Mg Rover Collapse Case Study

The Phoenix Four, the controversial former owners of collapsed car company MG Rover, devised a scheme to pay themselves a windfall totalling £75m from a dowry provided by BMW, according to a government report published this morning.

When BMW sold MG Rover in 2000 to the local businessmen for a token £10, the Germans agreed to hand over an extra £75m to relieve it of warranty commitments.

The report says a number of schemes were considered which would have given the four personal options over that £75m.

The 850-page report said that ultimately only £10m of this was handed to the four in the form of loan notes shortly after the takeover was completed. This was done so that the "issue would not become public for some time" the inspectors said.

Because the Phoenix Four had expected BMW to pay the full £75m up front in loan notes, they sought to pay themselves bonuses of £65m over five years to make up for the "shortfall". This target was later downgraded to £50m, the report claimed.

When MG Rover collapsed in April 2005 with the loss of 6,500 jobs, the Phoenix Four and former MG Rover chief executive Kevin Howe had paid themselves a total of £42m.

Witch hunt and whitewash

A statement from the Phoenix Four dismissed the report, which has cost taxpayers over £16m and taken over four years to complete, as "witch hunt against them and a whitewash for the government".

"It drips with the hallmarks of this government – spin, smear and point-blank refusal to take any responsibility for their own actions.

"We criticised the government for failing to help MG Rover. As we have seen elsewhere, there is a price to be paid for criticising this government and for us the price is this report."

The report detailed how the Phoenix Four transferred the assets of MG Rover into a separate company, most of them at below market value.

On 7 April, the day before MG Rover went into administration, one of the Phoenix Four, Peter Beale, charged an invoice of £417,201 to their holding company from legal firm Eversheds to MG Rover, the inspectors claimed. "It seems to us that Mr Beale probably authorised the payment with a view to benefiting PVH [the holding company] - so that PVH would not have to pay."

The report also claimed that the day after the government appointed inspectors to investigate the collapse of MG Rover, Beale bought "Evidence Eliminator" software to wipe his computer's hard disk. Beale told the inspectors he only ran the programme to delete personal documents.

The Phoenix Four now face being banned as company directors.

The business secretary, Lord Mandelson, said proceedings would begin against the four businessmen to formally ban them.

The report also said MPs investigating the collapse of the carmaker were given "inaccurate and misleading" information by one of the Phoenix Four.

It added that there had been evidence that government officials had given questionable briefings to the media.

MG Rover was Britain's last volume carmaker.


Case Details:

Price:

Case Code:BSTR166Electronic Format: Rs. 500;
Courier (within India):Rs. 25 Extra

Themes

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Case Length:16 Pages
Period:1975-2005
Organization:MG Rover
Pub Date:2005
Teaching Note:Not Available
Countries :UK
Industry:Automobiles

Abstract:

UK based MG Rover was one of the oldest car manufacturers in the world. Founded more than a century ago, MG Rover's problems began in the early 1970s. The company had to be nationalized to save it from bankruptcy induced by labour unrest and financial problems.

However, the situation did not improve under the Government's management and the company was privatized by selling it to British Aerospace (BAe). BAe sold MG Rover to BMW which, after prolonged losses, sold it to Phoenix Venture Holdings (Phoenix). Under Phoenix, MG Rover declared bankruptcy when the collaboration negotiations with China's SAIC collapsed.


The case details the circumstances that led MG Rover into problems and finally into bankruptcy. It examines the causes of MG Rover's troubles including the role played by the four acquirers of MG Rover.

Issues:

» Understand how internal, industry-specific and macroeconomic factors can negatively affect the financial performance of a company.

» Examine the role of government in business.

» Study the importance of good labor relations for proper functioning of a company.

» Study the circumstances that led to the collapse of MG Rover.

» Discuss the measures that should have been taken by the acquirers of MG Rover in order to revive the company's financial and business performance.

Contents:

Keywords:

MG Rover, Corporate Turnaround, Merger and Acquisition, Bankruptcy, Industrial Relations Crises, Financial Mismanagement, Nationalization, Privatization, Corporate Mismanagement, Declared Bankruptcy Collaboration, BMW, Phoenix Venture Holdings, SAIC, Rover Company, Morris Motors Company, Morris Oxford Car, Morris Garages, British Leyland, BLMC, BL failed, MG Rover Group, BMW-Rover Deal

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