself look bettet on
paper. For example, when it needed to increase its share capital, it
simply made a loan to someone who would use the money to buy BCCI
shares. The shares became collateral for the loan, and the loan, of
course, would never have to be re-paid. But BCCI couldn't continue
Iike this forever. And throughout the lattet pzrt of the 80s the
authorities were becoming increasingly suspicious of the bank's
activities. Here's Lionel Barber o{ the Financial Tirnes talking about a
conversation between the US commissioner of customs and Robert
Gates, then the CIA's deputy director.

63
 Make or Break

Barber: \Xrell, u,e discovered something reallv rather titillating but actually
mavbe quite importaflt and that is that NIr Van Raab, rvhen he was
customs commissioner, actuallv phoned Robert Gate s in October 1988
and said 'Listen, rvhat do vou knou, and rr"'hat can vou tell us about this
bank'and...er...N{r Gates paused and then described BCCI as the
'Bank of Crooks and Criminals International'.

DE: In 1988, the bank suffered a number ofmajor setbacks. In Febtuarv of

that year Abdel Ilasan Abedi had trr''o maior heatt attacks which
confined him to a rvheelchair and severelv damaged his pou'er of
speech. A feu, months later, in an undercover operatiofl, US customs
arrested several of BC(lI's staff. The bank rvas found guilt,v of
laundering drug money. At the end of the vear, BCCI's books shou'e d
a loss of $49m. In the follorr''ing vear, 1989, the loss shown \r'as more
than 10 times that amount. It rr,.as clear that BCCI was haemorrhaging
mone! and its auditors, Price \X,'aterhouse, were becoming increas-
ing1,v suspicious of widespread fraud u,-ithin the bank. r\fter months of
investigation, in Julv 1991, Price \\'-aterhouse sent a special report to
the Bank of England. r\t lunchtime on Julv 5, the Rank acted.

BBC news: Millions of pounds deposited at British branches of the Bank of Credit
and Commerce lnternational have been frozen, follorving an
international investigation 1ed bv the Bank of England. Banking
authorities atound the u,orld har.e stopped the mor-ement of anv of
BCCI's assets after uncovering evidence of u'idespread fraud.

DE: To BCCI's thousands of ordinarv customers the closure came as a

terrible shock. Standing on the par.ement outside the locked doors of
one London branch, se-',etal oithem gar.e their reaction to the ne\rs.

Neus reports: I'm shocked. I'm absolutelv shocked. 'fhev're verv good bankers,
thev'r,e been excellent bankers and I never expected this at a1l. 1'm sure
it'll sort itself out. I har.e a quarter million pounds in this bank. I am 4
months outside of the countrv and I arrive todav and I find the bank
closed and I have not mone\r for tomorrou,', vou knov'... It has been
closed br,- the Bank of trngland, that's all thev say. W'e don't knou.
rvhat's going to happen with our monev and al1 that... 1ot of little
people, small people, have put their monev in there and in these hard
times, this is an extra burden on evervbod,v e1se.

DE: will probablv alwavs surround manv of B(ICI's activities. W'e

NI,vster,v
mav never knou, the full extent of its involvement rvith terrorist
groups or with ll()vernment organizations like the CIA. \\1e mav never
knov- exactlv rr,-hv BCCI was not r,,'ound up earlier. But after BCCI,
one thing is certain. The general public can nevet again have total
confidence in the international banking system.

64

I
Apple Computers. The launch of
I\ew Coke. The BCCI fraud.
Some of the most dramatic business
successes and failures of recent times.

MAIG OR BREAK tells the story of these

and other fascinating tleals and deceptions
from the business world.
MAKE OR BREAK is aimed at
intermediate students of business English.
On the 60-minute cassette, writer and
narrator David Evans links extracts from
interviews and contemporary news reports
to reveal the background to the six topics.

The accompanying book provides

graphs, charts and photographs; additional
information on the characters involved.
and explanations of the business terms and
language used.

Full tapescripts are also provided.

ISBN l-85497-274-X