Creating Value Through Divestiture of Assets: The Case of Thorn EMI

This version: June 1st, 1999

Kevin M.J. Kaiser McKinsey & Co Amstel 344, 1017 AS Amsterdam, The Netherlands tel.: +31 20 5513636 fax: +31 20 5513647 e-mail: kevin_kaiser@mckinsey.com

Aris Stouraitis * Doctoral Programme Imperial College (The Management School) 53 Princes Gate, Exhibition Road, London SW7 2PG, United Kingdom tel.: +44 171 594 9143 fax: +44 171 823 7685 e-mail: a.stouraitis@ic.ac.uk

Corresponding author. Preliminary and incomplete. Please do not quote without the authors permission. Comments welcome.

We would like to thank Andrew Chen, Stuart Gilson, Bronwyn Hall, participants at the 1998 European Financial Management Association annual meeting and at the 1999 Fondazione ENI Enrico Mattei conference on the influence of financial markets on restructuring in science based industries for their helpful comments. All material for this paper was obtained from public sources. This research began while the authors were Assistant Professor of Finance and Research Associate respectively at INSEAD, Fontainebleau, France and benefited from financial assistance provided by INSEAD.

Creating Value Through Divestiture of Assets: The Case of Thorn EMI

ABSTRACT

This is a study of the restructuring programme at Thorn EMI during 1985-1996, which transformed a diversified conglomerate, trading at a diversification discount, to a narrowly focused firm, while creating considerable value for shareholders. The firm restructured following action by the outside directors and differed in corporate governance from other UK diversified firms. A smaller board of directors majority-controlled by non-executive directors and managerial compensation in the form of stock options providing long-term incentives ensured adequate monitoring and alignment of managerial incentives with shareholder interests. These changes were sufficient to eliminate agency costs of managerial discretion without the need to assume debt, which enabled the firm to reinvest the proceeds from asset sales to positive net present value projects. Furthermore, the case allows us to examine the costs and benefits associated with gradual restructurings over a long time horizon and provides insights on the sources of value gains associated with spin-offs.

We dont intend to have pop-singers designing aircraft Peter Laister, chairman and chief executive, at the height of Thorn EMIs diversification1

1. Introduction

There is extensive research addressing the issue of inefficient diversification into unrelated activities in the presence of agency costs of managerial discretion. Diversified firms trade at large diversification discounts (Berger & Ofek (1995), Servaes (1996)) and the level of diversification is related to how closely managerial incentives are aligned with the interests of shareholders (Denis, Denis & Sarin (1997)). Top management changes have been documented to increase the likelihood of a diversified company embarking on a restructuring programme (Weisbach (1995)). Hermalin & Weisbach (1988) show that refocusing is also likely to be associated with changes in board composition. Restructuring is accomplished through asset sales (Rosenfeld (1984), Alexander, Benson & Kampmeyer (1984), Jain (1985), Klein (1986), Hite, Owers & Rogers (1987), John & Ofek (1995), Lang, Poulsen & Stulz (1995)), layoffs (Dial & Murphy (1995)) and spin-offs which can be undertaken with the aim of creating potential takeover targets (Cusatis, Miles & Woolridge (1993)) or in order to enhance value by improving the quality of available information about the divisions involved (Gilson, Healy, Noe & Palepu (1997)). In the absence of agency costs of managerial discretion, firms use the proceeds from asset sales for leverage reduction or return them to shareholders (Lang, Poulsen & Stulz (1995), Allen & McConnell (1998)). Restructurings are often fast, painful processes concentrated in a short time span, as in the case of General Dynamics

Comment on the proposed merger between Thorn EMI and British Aerospace quoted in BAe/Thorn EMI: An Odd Couple, The Economist, May 19th, 1984, pp. 72-76.

(Dial & Murphy (1995)), rather than slow and evolutionary as in the case of General Mills (Donaldson (1990)). This paper is a study of the restructuring of Thorn EMI during 1985-1996. By 1985 the UK firm was a diversified conglomerate with 3 billion turnover and assets in music, electronics, lighting, retailing, engineering, defense, rentals, television, film production and other activities. Management had recently announced a strategy of further diversification in high-technology sectors. At the same time, the firm was just breaking-even, its stock price had halved during the last eighteen months and it was trading at a diversification discount of 68% compared to the sum of the imputed stand alone market values of its divisions. The appointment of new management in 1985 marked the beginning of restructuring characterized by selloffs in all non-core operations. Ten years later the company had divested all activities except from the rental business and the music group, which were spun-off in August 1996, creating two independent highly focused companies, Thorn rentals and the music concern EMI Group. In the course of the restructuring the diversification discount was eliminated and was transformed to an excess premium in anticipation of the final spin-off, as the market capitalization of the company increased more than eleven-fold. The driving force behind the restructuring was the monitoring function of the board of directors, the provision of long-term incentives through executive compensation, and potentially presure from an active market for corporate control, rather than the disciplinary role of debt. Corporate governance changes during the restructuring of Thorn EMI ensured that managerial incentives were properly alligned with shareholder interests. In extreme contrast to the diversification strategy of the earlier years, the restructuring was orchestrated by new management, a smaller board of directors where non-executive directors held the majority and by executives who were granted considerable amounts of company stock and options, thus alligning their interests with those of shareholders. Compared to other large UK firms that refocused less extensively during the same 4

period, Thorn EMI had a smaller board of directors during the restructuring and a higher percentage of non-executive directors. The exercise price of the stock options granted to management was considerably higher than the spot price at the day of grant and also a portion of these grants was in the form of Share Appreciation Rights whose exercise price was indexed to inflation, thus providing incentives for large value improvements. Corporate governance and executive compensation changes were sufficient to eliminate the agency costs of managerial discretion, without the need to take on additional debt. In the absence of agency costs and without any considerable debt burden, the company was able to reinvest the proceeds from asset sales for positive net present value projects. Employment increased in the core areas of activity during the restructuring, as the proceeds were reinvested for expansion through acquisitions in continuing operations that offered a higher rate of return, i.e. in the areas of rentals and music. This case enables us to examine two additional issues of interest to the corporate restructuring literature. First, we provide evidence on some of the costs and benefits associated with a slow as opposed to a fast restructuring. The restructuring of Thorn EMI took eleven years to implement, a strategy consistent with that of General Mills (Donaldson (1990)) but different to that of General Dynamics (Dial & Murphy (1995)). This may have enabled the company to avoid rushed sales of assets, which are likely to be concluded at a low price (Pulvino (1998)). We present evidence showing that the majority of assets were divested by Thorn EMI at a price higher than their value-in-use based on accounting fundamentals at the time of the transaction. The potential cost of this slow process is that while keeping for a long time peripheral businesses which are earmarked for divestment (i) their performance (and hence the accounting fundamental values on which their valuation is based) may deteriorate over time, and (ii) general economic conditions may change, making it difficult to obtain a good price. There is evidence that this was the case for some assets 5

divested by Thorn EMI. Second, we show that the largest part of the premium over stand alone values at which the firm was trading prior to its demerger can be attributed the spun-off entities being potential takeover targets rather than reaping information benefits. An analysis of the restructuring appears in the sections that follow. Section 2 presents the history of the restructuring, its impact on market value and operating performance and the use of the proceeds from asset sales. Sections 3-5 answer the question of why the firm restructured, by examining corporate governance, managerial incentives in the form of executive compensation, and pressures from the market for corporate control that had an impact on the firm embarking on a refocusing programme. We examine both changes within the firm over time as well as differences between Thorn EMI and the UK corporate environment during this period. Section 6 examines the costs and benefits to the firm from adopting a slow restructuring process. Section 7 examines whether the value gains attributed to the spin-off were the result of information effects or anticipation of potential takeovers. Finally, Section 8 concludes.

2. A history of the restructuring at Thorn EMI and its effects on performance

2.1. A history of the restructuring

Thorn Electrical Industries was founded by Jules Thorn in 1928 to import light bulbs and radio components in the UK and after the war diversified through acquisitions in electronics, electrical appliances and television-radio rentals to become the largest manufacturer of radio and television sets in Britain and the largest television rental firm worldwide. The diversification strategy culminated in 1979 with the acquisition of EMI Ltd. The latter had been established in 1931 to 6

manufacture recording equipment, had diversified in sophisticated electronic systems, and had acquired Capitol Records in 1954 and other entertainment and film assets by 1970. The merged conglomerate acquired the name Thorn EMI in 1980. Its businesses had been responsible for the invention of the stereo recording technique, the development of early radar equipment, BBCs first terrestrial television system, the distribution of the hits of The Beatles, the invention of computed tomography scanning for medical diagnostics, had produced Oscar winning films and its central research laboratories had received a Nobel Prize. By 1984 the conglomerate had a turnover of 3 billion, with assets in six major areas, as reported in Table 1: consumer electronics (including the rentals division), music, film interests, the electronics, information technology and engineering division (from advanced defence systems to computer software and mechanical engineering assets), domestic appliances and retail chains, and lighting (from large-scale light fittings to domestic illumination). As its diversification strategy continued, in May 1984 the company unsuccessfully attempted to merge with the civil aviation group British Aerospace and two months later it acquired the microchip manufacturer INMOS . The accompanying decline in its share price, depicted in Figure 1, led to the resignation of chairman Peter Laister in July 1985. Peter Laister was succeeded by Sir Graham Wilkins, with Colin Southgate appointed managing director responsible for day-to-day operations (he became chief executive in 1987 and chairman in 1989). The new management announced a strategy of focus in businesses characterized by high profitability and global potential, while diversification into unrelated areas was to be reversed. A summary of the restructuring is presented in the remaining of Table 1. During 19851989 the firm concentrated in the core areas of music, rentals and lighting. It divested or put up for sale most of its remaining assets. In 1990 it decided to divest its lighting assets as well and concentrate narrowly in two areas of activity, which was achieved by 1995. Finally, it spun-off of its remaining operations into a music group (EMI Group PLC) and a rentals firm (Thorn PLC), which 7

started trading separately on the London stockmarket on August 19th, 1996 and whose stock prices both became constituents of the FTSE 100 index. This marked the end of the firms 70-year history.

2.2. Market value and performance improvements

As a diversified conglomerate, the company was trading at a large diversification discount as shown in Table 5 and Figure 2. We calculate the imputed market capitalization of Thorn EMI as the sum of the imputed stand alone market value of its divisions using a methodology similar to Berger & Ofek (1995), described in the Appendix. By the time of the management changes that launched the restructuring the market capitalization of Thorn EMI had fallen to 763 million and the diversification discount was 68%, i.e. the firm was trading at one third of its imputed break-up value. Eleven years later its market value had increased to 7.9 billion (the music side accounted for 80% of this) and the discount had been transformed to an excess premium. Its stock price increased fivefold during this period, compared to a three-fold increase for the FTSE 100 index2. The restructuring created considerable value and led to the elimination of the diversification discount as the former conglomerate became narrowly focused. Operating performance improved in line with the above evidence. Tables 2-4 report turnover and operating profit figures, accounting ratios and cash-flow statements for 1982-1996. During 1986-1996 the net income of Thorn EMI increased from 0.4 million to 225 million, return

A higher return for the stock of Thorn EMI as compared to the market portfolio could be consistent with the company having a greater than one. However, its estimated s were never greater than one after 1985. Another comparison between the market capitalization of Thorn EMI and the average market capitalization of the companies included in the FTSE 100 index (total FTSE 100 capitalization divided by 100) shows that from April 1990 (when data on the index exist) until August 1996 the market capitalization of the average FTSE 100 company increased from 3 billion to 6.6 billion (119%) while the value of Thorn EMI increased from 1.9 billion to 7.9 billion (325%).

on equity from 17% increased to 86% and return on total capital employed increased from 10% to 35%. Cash from operating activities was constant at approximately 370 million during the five-year period 1982-1986 and reached more than 1 billion by 1996, as the company concentrated in more cash-generative activities. The firms gearing ratio increased after 1988, however the interest cover remained high (it decreased to 4x only during the recession) which shows that the company did not feel any pressure for meeting interest payments. Therefore, debt did not act as a disciplinary mechanism during the restructuring. As a result of the disposals total employment decreased from 90,000 to 34,000. Abnormal returns associated with 56 events during the restructuring are presented in Table 6. The management changes that launched the programme were greeted favourably by the market. Completed disposals and announcements of negotiations towards disposals were associated with a positive market reaction and any aknowledgment of failure to divest was associated with a negative reaction. The market responded positively to divisional reorganizations. The announcements indicating progress towards the final demerger of the music side from the rental assets were also associated with positive market reactions. Finally, on average acquisitions were not associated with a negative reaction.

2.3. Use of the proceeds from divestments

From the cash-flow statements presented in Table 4 we observe that only a fraction of the proceeds from selloffs was paid out to shareholders or debtholders. Leverage decreased by 241 million during the early period of the restructuring 1986-1988. The proceeds from disposals during the year of 1988 were more than enough to cover this amount. Although dividend payments increased from 37 million to 148 million during 1985-1996 this amount represents only a fraction 9

of the total funds raised through asset sales, new debt and equity issues. In the absence of a debt burden, the proceeds obtained through asset disposals and rights issues were reinvested for expansion through acquisitions in the firms core areas of activity, the most notable of which were the acquisitions of Rent-A-Center in 1987 and Virgin Music in 1992. This resulted in employment increases in the core divisions. During 1985-1996 employment in the music division increased 11% from 9,500 to 10,600. Similarly, in the rentals and retail operations employment increased at least 9% from 21,600 (this number includes some retail activities that were subsequently divested) to 23,600. In contrast, Dial & Murphy (1995) report that General Dynamics, a firm of similar size, laid-off 28% of its workforce during its restructuring and reduced employment in the divisions it retained. The use of the proceeds from selloffs has been recognised as a significant indicator of the presence of agency costs of managerial discretion by Lang, Poulsen & Stulz (1995), who document that firms reinvesting the proceeds experience negative abnormal returns. Although Thorn EMI reinvested the proceeds from selloffs in acquisitions, the next section shows that corporate governance ensured that managerial incentives were properly alligned with shareholder interests.

3. Corporate governance

The size and composition of the board of directors have been recognized as important determinants of the effectiveness of board monitoring over company management in a number of studies. Yermack (1996) has found an inverse relationship between board size and firm value for large firms both in cross-sectional analysis as well as over time. Hermalin & Weisbach (1988) show that firms tend to reduce the number of executive directors in the board and increase the number of non-executive directors following the appointment of a new CEO, after they have experienced poor 10

performance and while they are refocusing. At the same time, Weisbach (1995) reports that top management changes increase the likelihood of a company embarking on a restructuring programme. This section presents an overview of corporate governance and executive compensation during the restructuring of Thorn EMI and describes the mechanisms that ensured proper monitoring of management by the board of directors and the allignment of managerial incentives with the interests of shareholders. It demonstrates what changes within the firm were responsible for the restructuring and what factors distinguished Thorn EMI from other UK firms.

3.1. Top management changes

At the height of the firms diversification in 1984-85 net income had decreased to zero and the stock price had significantly underperformed the market as the firms management had announced a strategy of further diversification in high-technology sectors. At the board meeting of July 1st, 1985 chairman and chief executive Peter Laister resigned after what was described in the financial press as a boardroom coup initiated by the non-executive directors3. The non-executive deputy chairman Sir Graham Wilkins was appointed new chairman. Colin Southgate was appointed managing director. It was the monitoring action of non-executive directors as a response to deteriorating performance that led to the restructuring.

3.2. Board size and composition

International Directory of Company Histories, Vol I (Chicago: St. James Press, 1988), p. 532 and Midgley, D. Thorn EMIs Fissile Future, Management Today, August 1994, p. 26.

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Data on board size, composition, membership of directors in board committees and blockholdings of stock for Thorn EMI during the period 1982-1996 are presented in Table 7. The data are consistent with improved monitoring effectiveness by the board of directors that oversaw the restructuring. The board during the restructuring was smaller by one third compared to the board at the height of the firms diversification strategy. The number of directors was reduced from 13-14 during 1983-1985 to 9-10 after 1986. The proportion of non-executive directors sitting on the board increased to over 50% after 1990. This coincides with the most radical phase of the restructuring which involved the decision to dispose the lighting assets, the defence assets and the implementation of the final spin-off. It also coincides with the largest increases in the firms market value. The composition of board committees is also consistent with effective decision making and monitoring, in accordance with Klein (1998). Non-executive directors were the exclusive participants in the committees responsible for monitoring and control (Audit, Executive Share Option Scheme, Compensation and Nomination) 4. Executive directors were the only members of the committees responsible for operational, investment and financial decision making (Executive, Capital Expenditure and Finance). Finally, ownership of stock blockholdings existed before 1985 but blockholdings were more numerous and represented a higher percentage of outstanding shares during the radical phase of the restructuring in the 1990s. However, there is no public evidence that blockholders held board seats or exerted any direct influence in monitoring management.

3.3. Corporate restructuring and governance in the UK: was Thorn EMI different?

The executive chairman of the board was a member of the last two committees but could not participate in the meetings setting his level of compensation.

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In this section we explore the frequency of restructuring in the UK and examine whether Thorn EMI was different compared to other UK firms. This enables us to understand why Thorn EMI restructured so extensively whereas other firms did not. Unlike in the rest of Europe, the UK corporate environment during the 1980s was permissive to corporate restructuring. Table 8 presents data on the number and value of selloffs by publicly traded firms in 13 European countries during the period 1984-94. There were as many deals by number and value in the UK as there were in all the remaining European countries combined. There were 7,505 selloffs by UK parents during the period worth $274 billion. Activity peaked in 1990, when there were 1,205 deals worth $59 billion. Therefore, restructuring through selloffs was not uncommon in the UK during this period. Furthermore, the conservative government that held power throughout the 1980s reduced labour union power and thus removed a potential impediment to restructuring. However, despite the permissive environment, the restructuring of Thorn EMI was more radical than anything else experienced in this market during the period because in two significant ways Thorn EMI was different compared to other UK firms. First, Thorn EMI was more in need of restructuring than the average diversified firm in the UK. The 68% diversification discount we calculate for Thorn EMI in 1985 is much larger than what would be expected for the average diversified firm. Lins & Servaes (1997) calculate an average discount of approximately 15% based on a sample of 150 UK firms operating in more than one segment in 1994, which is similar to the diversification discounts calculated for US firms in earlier studies and time periods. At the same time they find that the mean (median) operating earnings over turnover ratio for UK diversified firms was 11.9% (9.5%). The same ratio for Thorn EMI was 4.6% during the year the restructuring programme was launched. This sample does not make any distinction between firms that restructured.

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Second, we compare Thorn EMI with other UK firms that restructured during the same period by examining corporate governance characterictics for a sample of large publicly traded UK firms that made 444 selloff announcements during 1984-94 divesting comparable assets of a value higher than 5 million5. We divided this sample into announcements by firms advocating increasing focus as the reason behind the selloff (124 announcements) and the remaining firms advocating different reasons (320 announcements). Evidence on board size and composition as well as other variables of interest for the sample of UK firms divesting assets during 1984-1994 are reported in Table 9. The evidence is in line with previous US studies. Selloff announcements by firms increasing focus exhibit mean (median) average abnormal returns of 1.2% (0.6%) for days [-3,+1] relative to the announcement day. The remaining selloff announcements exhibit lower returns of 0.5% (0.2%). Refocusing firms tend to be larger and divest larger divisions. Finally, 50% of the announcements by refocusing firms were made by companies whose chairman of the board had changed during the three years preceding the announcement, 56% were made by firms whose chief executive had changed, in 69% of the cases at least one of the two had changed and in 37% of the cases both had changed. On the other hand the respective percentages of announcements by firms with top management changes for the remaining selloffs are all lower, and range between 19% and 47%. The board of directors of Thorn EMI during the restructuring was smaller than the mean board of directors for the sample firms increasing focus. The mean (median) board size for this sample is between 10 and 16 (9 and 17) board members for every year between 1985-1994,

This sample was collected by searching the IFR Securities Data Co. corporate transactions database for all selloff announcements representing assets of a value higher than 5 million by UK publicly traded firms during 1984-94. Subsequently, we searched the Index to The Financial Times and deleted transactions that did not appear in the newspaper, announcements with other confounding news, announcements by Thorn EMI and by firms for which we could not obtain board of directors data. The final sample consisted of 444 announcements. The selection criteria for this sample ensure that it includes larger firms. Furthermore, the unit of analysis is the announcement and not the firm. This gives larger weight to firms that made several selloff announcements during this period and are therefore more similar to Thorn EMI.

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which is larger than the Thorn EMI board during every single year. The mean percentage of nonexecutive directors sitting on the board for the sample firms is relatively constant during the period (from 37% to 48%) and is always less than the percentage of non-executive directors at the Thorn EMI board after 1989. With the exception of 1990, the mean and median percentage of outside directors for the sample was never above 50%6. In summary, the evidence presented in this section is consistent with (i) Thorn EMI at the height of its diversification strategy trading at a larger diversification discount than the average diversified firm in the UK, (ii) action by the non-executive directors on the board being responsible for replacing top management as a response to deteriorating performance, (iii) the restructuring programme being implemented by a smaller board of directors and with a higher proportion of nonexecutive directors than during the firms diversification years and, (iv) Thorn EMI management being subject to better monitoring by the board of directors during its restructuring than the average UK firm announcing selloffs in order to increase focus during the same period7.

4. Executive compensation

Monitoring by the board of directors may not be enough for aligning managerial incentives with the interests of shareholders. Executive compensation must be subject to the proper incentive mechanisms for ensuring that managers take value maximizing actions. Excessive diversification and

From the 124 announcements by firms increasing focus 15 announce that they plan to reinvest the proceeds from the sale for expansion through acquisitions. The mean and median board size for these firms is 10 and the mean (median) percentage of non-executive directors sitting on the board is 38% (40%). 7 Dahya, Lonie & Power (1998) report that for a sample of 271 UK publicly traded firms during 1989-1992 (of which 105 experienced top management changes) the mean (median) board size and percentage of non-executive directors on the board was 8 (7) and 45% (40%) respectively. Due to the sample selection criteria they employ, their sample is likely to contain many smaller firms.

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radical restructuring are closely linked to the nature of executive compensation. Denis, Denis & Sarin (1997) examine the relationship between diversification and the presence of agency costs of managerial discretion and for moderate levels of ownership find a strong negative relationship between the level of diversification and the fractional equity ownership of the CEO, company officers and directors. In the same spirit Hermalin & Weisbach (1991) report a positive relationship between stock ownership by managers and firm value at low levels of ownership. In this section we examine the level and composition of executive compensation at Thorn EMI over time and describe the long-term incentive-compatible characteristics of the executive compensation scheme. Data on executive compensation at Thorn EMI during 1982-1996 are presented in Table 10, which shows the remuneration of the chairman of the board, the chief executive, the managing director, the average remuneration of the remaining executive board members and the average remuneration of non-executive directors, classified as salary, number of company shares held and number of options held. We also standardize holdings of stock and options by dividing them by the total number of company shares outstanding at the end of the financial year. Panel B reports the value of this compensation8. A number of observations can be made by examining the portion of the remuneration consisting of stock holdings and stock options. The restructuring programme was launched and completed by executive directors each of whom held more than twice the number of options (adjusted for subsequent capital increases) than their predecessors at the height of the firms diversification strategy. During 1983-1985 the chairman of the board held stock options representing between 0.04% and 0.06% of the firms total shares outstanding. After new management was appointed the adjusted chairmans holdings were increased to 0.08% and

All figures are deflated using the annual changes in the UK Retail Price Index. Stockholdings and options are valued at the end of the financial year and details of calculations appear in the Appendix.

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continued rising until they reached 0.14% in 1996. The last managing director of the diversified group held options equivalent to 0.02% of the firms shares outstanding. The managing director who launched the restructuring was granted three times as many options, representing 0.06% of the firms outstanding shares. The options holdings of each of the remaining executive directors were doubled with the management change that launched the restructuring. Similarly, the stockholdings of the chairman almost doubled in absolute terms during the year of the management change. By 1996 the chairman held 0.05% of the firms outstanding shares, a proportion more than ten times larger than his predecessor who was pursuing the firms diversification, as the bonus element of executive compensation was always granted in the form of stock. Similar observations can be made by examining the level of compensation in Table 10, Panel B. The chairmen during 1982-1985 received annually between 32-87% (on average 50%) of the value of their annual compensation in the form of salary. In contrast, the chairmen responsible for refocusing during 1986-1996 received between 7-29% (on average 20%) in the form of salary and the remaining as stock and options. The same trend can be observed for the average executive board member, who received on average 41% of his compensation as salary during the early period and 31% during the restructuring. Overall, on average 43% of the value of total board remuneration during 1983-1985 was in the form of salary and this proportion declined to 28% during the restructuring of 1986-1996. Therefore, the incentives of the executive board members of the company during the restructuring were significantly better aligned with the interests of shareholders than were the incentives of the board that pursued the diversification strategy. Finally, there were other details of the stock options remuneration scheme that provided long-term incentives to management. First, the strike price of the options granted was between 2530% higher than the spot price at the date of grant, thus inducing the holders to provide additional effort. These options were exercisable between the end of the 3rd year and the end of the 10th year 17

following the award. Options granted since 1995 were also subject to achievement of performance targets. Second, a quarter of the options included in the tables are Share Appreciation Rights (SARs) granted since 1993, which are not technically options but very similar: they gave the holder a cash award equal to the difference between the strike price and the spot price at the date of exercise. The initial exercise price was again 25-30% higher than the spot price at the date of grant and was indexed to increases in the UK Retail Price Index, thus adjusting the strike price upwards in line with inflation. These awards were designed to induce higher effort on the part of management and allign managerial incentives with long-term shareholder interests.

5. Pressure from the market for corporate control

An alternative mechanism exerting pressure on the management of underperforming companies is the market for corporate control. The presence of a large diversification discount creates opportunities for bust-up takeovers (Boot (1992)). The disciplinary function of the market for corporate control on firm management has been well documented. Berger & Ofek (1996) show that the probability of being taken over is higher for diversified firms with greater diversification discounts and that firms trading at the largest discounts are more likely to be taken-over by LBO raiders who break-up their targets. Evidence from the UK shows that there exists an active corporate control market since the 1970s. For example, Franks & Mayer (1996) report that during 1985-86 there were 325 bids for publicly traded firms in the UK, 80 of which were hostile (35 were successful, 22 ended with the acquisition of the target by another bidder and 23 targets remained independent) and that 90% of target firm directors resigned following successful hostile bids. 18

Pressure from the market for corporate control may have influenced the management of Thorn EMI in pursuing the restructuring, since the significant diversification discount made the company an obvious candidate for a hostile bid. There is no public information on whether such a bid had been contemplated during the early years of the restructuring. However, there is public evidence that the firm was considered at least twice as a potential takeover target during the early 1990s. In November 1992 Paramount Communications privately proposed a takeover, while the two firms were involved in negotiations for potential co-operation between the formers music division and the latters film interests. The offer was not made public and was rejected9. In November 1993, the financial press speculated that an unspecified group may be purchasing a toehold but no bid was launched10. This supports the conjecture that there was a positive probability that Thorn EMI could become the target of a takeover bid, at least during the early 1990s.

6. Costs and benefits associated with a gradual restructuring

Donaldson (1990) has discussed the benefits of gradual voluntary restructuring, implemented over a long period of time: (i) downsizing over a long horizon through natural attrition as opposed to layoffs is less painful to the organization, and (ii) the divesting firm is able to time the disposition of assets, avoid fire sales, search for buyers and withdraw from negotiations to get a better price. The case of Thorn EMI, which phased its restructuring over a period of eleven years presents the opportunity to examine in more detail some of these benefits but also the potential costs of this process.

The story had surfaced in documents submitted to US judicial authorities in relation to the takeover battle for Paramount between Viacom and QVC (Paramount Proposed Thorn EMI Take-Over, The Financial Times, December 7th, 1993, p. 20).

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With respect to the issue of layoffs, although the company announced layofs on a number of occasions (especially when reorganizing its loss-making lighting assets, its defence assets and the Rumbelows retail chain in the 1990s), these were of a limited scale, they did not attract criticism (in contrast to the extensive layoffs announced by General Dynamics (Dial & Murphy (1995)) and as a result there were no news of labour disruptions or strikes at the company throughout the eleven years of the restructuring. In view of the number of selloffs undertaken by the firm during this time, the case of Thorn EMI provides extensive evidence for examining in detail the second issue adressed by Donaldson (1990), the issue of asset sales. As outlined earlier, the benefit of a gradual disposals programme is the possibility of obtaining good prices for the divested assets. For Thorn EMI we can evaluate the selling price received by comparing it with the value-in-use of the divested assets, with the latter estimated using fundamental accounting information at the time of the disposal. The value-in-use of the divested assets is obtained in a way similar to the calculation of the diversification discount11. Selling prices, value-in-use and other relevant information for 27 asset sales undertaken by Thorn EMI during its restructuring are reported in Table 11. 70% of the selloffs have been concluded at a selling price higher than the estimated value-in-use of the divested assets at the time of the disposal. The mean (median) premium of selling price over value-in-use is 32% (13%). In line with this evidence, in at least 14 out of the 27 divestments there were more than one bidders for the assets (it is possible that there where numerous interested parties for more assets but this was not

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Thorn in the Frame, The Financial Times, November 3rd, 1993, p. 44. We use a procedure similar to Berger & Ofek (1996), as described in the Appendix. Drawing on accounting research (Ohlson (1995), Collins, Maydew & Weiss (1997)) we use earnings and book value information for valuing the divested divisions. Earnings multiples are used for estimating the value of profitable divisions. Hayn (1995), Berger, Ofek & Swary (1996), Burgstahler & Dichev (1997), Collins, Pincus & Xie (1999) document that book values as opposed to earnings are more informative of the firms value for firms with negative or low positive earnings because of the lower persistence of negative earnings over time and the proxying of book value for shareholders abandonment option. Therefore, for divisions with negative or zero earnings we use the book value of assets to approximate their value-in-use.

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disclosed). An examination of the acquirers indicates that the majority were either specialists in the sector where the divested divisions operated or they were MBO teams. The fit between divested assets and the acquirers operations has been recognized to affect the price acquirers are able to pay because buyers operating in related activities are able to put the assets in more efficient use and the selling firm can share the gains from the improved allocation of resources by receiving a better price (John & Ofek (1995)). In contrast, Pulvino (1998) shows that airlines divesting used aircraft obtain lower prices and divest to lower-value users when they are forced to rushed sales. The evidence on the divestments by Thorn EMI indicates that the company obtained favourable prices for the assets at the time of the disposal by avoiding rushed sales, negotiating with a large number of interested parties and divesting to higher-value users. However, there are two potential costs to divesting over a long period of time, which may be concealed when the assets are valued using information pertaining to the time of the disposal. While keeping for a long time peripheral businesses which are earmarked for divestment (i) their operating performance (and hence the accounting fundamental values on which their valuation is based) may deteriorate over time, and (ii) general economic conditions may change, making it difficult to obtain a good price. Both of these occurred in some disposals undertaken by Thorn EMI. The disposals undertaken during 1993-95 were almost exclusively disposals of the remaining loss-making electronics and defence operations, which were the last remnants of the technology division put up for sale in 1989-90. The breakdown of initial negotiations with interested parties during 1990 was immediately followed by the onset of recession and Thorn EMI was forced to keep and operate the assets in the absence of willing buyers12. The operating performance of this division deteriorated during the recession and continued deteriorating significantly following the

12

GNP growth in constant prices in the UK was negative for every quarter except one starting with the 3rd quarter of 1990 until and including the 1st quarter of 1992. These data were obtained from IMFs International Financial Statistics database.

21

recession (this can be observed from the divisional operating performance figures reported in Table 2). Operating profit divided by turnover decreased from 12% for the year ending March 31st, 1991 to -6% by 1995. Under the caveat that we are unable to observe whether Thorn EMI had rejected any better offers from potential acquirers in earlier negotiations, it is true ex post that early disposal of these assets may have been optimal. In summary, the gradual restructuring undertaken by Thorn EMI was associated with: (i) limited layoffs, undertaken without inviting public criticism and without labour disruptions, (ii) disposal of the majority of the assets at favourable prices, and (iii) some examples where the prolonged process of the disposals resulted in deteriorating performance for the divested divisions, which must have affected adversely the magnitude of the price received from the sale.

7. Spin-off and market value: information effects or anticipation of future takeovers?

The literature has recognised two main sources of gains from spin-offs. Gilson, Healy, Noe & Palepu (1997) view them as creating value by allowing the provision of more accurate information about the spun-off entities. They provide evidence showing that analysts forecast accuracy and coverage improve following spin-offs. Cusatis, Miles & Woolridge (1993) report that spin-offs are associated with value gains by creating independent and focused firms that can be acquired in takeovers. A comparison of the actual and imputed market value of Thorn EMI around the spin-off can provide some evidence on the source of the gains associated with the transaction. In Table 5 and Figure 2 we observe that during the two years preceding the spin-off, with Thorn EMI consisting of a rentals ( Thorn) and a music division (EMI Group), the company traded at a

22

substantial premium compared to the sum of the imputed value of its parts as stand alone entities. The premium was 57% in 1995 and 67% in 1996. The presence of a large excess premium over the imputed stand-alone value of the two divisions comprising the firm in anticipation of the spin-off is the result of two factors. First, part of it can be attributed to information benefits resulting from the spin-off, in the spirit of Gilson, Healy, Noe & Palepu (1997). If the gains from the spin-off were related to the availability of more accurate information about the two entities following the demerger, then we would expect the diversification discount to disappear only when the two entities started trading separately, giving rise to the gains in valuation from the improvement in information availability. However, in the case of Thorn EMI the rentals division had no transactions with the music group and the absence of such transactions could render voluntary disclosure of divisional information an equally credible alternative to break-up as a source of information gains. This could reveal information of above average future growth opportunities for the firm even in the period preceding the demerger. In line with the above argument, since 1993-94 Thorn EMI activities had been completeley separated. They were controlled from a small headquarters office in London, but the two core activities of rentals and music were run from separate (and distant) offices, with no management interchange: Thorn rentals was run from Surrey in the UK, whereas EMI music was run from New York. On the other hand, a takeover premium could have been incorporated in the stock price in anticipation of the spun-off entities becoming potential takeover targets following the demerger. A series of studies of takeover activity in the UK have documented target firm abnormal returns during the period 1955-1986 between 27% and 47% for the 6 month period starting approximately 3-4 months before the initial bid (Firth (1979,1980), Franks & Harris (1989), Franks & Mayer (1996)). The financial press and analystss reports speculated in 1995 that EMI (representing around 80% of the combined firms value) was likely to receive bids upon completion of the spin-off from potential 23

acquirers, identified as Walt Disney, Viacom, News Corp., Dreamworks SKG and Microsoft. Some parties had approached Thorn EMI in order to negotiate the sale of the division before the spin-off and thus preempt a bidding war. Assuming a takeover premium equal to the average premium for revised/contested bids in the UK of 47% reported by Franks & Mayer (1996), around two-thirds of the excess value of Thorn EMI in 1995-96 may have been an incorporated takeover premium for the music division. In support of this hypothesis, two years after the spin-off, in the absence of a takeover, the excess premium had been eliminated. When Thorn PLC was acquired by Nomura International in July 1998, the sum of the values of the former Thorn EMI components traded at a premium of just 12% above the average firm in their respective industries, equivalent to the premium obtained by Thorn PLC shareholders. In summary, although we cannot eliminate the possibility that part of the value gains from the spin-off were attributed to information benefits, this proportion must have been at most one-third of the total gains. Most of the excess premium in anticipation of the spin-off resulted from market expectations of a takeover bid for EMI Group PLC.

8. Conclusions

Thorn EMI presents an extreme European example of a firms transformation from a diversified conglomerate trading at a large diversification discount to a narrowly focused firm in the course of eleven years, while creating considerable value for its shareholders. The extent of refocusing and the length of time it consumed provide insights on a range of topics that have been examined in the corporate restructuring literature in large samples.

24

First, by examining the question of why the company restructured and its differences with other diversified UK firms, this case offers insights on the role of corporate governance and executive compensation in the restructuring process: (i) action by the firms non-executive board members as a response to deteriorating performance was responsible for the removal of top management that pursued inefficient diversification, (ii) the most radical phase of the restructuring was monitored by a small board, majority controlled by non-executive directors, (iii) top management was compensated mainly via stock and stock options, designed to allign managerial incentives with long-term shareholder interests (as opposed to short-term value gains), and (iv) these mechanisms were sufficient to eliminate the presence of agency costs of managerial discretion without the need to resort to the disciplinary role of debt, thus allowing the firm to retain and reinvest the proceeds from disposals in positive net present value projects. Second, it provides insights on the costs and benefits associated with a gradual restructuring process over a long time horizon: (i) it minimized the pain to the organization by avoiding massive layoffs, (ii) it allowed management to divest assets at favourable prices and to avoid rushed fire sales, but at the same time (iii) it was also associated with costs because the operating performance (and hence the valuation) of some businesses earmarked for divestment deteriorated over time. Third, it provides insights on the value gains associated with spin-offs: (i) in the case of Thorn EMI most of the increases in value where the result of a takeover premium being incorporated in its stock price on the expectation that the music division would attract takeover bids following its demerger, whereas (ii) benefits associated with improved divisional information disclosure played a lesser role. Finally, the case of Thorn EMI demonstrates the potential extent of restructuring that is necessary for a number of continental European diversified firms, which are currently operating in environments that discourage restructuring. It also shows that it is possible for the necessary 25

restructuring to occur in ways that are not traumatic to the organization if the appropriate corporate governance and incentive mechanisms are in place.

26

Appendix A: Methodology and details of estimation A.1. Diversification discount and valuation of divested divisions We use a procedure similar to Berger & Ofek (1996). Drawing on accounting research (Ohlson (1995), Collins, Maydew & Weiss (1997)) we use earnings and book value information for valuing the divested divisions. Earnings multiples are used for estimating the value of profitable divisions. Hayn (1995), Berger, Ofek & Swary (1996), Burgstahler & Dichev (1997), Collins, Pincus & Xie (1999) document that book values are more informative of the firms value for firms with negative earnings. Therefore, for divisions with negative or zero earnings we use the book value of assets to approximate their value-in-use. We multiply the earnings of each Thorn EMI division by annual price-earnings ratios for the same industry obtained from DATASTREAM and we sum these values to obtain the imputed market value of the whole firm if its divisions had traded separately. We adjust divisional operating earnings for exceptional charges, interest and taxes before applying the multipliers. Items that could not be traced to a particular division and interest charges were allocated based on a divisions share of total company turnover and taxes based on a divisions share of total operating profit. The reported diversification discount is calculated using multipliers for: Retail (General), Media, Household Products and Information Technology. We also used a series of alternative sectoral price-earnings multipliers: Retail (Chains), Retailers (Department Stores), Home Entertainment, Electronic Equipment and General Industrials. The results were unaffected by the use of different sectoral ratios. For divested assets, operating earnings are adjusted by applying net profit to operating earnings ratios obtained from aggregate sectoral balance sheets. A.2. Abnormal returns We used the FTSE 100 index for the London stockmarket as the benchmark. Data were obtained from DATASTREAM. First, we used a market model residuals approach (Brown & Warner (1985)) with days [-300,-61] as the estimation period for the parameters of the market model. The event day t =0 was defined as the day the relevant news story appeared in The Financial Times (market model residuals). Second, starting in 1984-1985 we estimated bi-annual linear regressions RTt = + RMt +

d
n =1

n nt

+ t

where RT t is the return of Thorn EMI stock and RMt is the return of the stockmarket index on day t, and dnt is a dummy variable with dnt=1 if t =0 or t =-1 (or t =-3 through t =+1) relative to the announcement day of the nth event. Abnormal returns for days [-1,0] ([-3,+1]) are twice (five times) the value of the estimated coefficient of dnt (dummy variable regressions). Third, mean adjusted returns were calculated by subtracting from raw returns the mean Thorn EMI return during the 240-day estimation period (mean adjusted returns). A.3. Valuing stock options Stock options were valued at the end of each financial year using the Black-Scholes formula. Most options held by the chairman were exercised at the tenth year following their grant and this expiration period was used in the valuation of all options. Two-and-a-half years of past daily returns were used to estimate volatility. The 3-month UK Treasury Bill rate was the interest rate used.

27

References Alexander, G.J., P.G. Benson & J.M. Kampmeyer (1984), Investigating the Valuation Effects of Announcements of Voluntary Corporate Selloffs, Journal of Finance (June 1984). Allen, J.W. & J.J. McConnell (1998), Equity Carve-Outs and Managerial Discretion, Journal of Finance, Vol. LIII, No 1 (February 1998), pp. 163-186. Berger, P. G. & E. Ofek (1995), Diversifications Effect on Firm Value, Journal of Financial Economics, 37, pp. 39-65. Berger, P.G. & E. Ofek (1996), Bustup Takeovers of Value-Destroying Diversified Firms, Journal of Finance, Vol. LI, No 4, pp. 1175-1200. Berger, P.G., E. Ofek & I. Swary (1996), Investor Valuation of the Abandonment Option, Journal of Financial Economics, 42, pp. 257-287. Boot, Arnoud W.A. (1992), Why Hang On to Losers? Divestitures and Takeovers, Journal of Finance, Vol. XLVII, No 4, pp. 1401-1423. Brown, S.J. & J.B. Warner (1985), Using Daily Stock Returns: The Case of Event Studies, Journal of Financial Economics, 14, pp. 3-31. Burgstahler, D.C. & I.D. Dichev (1997), Earnings, Adaptation and Equity Value, The Accounting Review, Vol. 72, No 2, pp. 187-215. Collins, D.W., E.L. Maydew & I.S. Weiss (1997), Changes in the Value-Relevance of Earnings and Book Values Over the Past Forty Years, Journal of Accounting and Economics, 24, pp. 3967. Collins, D.W., M. Pincus & H. Xie (1999), Equity Valuation and Negative Earnings: The Role of Book Value of Equity, The Accounting Review, Vol. 74, No 1, pp. 29-61. Cusatis, P.J., J.A. Miles & J.R. Woolridge (1993), Restructuring Through Spinoffs: The Stock Market Evidence, Journal of Financial Economics, 33, pp. 293-311. Dahya, J., A.A. Lonie & D.M. Power (1998), Ownership Structure, Firm Performance and Top Executive Change: An Analysis of UK Firms, Journal of Business Finance & Accounting, 25(9)&(10), pp. 1089-1118. Denis, D.J., D.K. Denis & A. Sarin (1997), Agency Problems, Equity Ownership and Corporate Diversification, Journal of Finance, Vol. LII, No 1, pp. 135-160. Dial, J. & K.J. Murphy (1995), Incentives, Downsizing and Value Creation at General Dynamics, Journal of Financial Economics, 37, pp. 261-314.

28

Donaldson, Gordon (1990), Voluntary Restructuring: The Case of General Mills, Journal of Financial Economics 27, pp. 117-141. Firth, M. (1979), The Profitability of Takeovers and Mergers, The Economic Journal, 89 (June 1979), pp. 316-328. Firth, M. (1980), Takeovers, Shareholder Returns, and the Theory of the Firm, Quarterly Journal of Economics (March 1980), pp. 235-260. Franks, J.R. & R.S. Harris (1989), Shareholder Wealth Effects of Corporate Takeovers: The UK Experience 1955-1985, Journal of Financial Economics, 23, pp. 225-249. Franks, J.R. & C. Mayer (1996), Hostile Takeovers and the Correction of Managerial Failure, Journal of Financial Economics, 40, pp. 163-181. Gilson, S.C., P.M. Healy, C.F. Noe & K.G. Palepu (1997), Information Effects of Spin-Offs, Equity Carve-Outs and Targeted Stock Offerings, unpublished. Hayn, Carla (1995), The Information Content of Losses, Journal of Accounting and Economics, 20, pp. 125-153. Hermalin, B.E. & M.S. Weisbach (1988), The Determinants of Board Composition, RAND Journal of Economics, Vol. 19, No 4, Winter 1988, pp. 589-606. Hermalin, B.E. & M.S. Weisbach (1991), The Effects of Board Composition and Direct Incentives on Firm Performance, Financial Management , Winter 1991, pp. 101-112. Hite, G.L., J.E. Owers & R.C. Rogers (1987), The Market for Interfirm Asset Sales: Partial SellOffs and Total Liquidations, Journal of Financial Economics, 18, pp. 229-252. Jain, Prem (1985), The Effect of Voluntary Sell-Off Announcements on Shareholder Wealth, Journal of Finance (March 1985). John, Kose & Eli Ofek (1995), Asset Sales and Increase in Focus, Journal of Financial Economics, 37, pp. 105-126. Klein, April (1986), The Timing and Substance of Divestiture Announcements: Individual, Simultaneous and Cumulative Effects, Journal of Finance (July 1986). Klein, A. (1998), Firm Performance and Board Committee Structure, Journal of Law & Economics, Vol. XLI (April 1998), pp. 275-303. Lang, Larry, Annette Poulsen & Rene Stulz (1995), Asset Sales, Firm Performance and the Agency Costs of Managerial Discretion, Journal of Financial Economics, 37, pp. 3-37. Lins, K. & H. Servaes (1997), International Evidence on the Value of Corporate Diversification, unpublished. 29

Ohlson, J.A. (1995), Earnings, Book Values, and Dividends in Equity Valuation, Contemporary Accounting Research, Vol. 11, No 2, pp. 661-687. Pulvino, T.C. (1998), Do Asset Fire Sales Exist? An Empirical Investigation of Commercial Aircraft Transactions, Journal of Finance, Vol. LIII, No 3 (June 1998), pp. 939-978. Rosenfeld, J.D. (1984), Additional Evidence on the Relation Between Divestiture Announcements and Shareholder Wealth, Journal of Finance (December 1984). Servaes, H. (1996), The Value of Diversification During the Conglomerate Merger Wave, Journal of Finance, Vol. LI, No 4, pp. 1201-1225. Weisbach, Michael S. (1995), CEO Turnover and the Firm's Investment Decisions, Journal of Financial Economics, 37, pp. 159-188. Yermack, D. (1996), Higher Market Valuation of Companies with a Small Board of Directors, Journal of Financial Economics, 40, pp. 185-211.

30

Table 1 A history of the disposals at Thorn EMI 1985-1996 A detailed history of the disposals at Thorn EMI during the period 1985-1996. The table lists major divisions and subsidiaries, their turnover for the year ended March 31st, 1984 as a percentage of total company turnover and the year the assets were put up for sale ( * ) and/or the year the last assets were divested ( | ). The last column lists the divisions that were spun-off as separate companies in 1996.

Divisions (% of total 1984 turnover)

Major Subsidiaries 1985 1986

Year First Subsidiary Put Up for Sale and/or Last Subsidiary Divested 1987 1988 1989 1990 1991 1992 1993 1994 1995

Spin-Off 1996

Rentals Retail

<

< Music Screen Entertainment

| | | (25%) | | (16%) ( 4%)

Appliance Rentals Rumbelows Fona HMV music stores EMI Music Film production etc. Thames TV Ferguson Kenwood Major Domestic Appliances Home Heating Thorn EMI Lighting Defence Systems Aerospace & Avionics Measurement Thorn Security INMOS Software products Thorn Ericsson Mechanical Engineering Electrical Components

---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------> | Thorn PLC ---------- ---------- ---------- ---------- ---------- ---------- ---------- --*------- ---------- ---------- --| ---------- ---------- ---------- ---------- ---------- ---------- ---------- --*------- ---------- ---------- --| ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------> | | EMI Group PLC ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------> | --*------- --| --*------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --| ---------- ---------- --| ---------- ---------- ---------- ---------- --| ---------- ---------- --| --| ---------- ---------- ---------- ---------- ---------- --*------- ---------- ---------- --| --------------------------------------------------------------------------------------------------------------------------------------------------*------- ---------- ---------- ---------- ---------- ---------- --| --*------- --| --| ---------- ---------- ---------- ---------- ---------- --|

Consumer Electronics Domestic Appliances

<

< Lighting Electronics <

| | | (25%) | | ( 9%) | | | | | | (21%) | | | | | |

Information Technology

--*------- ---------- ---------- --| ---------- ---------- ---------- ---------- ---------- ---------- --| ---------- ---------- ---------- --| ---------- --| ---------- --|

Telecommunications Engineering <

Table 2 Operating performance of Thorn EMI 1982-1996 Operating performance of Thorn EMI during the period 1982-1996. The table lists divisional and total company turnover, profit before finance charges and exceptional items and net profit in millions. Figures in parentheses designate a loss. Blank cells indicate that the divisional result was not part of the group during that year. na indicates that separate divisional data were not available for that year. Data were collected from company Annual Reports. ____________________________________________________________________________________________________________________________________________ Divisional operating performance by year operating profit before finance charges and exceptional items / turnover _______ _______________________ _____________________________________________________________________________________________________________ Divisions 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 _______ _______________________ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ Rentals & Retail na na 77.9 86.6 97.6 128.1 147.9 158.5 176.2 126.6 107.2 117.9 129.2 152.4 187.2 787.7 831.9 885.3 972.7 1150.9 1326.0 1445.5 1499.0 1633.6 1710.7 1484.2 1589.4 1537.4 HMV na na na na na na na na na na na na 6.1 14.0 19.6 403.9 503.2 771.2 _______ _______________________ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ Consumer Electronics 72.8 84.7 na na na na 685.0 786.7 Lighting 0.9 9.8 na na na na na na 29.6 (1.4) 12.6 15.2 ----------------------------------234.5 249.9 546.2 478.0 343.7 346.7 Total Consumer Electronics, na na 56.1 23.6 29.3 9.2 20.3 43.5 29.6 (1.4) 12.6 15.2 Appliances & Lighting 1041.0 1012.3 1053.3 439.8 415.4 523.1 546.2 478.0 343.7 346.7 _______ _______________________ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ Music 36.6 21.0 14.5 9.9 na na na na na na 125.1 196.9 246.1 294.9 365.2 486.9 500.8 480.4 571.7 1128.6 1507.3 1760.5 2189.0 2705.1 Screen Entertainment (10.0) (4.5) 9.2 11.9 ----------------------------------97.4 109.9 111.4 132.8 Total Music & 26.6 16.5 23.7 21.8 13.4 25.4 38.2 53.5 99.3 111.7 144.8 242.6 246.1 294.9 365.2 Entertainment 584.3 610.7 591.8 704.5 718.0 666.4 649.5 765.9 883.6 1016.2 1423.6 1898.3 1760.5 2189.0 2705.1 _______ _______________________ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ Technology 19.6 28.0 31.9 39.7 13.7 29.8 39.4 54.6 54.4 73.3 13.2 1.5 4.5 (2.8) 606.9 661.9 672.4 831.0 851.9 679.0 755.2 591.6 546.7 632.2 436.5 425.0 181.3 47.4 _______ _______________________ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ Discontinued Operations 17.8 (28.1) (2.1) 9.8 5.8 (2.8) 3.3 2.1 (3.4) (3.1) 942.9 567.8 83.0 84.0 150.1 34.9 117.0 71.6 462.2 178.3 _______ _______________________ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ Thorn EMI (total) 140.8 164.2 189.6 171.7 154.0 191.8 243.7 319.9 365.3 307.4 281.1 379.3 382.5 455.4 520.0 2435.9 2715.9 2820.9 3204.4 3316.5 3185.0 3054.0 3290.6 3571.1 3660.3 3954.4 4452.3 4292.1 4507.3 5055.6 _______ _______________________ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ Thorn EMI (net profit) 60.5 36.2 87.5 37.8 0.4 74.9 123.3 173.6 233.6 108.5 74.1 178.5 201.8 106.7 224.7

32

Table 3 Accounting Ratios for Thorn EMI 1985-1996

Selected accounting ratios for Thorn EMI for years ending on March 31st, 1985 through 1996. The table has been compiled from data included in the OneSource database for UK companies, which is being collected by OneSource Information Services Inc., and from company Annual Reports. All profitability ratios are computed on the basis of pre-tax profit. Pre-tax Profit Margin is defined as pre-tax profit over turnover. Shareholder funds refer to ordinary and preference share capital plus revenue and capital reserves plus profit and loss balances. Capital employed is shareholders funds plus long-term loans plus other long-term liabilities. Gearing ratio is short- and long-term debt divided by shareholders funds. Interest cover is profit before interest and taxes divided by interest expense.

1985 Return on Capital (%) Return on Total Assets (%) Return on Shareholder Funds (%) Pre-Tax Profit Margin (%) Turnover/Total Assets (%) Gearing Ratio (%) Interest Cover (x) Number of Employees 9.62 4.86 17.37 3.38

1986 9.86 4.92 18.03 3.16

1987 15.49 7.66 25.31 5.01

1988 20.09 10.88 34.95 7.38

1989 24.81 12.65 49 8.79 144 47 10x

1990 22.39 11.84 49.35 8.89

1991 17.33 8.99 42.28 7.06

1992 8.64 4.83 20.16 3.74

1993 20.14 8.56 60.43 6.14

1994 24.68 11.12 44.42 7.61

1995 19.44 8.32 46.44 6.01 138.3 121 10x 32,061

1996 34.55 13.37 85.56 9.45 141.53 135 14x 34,638

143.79 155.96 152.88 147.54 67 3x 70 3x 48 6x 74,321 28 13x 66,630

133.16 127.26 129.17 139.38 146.17 69 8x 82 6x 57,932 66 4x 53,757 137 9x 73 10x

90,327 85,700

65,444 61,124

49,433 34,495

Table 4 Summary Cash Flow Statements for Thorn EMI 1982-1996

1982 Operating Activities Operating Cash Flow Decrease/(Increase) in Working Capital Total cash from Operating Activities Investing Activities Acquisition of Subsidiaries & Other Interests Purchases of Fixed Assets (including rental equipment) Total Acquisitions & Purchases of Fixed Assets Cash Flow from Disposals Total cash from Investing Activities Financing Activities Rights Issues Increase/(Decrease) in Borrowing Total cash from Financing Activities Other Cash Outflows Taxes Dividends Increase/(Decrease) in Cash 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

301.6 71.6 373.2

355.6 23.8 379.4

396.8 (60.2) 336.6

382.3 2.2 384.5

363.9 7.4 371.3

382.6 82.4 465.0

472.8 35.9 508.7

591.8 19.5 611.3

672.7 (5.2) 667.5

622.4 27.6 650.0

613.3 41.2 654.5

719.9 3.6 723.5

749.6 (8.9) 740.7

866.1 72.7 938.8

997.9 (58.7) 939.2

na na

na na

na na

(103.1) (409.9)

na na

na na

(468.1) (400.8)

(205.3) (557.7)

(284.0) (480.3)

(217.1) (519.4)

(104.5) (443.9)

(632.6) (450.2)

(18.8) (539.5)

(112.2) (692.8)

(119.5) (695.2)

(349.2) (370.3) (330.9) (513.0) (329.5) (372.8) (868.9) (763.0) (764.3) (736.5) (548.4) (1082.8) (558.3) (805.0) (814.7) 23.8 (325.4) 43.0 (327.3) 52.8 (278.1) 40.6 (472.4) 179.3 (150.2) 156.8 (216.0) 249.6 (619.3) 212.9 212.8 (550.1) (551.5) 168.0 (568.5) 125.2 (423.2) 113.8 (969.0) 272.0 (286.3) 188.5 (616.5) 233.5 (581.2)

31.4 31.4

58.0 58.0

12.4 12.4

138.2 80.4 218.6

6.4 (14.9) (8.5)

14.1 (101.9) (87.8)

505.1 (124.4) 380.7

108.0 98.3 206.3

6.1 167.6 173.7

85.1 93.6 178.7

295.4 28.3 323.7

327.7 130.2 457.9

14.1 73.4 87.5

5.5 (30.5) (25.0)

14.0 (11.5) 2.5

(16.4) (27.4) (30.1) 5.3

(36.5) (33.5) (30.0) 10.1

(10.9) (36.1) (33.6) (9.7)

(19.5) (36.3) (37.1) 37.8

(110.0) (56.0) (42.2) 4.4

(69.7) (55.3) (40.5) (4.3)

(106.8) (57.0) (49.4) 56.9

(137.8) (72.8) (67.0) (10.1)

(47.7) (106.1) (78.6) 57.3

(95.2) (116.3) (89.0) (40.3)

(82.6) (80.0) (105.7) 286.7

(87.3) (122.0) (133.8) (130.7)

(10.1) (116.4) (130.8) 284.6

(12.0) (130.6) (145.1) 9.6

(32.2) (175.8) (147.8) 4.7

Table 5 Diversification discount 1982-1996

The diversification discount is estimated using multipliers as in Berger & Ofek (1995). A description of the estimation methodology and the data is presented in Appendix A.

Date

31-Mar-82 31-Mar-83 31-Mar-84 31-Mar-85 31-Mar-86 31-Mar-87 31-Mar-88 31-Mar-89

Actual Imputed Discount (-) Market Market Premium (+) Value (m) Value (m) % 754.65 1066.55 -29.2 842.78 1392.85 -39.5 1151.17 2179.60 -47.2 873.82 2775.60 -68.5 1073.77 2130.91 -49.6 1350.51 2355.76 -42.7 1569.89 2546.01 -38.3 1939.05 2521.69 -23.1

Date

31-Mar-90 31-Mar-91 31-Mar-92 31-Mar-93 31-Mar-94 31-Mar-95 31-Mar-96

Actual Market Value 1911.86 2218.71 2392.77 3609.95 4519.86 4679.91 7339.93

Imputed Market Value 3918.68 2108.17 1448.28 3131.66 4590.39 2980.17 4388.52

Discount (-) Premium (+) % -51.2 +05.2 +65.2 +15.3 -01.5 +57.0 +67.2

Figure 1 Stock price of Thorn EMI ( ___ ) versus FTSE 100 stockmarket index ( ---- ) 1982-1985 (standardized so that their value on Jan. 4th, 1982 equals 100)

200 standardized price 180 160 140 120 100 80 60

1982

1983

1984 date

1985

Figure 2 Thorn EMI actual ( ___ ) and projected market capitalization ( ---- ) 1982-1996 (in m)

Market Capitalization (m)

8000 6000 4000 2000 0

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

Year

36

Table 6 Abnormal returns for restructuring announcements during the restructuring of Thorn EMI Abnormal returns for windows comprising days [-1,0] and [-3,+1] relative to the publication day of the announcement to The Financial Times newspaper for 56 restructuring announcements during the restructuring of Thorn EMI for the period 1985-1996. The parameters of the market model have been computed using 240 daily returns observations. The dummy variable methodology columns present abnormal returns calculated by regressing stock returns for two years on the returns of the market index and dummy variables spanning the event window. The abnormal returns are computed by multiplying the estimated regression coefficients of the dummy variables by the number of days in the event window. The market index used in both cases was the FTSE 100 index. Mean adjusted returns have been computed by subtracting from raw returns the mean return during the 240-day estimation period. Year Events (number of observations) Abnormal Returns [-1,0] Market model residuals Dummy variable regression s Mean adjusted returns Abnormal Returns [-3,+1] Market model residuals Dummy variable regression s Mean adjusted returns

1985

New management appointments (N=2) Mean Median Percentage of positive abnormal returns 2.9% 2.9% 100% 2.7% 2.7% 100% 3.2% 3.2% 100% -2.1% -2.1% 50% -2.5% -2.5% 50% -2.0% -2.0% 50%

198595

Completed disposals (N=15) Mean Median Percentage of positive abnormal returns 0.5% 0.2% 67% 0.7% 0.8% 73% 0.7% 0.5% 73% 0.7% 1.1% 60% 1.0% 1.4% 67% 1.7% 0.7% 80%

198595

Ongoing negotiations towards disposal (N=12) Mean Median Percentage of positive abnormal returns 0.3% 0.4% 75% 0.1% 0.3% 67% -0.1% -0.2% 42% 0.3% 0.3% 67% 0.0% 0.4% 58% -0.2% 0.5% 58%

199093

Break-down of negotiations towards disposal (N=3) Mean Median Percentage of positive abnormal returns Internal reorganizations (N=5) Mean Median Percentage of positive abnormal returns

-2.4% -1.1% 33%

-2.2% -1.2% 33%

-2.0% 0.0% 67%

-4.4% -3.2% 0%

-5.6% -5.4% 0%

-4.7% -4.2% 0%

198695

0.6% -0.0% 40%

0.8% 0.4% 80%

1.6% 1.8% 60%

1.0% -0.3% 40%

0.6% -0.5% 40%

3.0% 1.7% 60%

199096

Progress towards demerger (N=5) Mean Median Percentage of positive abnormal returns 1.8% 1.3% 100% -1.5% 1.8% 1.4% 100% -1.3% 2.3% 2.1% 100% -0.7% 1.5% 0.7% 60% -3.7% 0.7% -0.7% 40% -2.9% 2.7% 4.4% 60% -0.2%

1994 198795

Postponment of demerger (N=1) Acquisitions (N=13) Mean Median Percentage of positive abnormal returns

-0.5% -1.0% 38%

-0.8% -1.1% 31%

0.0% -0.6% 46%

-0.3% 0.9% 69%

-0.2% 0.5% 62%

-0.2% 0.7% 62%

37

Table 7 Thorn EMI board of directors composition 1982-1996

1983 Number of Executive Directors Number of Affiliate Directors * Number of Non-Executive Directors Total Board Size Proportion of Non-Executive Directors in Board Proportion of Non-Executive Directors in Board Committees Audit Compensation (Remuneration) Executive Share Option Scheme Nomination Executive Capital Expenditure Finance Total % of blockholdings (number of holdings above 3% of outstanding shares) 9 0 5 14 36%

1984 7 1 5 13 38%

1985 8 1 4 13 31%

1986 6 1 3 10 30%

1987 6 1 2 9 22%

1988 6 1 3 10 30%

1989 5 0 3 8 37%

1990 4 0 5 9 56%

1991 4 0 5 9 56%

1992 4 0 6 10 60%

1993 4 0 6 10 60%

1994 4 0 6 10 60%

1995 4 0 5 9 56%

1996 4 0 6 10 60%

na na na na na na na 5.3% (1)

na na na na na na na 5.3% (1)

na na na na na na na 5.4% (1)

na na na na na na na 5.3% (1)

na na na na na na na 5.2% (1)

na na na na na na na 5.4% (1)

na na na na na na na 5.9% (1)

100% 83% 100% 0%

100% 86% 100% 86% 0%

100% 86% 100% 86% 0% 0%

100% 83% 83% 0% 0% 0% 7.9% (2)

100% 100% 86% 0% 0% 0% 3.4% (1)

18.1% (5)

14.2% (4)

14.2% (4)

7.1% (2)

* Directors who are technically non executive but have either entered into agreements providing services to the firm or have served as executive directors in the past. Some authors refer to them as grey directors.

Table 8 Annual volume and number of selloffs announced by European firms during 1984-1994 by country of origin of selling firm
Date Value in $millions (number of deals) UK France Germany Italy Sweden Switzerland Netherlands Spain Finland Denmark Belgium Norway Ireland 1984 1985 1986 1987 1988 104.7 2,963.4 10,588.0 14,500.8 33,298.3 (11) (59) (154) (315) (629) 43.6 114.4 291.5 2,055.0 4,477.9 (3) (9) (22) (39) (83) 39.0 79.3 122.4 973.8 171.2 (3) (10) (15) (24) (35) 48.7 301.2 596.1 4,235.6 (1) (4) (9) (9) (36) 59.0 741.3 423.2 1,296.3 (1) (4) (14) (18) (28) 200.0 12.2 273.5 993.1 57.9 (1) (5) (8) (9) (18) 99.2 96.9 2,785.9 102.4 (4) (6) (8) (23) (27) 445.0 8.9 144.3 684.6 (0) (3) (4) (5) (11) 20.0 83.7 (0) (0) (4) (2) (8) 61.5 279.8 (1) (0) (0) (2) (9) 20.0 115.3 (0) (1) (2) (3) (7) 28.0 1.1 (0) (1) (0) (4) (5) 32.7 193.4 (0) (0) (0) (3) (5) 1989 48,889.9 (865) 6,809.4 (101) 4,113.9 (50) 4,281.6 (25) 3,037.0 (50) 252.1 (21) 3,176.9 (49) 311.3 (16) 9.0 (13) 263.0 (15) 1,669.5 (10) 281.6 (10) 94.1 (9) 1990 59,002.2 (1,205) 7,374.1 (144) 6,547.4 (147) 7,687.8 (39) 4,386.7 (78) 1,877.7 (49) 1,679.6 (83) 1,237.0 (17) 237.7 (18) 1,088.9 (12) 462.3 (11) 95.1 (10) 194.7 (20) 1991 28,377.9 (1,201) 10,142.7 (391) 19,463.7 (922) 6,528.1 (89) 3,740.8 (276) 839.6 (112) 1,859.7 (227) 4,899.2 (51) 788.1 (119) 1,269.7 (62) 162.4 (45) 630.9 (72) 480.3 (49) 1992 26,105.3 (992) 8,927.2 (419) 13,540.6 (938) 4,432.4 (211) 6,333.1 (263) 1,577.4 (144) 2,362.7 (225) 3,314.1 (88) 2,239.6 (165) 342.6 (54) 869.3 (40) 1,075.4 (102) 212.6 (21) 1993 27,778.1 (1,074) 6,951.9 (331) 13,242.4 (524) 7,346.6 (194) 7,673.1 (244) 9,344.7 (125) 5,085.9 (222) 2,161.2 (58) 2,020.9 (115) 1,062.2 (93) 1,018.9 (36) 1,562.3 (108) 1,501.8 (23) 1994 22,207.2 (1,000) 15,653.9 ( 271) 4,473.2 (415) 6,057.7 (127) 5,815.0 (205) 5,527.8 (129) 1,003.3 (194) 2,111.2 (63) 1,423.2 (104) 1,043.2 (91) 297.1 (36) 812.2 (72) 796.4 (23) Total 273,815.8 (7,505) 62,841.6 (1,813) 62,766.9 (3,083) 41,515.8 (744) 33,505.3 (1,181) 20,956.1 (621) 18,252.6 (1,068) 15,316.8 (316) 6,822.3 (548) 5,410.9 (339) 4,614.8 (191) 4,486.7 (384) 3,506.0 (153)

Source: SDC Database

39

Table 9 Descriptive statistics and board of directors composition of UK firms divesting assets 1982-1996 This sample was collected by searching the IFR Securities Data Co . corporate transactions database for all selloff announcements representing assets of a value higher than 5 million by UK publicly traded firms during 1984-94. Subsequently, we searched the Index to The Financial Times and deleted transactions that did not appear in the newspaper, announcements with other confounding news, announcements by Thorn EMI and by firms for which we could not obtain board of directors data. The final sample consisted of 444 announcements (124 announced increasing focus as the reason behind the selloff and 320 announced different motivations).

CAAR [-1,0]

CAAR [-3,0]

Selling Firm Market Value (m)

PANEL A Divested Assets Selling Price (m)

Selling Board Size Price / Selling Firm Market Value

Percent NonExecutive Directors

Chairman Change

Chief Executive Change number [%]

number [%]

Chairman or Chief Executive Change number [%]

Both Changed

number [%]

Selloffs increasing focus (N=124) Mean [Median] Remaining selloffs (N=320) Mean [Median]

1.1% [0.4%]

1.2% [0.6%]

2,686 [1,184]

73 [25]

0.09 [0.03]

12 [11]

41% [41%]

62 [50%]

69 [56%]

85 [69%]

46 [37%]

0.7% [0.1%]

0.5% [0.2%]

1,950 [890]

63 [18]

0.12 [0.03]

11 [11]

39% [39%]

122 [38%]

89 [28%]

151 [47%]

60 [19%]

1983 Thorn EMI Total Board Size % Non-Executive Directors UK refocusing firms (N=124) Mean Total Board Size [median] Mean % Non-Executive Directors [median] Number of announcements 14 36%

1984 13 38%

1985 13 31%

PANEL B 1986 1987 10 30% 9 22%

1988 10 30%

1989 8 37%

1990 9 56%

1991 9 56%

1992 10 60%

1993 10 60%

1994 10 60%

1995 9 56%

1996 10 60%

13 [13] 24% [24%] 2

16 [16] 40% [38%] 6

11 [11] 38% [33%] 15

12 [11] 37% [33%] 14

11 [11] 43% [42%] 12

14 [17] 48% [59%] 10

10 [9] 42% [41%] 10

11 [10] 41% [40%] 17

12 [11] 41% [43%] 23

11 [11] 42% [44%] 15

40

Table 10 Compensation for members of the board of directors of Thorn EMI 1982-1996

PANEL A: Aggregate holdings 1982 Chairman of the Board Salary ( miilion) Stock holdings - number of shares [% of total shares outstanding] Options - total number held [% of total shares outstanding] Chief Executive/Managing Dir. Salary Stock holdings - number of shares [% of total shares outstanding] Options - total number held [% of total shares outstanding] Remaining Executive Directors (average per director) Salary Stock holdings - number of shares [% of total shares outstanding] Options - total number held [% of total shares outstanding] Non-Executive Directors (average per director) Fees Stock holdings - number of shares [% of total shares outstanding] Total Board Remuneration Salary Stock holdings - number of shares [% of total shares outstanding] Options - total number held [% of total shares outstanding] 108,412 5000 1983 115,213 5000 [0.00%] 99,000 [0.06%] 1984 146,908 500 [0.00%] 63,150 [0.04%] 1985 152,475 600 [0.00%] 137,182 [0.06%] 1986 150,919 9935 [0.00%] 125,000 [0.06%] 1987 172,500 9935 [0.00%] 177,500 [0.08%] 1988 142,500 18255 [0.01%] 177,500 [0.06%] 1989 206,140 45998 [0.02%] 286,041 [0.10%] 1990 401,923 47695 [0.02%] 345,410 [0.11%] 1991 398,874 47695 [0.02%] 345,410 [0.11%] 1992 419,749 51483 [0.02%] 360,626 [0.11%] 1993 472,759 75756 [0.02%] 360,626 [0.09%] 1994 474,347 152480 [0.04%] 425,508 [0.10%] 1995 509,000 164594 [0.04%] 576,621 [0.13%] 1996 526,000 213934 [0.05%] 609,776 [0.14%]

0 [0.00%]

na 500 0 [0.00%]

na 500 [0.00%] 41150 [0.02%]

none none none

none none none

na 31200 [0.01%] 121,500 [0.06%]

na 32401 [0.01%] 140,541 [0.06%]

na 45434 [0.02%] 177,791 [0.06%]

none none none

none none none

none none none

none none none

none none none

none none none

none none none

none none none

na 7185

60,231 6708 [0.00%] 27086 [0.02%]

98,333 3951 [0.00%] 38800 [0.02%]

68,755 4469 [0.00%] 47469 [0.02%]

89,532 1985 [0.00%] 81730 [0.04%]

95,126 1603 [0.00%] 86366 [0.04%]

179,632 255 [0.00%] 80691 [0.03%]

221,274 3039 [0.00%] 105254 [0.04%]

120,816 1371 [0.00%] 133808 [0.05%]

88,333 2054 [0.00%] 143808 [0.05%]

94,167 2,573 [0.00%] 84,989 [0.03%]

315,083 3093 [0.00%] 114379 [0.03%]

182,500 209865 [0.05%] 178962 [0.04%]

843667 37292 [0.01%] 219103 [0.05%]

913333 13484 [0.00%] 217223 [0.05%]

na 2132 [0.00%]

8,000 1532 [0.00%]

6,667 1532 [0.00%]

12,600 2046 [0.00%]

14,000 2086 [0.00%]

14,333 1064 [0.00%]

9,500 812 [0.00%]

18,667 812 [0.00%]

12,400 525 [0.00%]

24,000 533 [0.00%]

18,167 540 [0.00%]

24,333 1071 [0.00%]

25,000 1274 [0.00%]

22,667 1384 [0.00%]

26,167 1260 [0.00%]

628,412 66458 0 [0.00%]

637,713 63118 [0.04%] 329750 [0.19%]

829,408 36318 [0.02%] 334750 [0.19%]

787,475 42116 [0.02%] 469465 [0.22%]

840,000 57418 [0.03%] 573,419 [0.26%]

950,444 55672 [0.03%] 749,869 [0.34%]

1078658 67954 [0.02%] 678,055 [0.25%]

1028291 61398 [0.02%] 707,055 [0.25%]

879,423 54432 [0.02%] 746,835 [0.25%]

783,874 56525 [0.02%] 776,835 [0.25%]

757,249 61901 [0.02%] 615,594 [0.19%]

1442759 91459 [0.02%] 703762 [0.17%]

1171847 789721 [0.19%] 962394 [0.23%]

4045000 283390 [0.07%] 1233931 [0.29%]

4562000 261949 [0.06%] 1261445 [0.29%]

41

Table 10 (continued) PANEL B: Value of executive compensation in Stockholdings and stock options were valued at the end of each financial year using the Black-Scholes formula. Most options held by the chairman were exercised at the tenth year following their grant and this expiration period was used in the valuation of all options. Two-and-a-half years of past daily returns were used to estimate volatility. The 3-month UK Treasury Bill rate was the interest rate used. All figures are adjusted for inflation by using the UK Retail Price Index.

1982 Chairman of the Board Salary Stock holdings Options Total Salary as % of total Chief Executive/Managing Dir. Salary Stock holdings Options Remaining Executive Directors (average per director) Salary Stock holdings Options Total Salary as % of total Non-Executive Directors (average per director) Fees Stock holdings Total Total Board Remuneration Salary Stock holdings Options Total Salary as % of total 108,000 16,000 124,000 87%

1983 110,000 17,000 212,000 339,000 32%

1984 134,000 2,000 166,000 302,000 44%

1985 131,000 2,000 203,000 335,000 39%

1986 125,000 31,000 273,000 429,000 29%

1987 138,000 37,000 518,000 693,000 20%

1988

1989

1990

1991 243,000 156,000 598,000 996,000 24%

1992

1993

1994

1995

1996

108,000 145,000 259,000 60,000 169,000 154,000 346,000 693,000 725,000 514,000 1,007,000 1,138,000 21% 14% 23%

246,000 273,000 267,000 277,000 280,000 173,000 301,000 710,000 765,000 1,492,000 552,000 544,000 679,000 874,000 1,998,000 971,000 1,119,000 1,655,000 1,916,000 3,769,000 25% 24% 16% 14% 7%

na 2,000

na 2,000 88,000

none none none

none none none

na 97,000 246,000

na 120,000 336,000

na 149,000 312,000

none none none

none none none

none none none

none none none

none none none

none none none

none none none

none none none

na

58,000 23,000 58,000 138,000 42%

90,000 17,000 99,000 206,000 43%

59,000 12,000 83,000 154,000 38%

74,000 6,000 160,000 241,000 31%

76,000 6,000 201,000 283,000 27%

136,000 1,000 140,000 277,000 49%

156,000 11,000 253,000 420,000 37%

78,000 4,000 280,000 363,000 21%

54,000 7,000 246,000 306,000 18%

55,000 9,000 224,000 288,000 19%

182,000 103,000 459,000 485,000 12,000 977,000 173,000 94,000 170,000 320,000 404,000 760,000 364,000 1,400,000 1,036,000 1,340,000 50% 7% 44% 36%

na

8,000 5,000 13,000

6,000 7,000 13,000

11,000 5,000 16,000

12,000 6,000 18,000

11,000 4,000 15,000

7,000 3,000 10,000

13,000 3,000 16,000

8,000 2,000 10,000

15,000 2,000 16,000

11,000 2,000 13,000

14,000 4,000 18,000

14,000 6,000 20,000

12,000 6,000 19,000

14,000 9,000 23,000

610,000 755,000 676,000 698,000 758,000 820,000 725,000 567,000 477,000 444,000 833,000 660,000 2,202,000 2,424,000 214,000 161,000 108,000 178,000 207,000 223,000 225,000 175,000 184,000 208,000 364,000 3,676,000 1,318,000 1,826,000 704,000 862,000 701,000 1,161,000 1,858,000 1,217,000 1,705,000 1,566,000 1,335,000 1,223,000 1,053,000 1,640,000 2,084,000 4,279,000 1,527,000 1,778,000 1,486,000 2,036,000 2,823,000 2,260,000 2,655,000 2,308,000 1,996,000 1,876,000 2,250,000 5,975,000 5,604,000 8,530,000 40% 42% 46% 34% 27% 36% 27% 25% 24% 24% 37% 11% 39% 28%

43

Table 11 Valuation of assets divested by Thorn EMI We obtain valu-in-use for the divested assets by multiplying the earnings of each Thorn EMI division by annual price-earnings ratios for the same industry obtained from DATASTREAM. For divisions with negative or zero earnings we use the book value of assets as an approximation of their imputed market value. Operating earnings are adjusted by applying net profit to operating earnings ratios obtained from aggregate sectoral balance sheets. Assets divested Date Acquirer Number of interested parties Selling price of divested assets (m) 125 44 8 44 90 52 12 108 62 55 13 24 20 69 82 na na 41 58 162 7 9 39 na 15 18 na Value-inuse of divested assets (m) 142 22 7 67 81 na na 32 50 33 18 na 10 101 79 na na 15 51 147 5 13 37 na 12 33 na Book value of divested assets (m) 142 na 7 67 81 na na 32 na na 18 na na 101 40 na na 15 na 118 5 13 37 na 12 33 na Operating earnings of divested assets (m) 12 3 2 -17 -12 na na negative 5 4 negative na 3 negative 6 na na negative na 15 negative na -3.5 negative negative -1.2 na Mean Median % Positive Profit on the sale over valuein-use (m) -17 22 1 -23 9 na na 76 12 22 -5 na 10 -32 3 -15 15 26 8 15 2 -5 2 13 3 -16 65 Premium over valuein-use (%)

Screen Entertainment Thorn EMI Heating Metal Industries Major Domestic Appliances Ferguson Thorn-Ericsson joint-venture (51% stake) Thorn EMI Electronics Australia INMOS Meters Division Kenwood Systron Donner (4 divisions) Holophane Consumer Finance Lamp Manufacturing Thorn EMI Software Unitel shareholding Edmonton site Fire Appliances Division Thames TV (58.5% stake) Thorn Lighting Thorn EMI Electron Tubes Systron Donner Safety Systems Thorn Security Thorn Automation & Malco Defense Group Sensors Division Other Fixed Assets & Investments

21-Mar-86 March 1986 26-Jun-86 10-Apr-87 18-Jun-87 10-Jun-88 18-Oct-88 12-Dec-88 07-Jun-89 09-Sep-89 05-Jun-90 11-Sep-90 20-Sep-90 15-Nov-90 25-Jul-91 1991-92 1991-92 05-Mar93 23-Apr-93 21-Jun-93 11-Jan-94 31-Mar-94 28-May-94 19-Dec-94 23-Dec-94 31-Mar-95 1994-95

Bond Corporation (Australia) Myson Group PLC (UK) Expamet PLC (UK) Electrolux (Sweden) Thomson (France) Ericsson (Sweden) AWA (Australia) Thomson-SGS (France/Italy) Schlumberger Ltd. (UK) MBO BEI Electronics (USA) Fidenza Vetraria (Italy) National Westminster Bank PLC (UK) General Electric (USA) MBO unknown unknown Williams Holdings PLC (UK) Pearson PLC (UK) Investcorp (Bahrain) MBO Whittaker Corp. (USA) MBO MBO Thomson-CSF (France) Racal Electronics (USA) unknown

4 na na na na na na 170 na >1 >1 >1 na >1 >1 na na >1 >1 >1 >1 >1 na na >1 >1 na

-12% 103% 14% -35% 11% na na 235% 25% 65% -27% na 96% -32% 4% na na 165% 15% 10% 47% -35% 4% na 25% -48% na 32% 13% 70%

71%

44

45