The Missing Millions

Halfway down Fleet Street, London's Newspaper Row, stands an oasis named El Vino. There, over vintage wines and aged whisky, reporters and editors swap the stories that tough British libel laws discourage them from printing. One of the most durable topics over the past few years has been the flamboyant personality and liberal accounting methods of Captain Robert Maxwell, 46, who built tiny Pergamon Press into a major scientific publishing house. Among financial editors there was a common conviction that the Czech-born publisher, who won a military cross while fighting with the British in World War II, was an expert in complex corporate maneuvers.

Maxwell, a Member of Parliament until he was defeated in the June election, was held in considerably greater esteem in London's financial community. Last year, advised by merchant bankers N.M. Rothschild & Sons, Saul Steinberg, 31, chairman of Manhattan's Leasco Data Processing Equipment Corp., made a $60 million bid for control of Pergamon. The ebullient Steinberg saw Pergamon's big library of scientific data as a logical complement to Leasco (1969 sales: $101 million), which has aggressively moved into all phases of computer information services as well as management consulting and insurance.

The two entrepreneurs started negotiations last summer with a display of toothy smiles. But as Steinberg pressed for more financial information and disliked what he learned, the smiles turned to snarls. The resulting battle has become one of the longest, most acid and most entertaining in British business history. Steinberg's charges and Maxwell's countercharges have frequently enlivened prime-time television. Even the Board of Trade, Britain's overseer of commercial practices, is investigating the controversy.

Tumultuous Meeting. Steinberg halted his takeover effort a year ago, but not before Leasco had spent some $22 million to buy 38% of Pergamon's stock in the open market. Last October a tumultuous stockholders' meeting voted Maxwell off the board and out of the chairmanship. Next month Leasco filed a suit charging Maxwell and his associates with conspiring to make false statements about Pergamon's earnings and financial condition. Leasco demands $22 million in damages; Maxwell insists that the suit is a "ploy," and is suing Leasco, alleging conspiracy to defraud.

At the heart of the dispute are Pergamon's profits. Under the accounting formula used by Maxwell, Pergamon had 1968 pretax profits of $5.04 million. But a special audit by Price Waterhouse, published two weeks ago, placed 1968 profits at only $1.2 million and Pergamon's year-end assets at $10.8 million rather than the $16.9 million originally reported.

Error of Judgment. How could Price Waterhouse's reading of the books differ so greatly from Pergamon's, which was audited by the respected British firm of Chalmers Impey? One reason is the failure of a Pergamon affiliate, International Learning Systems Corp., an encyclopedia company, which lost $8.5 million in 27 months--a fact that did not come to light until two months ago because the books had not been kept up to date. Pergamon is writing off the $5,000,000 it invested in International Learning; Maxwell admits that failing to provide adequate management for the venture represents "a grievous error of judgment."

Another reason is that Price Waterhouse wants Pergamon to write off $560,000 of reported profits from sales to companies controlled by Maxwell and his family. Maxwell, who still owns 27% of Pergamon's shares, dismisses many of the Price Waterhouse adjustments as "technical in nature." Says Maxwell: "These public companies were not milked. Trading was to the advantage of Pergamon."

The affair has started a serious debate about British accounting practices. Critics complain that laymen have been encouraged to regard accounting as an exact science, when in reality it involves frequent value judgments. Moreover, Britain lacks the equivalent of the U.S. Securities and Exchange Commission to set rules for corporate disclosure, thus allowing management and its auditors to keep ordinary shareholders in the dark about the intricate formulas used to derive profit figures.

The Price Waterhouse report also places Steinberg in a delicate position. To oust Maxwell from the Pergamon board. Steinberg obtained the backing of institutional investors who owned 15% of Pergamon's shares. Their price was an assurance that Leasco would bid for the shares it does not own within 60 days of receiving the Price Waterhouse report. Despite the dubious outlook for Pergamon's profits, Steinberg will soon have to make a bid, not only because he is committed to do so, but also because he has a $22 million investment to protect.

Underneath the curious financial structure of Pergamon is a sound publishing business with an impeccable reputation in the scientific community. "Despite everything, we are still keen on Pergamon," said Steinberg last week. "The editors and publishers are highly competent, and the long-run future looks good if we can get through this difficult time." Still, says Steinberg, the next time he tries to acquire a British company, he will be sure to tune in on the talk at a Fleet Street pub.

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