Source: Scottish Maritime Museum.
LORD INCHCAPE AND THE MERGER BETWEEN THE BI AND THE P & O
The merger between the BI and the P & O was one of the most shrewd deals of Inchcape's life. It is a remarkable case of a company apparently selling itself out to a more powerful rival, whilst in reality gaining control of that rival and consolidating its authority for the present and the future. Why did Sir Thomas Sutherland, regarded as one of the strongest and most successful of P & O chairmen, his directors and shareholders allow this to happen?
The Earl Of Inchcape
Sutherland's career was outstanding by any standards. He had joined the P & O within fifteen years of its earliest contract in1852, when he was only 18. Two years later, he had been sent to Bombay, but it was in Hong Kong that he really made his mark. By the time he was 26, he had been appointed superintendent of P & O's Japan and China agencies and a member of the Hong Kong Legislative Assembly; Inchcape was 38 before he had achieved comparable prominence.
Sir Thomas Sutherland, G.C.M.G.
P & O Chairman
Painted by John Singer Sargent, 1898.
As Inchcape was to benefit from the vacuum of power at Mackinnon Mackenzie and the BI with the increasing age and untimely death of Sir William Mackinnon in 1893, so Sutherland rose to power whilst the P & O founder, Arthur Anderson, was reaching the end of his life. Appointed Managing Director in 1872 after four years as assistant manager and an extensive tour of all the P & O's operations worldwide, he revolutionised the whole set-up. Facing severe difficulties with the opening of the Suez Canal in 1869, Sutherland implemented drastic economy measures within a company whose finances had been cushioned by generous subsidies (Freda Harcourt, 1982)
Astutely predicting the principal trends in the ocean carrying trade, Sutherland built up the P & O, moving its base from Southampton to London, and contracting for a series of new efficient vessels. Under his able leadership, the P & O rose to great power and influence, establishing unique national prestige. Like Inchcape, he also played a significant role in public life, elected as Liberal MP for Greenock in 1884, and achieving his knighthood in 1891.
By 1913, the P & O had a secure financial base and extensive network of routes, such that it felt strong enough to negotiate with a similarly powerful shipping company without compromising its position. It had a paid-up capital of £5.5 million, 60 ships of over half a million tons and a dominant position on the prime mail routes through Suez to Calcutta, Yokohama and Sydney. Meanwhile, the P & O "Branch Line" to Australia , via the Cape ran extensive feeder services, and the Company maintained over 200 overseas agencies.
A second factor in persuading Sutherland to look sympathetically upon a merger with the BI was the growing inclination in the early twentieth century for shipping combines to grow. For example, P & O had already taken over the Blue Anchor Line in 1910, and the AUSN had been created through the ASN and QSS merger.
Thirdly, Sutherland himself, eighteen years older than Inchcape, was nearly 80 in 1913, and, unlike his successor was to do, sought retirement and a reduction of his responsibilities. Although other members of his Board certainly saw themselves as possible candidates for the chairmanship, such as Sir Walter Lawrence, it was not until Inchcape had established a prominent position in the BI that Sutherland felt confident that he had identified a worthy successor. All along, the possibility of merger with the BI was tied up with Inchcape's ultimate leadership of the combine.
The surviving documentation within the P & O archives, charts Sutherland's interest in the BI. Detailed examination of its Annual Report in 1913 reveals that the BI was closely comparable in size and complementary rather than competitive - in its activities, with the P & O. The BI had 120 steamers of over 700,000 tons; although the P & O had only half the number of ships, it could muster a similar aggregate tonnage. The BI dominated the Indian Ocean trades: the P & O the long-haul routes and home lines.
B.I. Crest
The BI certainly appeared financially sound: it could afford to distribute £130,720 in dividends (5% on preference stock and 10% on the ordinary shares) with £15,666 to carry over for 1914. It was expanding its fleet, with four new vessels delivered since the end of 1913, four more nearing completion and two cargo steamers on long-term contract had been purchased outright. Six old steamers had been disposed of in early 1913. Meanwhile, debentures totalling £211,860 had been recently paid off. The book value of the BI fleet was placed at £4.3m, with further capital and reserves worth £6m.
Duncan Mackinnon, who had unofficially acknowledged Inchcape's prominence in the BI for at least the previous three years, retired owing to failing health in 1913, and with the death of the Duke of Argyll in the same year, the "old guard" was disappearing, and with them, the opposition to a merger with P & O.
On 19th May 1914, the P & O Board - Sutherland, Adamson, Rathbone, Gladstone and Cunard - issued a Resolution to make an offer to the BI to buy its ordinary and preferred stock. The two Boards were to be "fused" still working separately but under a single controlling body "in which the Directors of the P & O will possess a preponderating voice". Despite their insistence on this clause from the outset, it was not to be adopted. Lord Balfour, in a private letter to Sutherland, was among the first of his colleagues to voice disquiet when he expressed fears that the future Board might not adequately protect the interests of its P & O element.
A further private letter to Sutherland, this time from Dr Freshfield, the P & O solicitor, reveals a fourth reason why Sutherland welcomed the BI merger. Apparently the capital powers of the P & O were almost completely exhausted. An increase in its capitalisation was necessary before any further expansion could be envisaged. An extraordinary general meeting, to authorise the raising of extra capital, was on the cards in any case.
Such a meeting was held a month later, when shareholders heard how the P & O Board proposed to come to an agreement with the BI whereby the BI shares would be exchanged for P & O stock. Each BI ordinary share (nominally £50) was to be paid for in P & O deferred stock, valuing each at £33. 06s 08d, and each £1 BI preferred stock acquired by £1 fully-paid 5% preferred stock. The increase in capital which this represented was £700,000 for the preferred stock and £638,133 for the deferred stock, totalling £1.3m., making the P & O's total capital £4.8m.
Sutherland, in presenting the case for the merger, insisted on referring to it not only as a good deal financially, but as a "combination", and that the aim was "to strengthen the position of both companies, to promote economy, eliminate possible rivalry and generally to increase the efficiency of their joint work." He emphasised that the conditions agreed were "the only possible terms on which this operation could have been carried out". He tried to placate the anxieties of the P & O stockholders and directors alike, by reiterating the Resolution that P & O would maintain a "preponderating voice" and that P & O business would continue under the same management and agencies. The stockholders were well justified in their suspicions of Inchcape's motives, and the policies he would adopt when he succeeded to the chairmanship.
That the prospect of Inchcape as their chairman was not altogether welcomed by P & O stockholders is plain. Sutherland maintained that the P & O was fortunate to acquire Lord Inchcape's services - there was no need to dwell on his reputation; this was well known to the whole shipping world. One or two dissentients (such interventions were comparatively rare at P & O AGMs, such was the respect in which Sutherland was held) thought that Lord Inchcape's remuneration should be decided at a public meeting. Oral evidence (Wilfred Mizen, retired P & O Company Secretary, who joined the Company in 1913) suggests that Sutherland was deaf by this stage, so his ignoring this question has no significance: but when repeated, Sutherland considered that it was but a small matter, and it was ungentlemanly to raise it. As in (sic) his hopes for the prominence of the P & O within the new combine, he was wrong.
On the 22nd May, Sutherland issued a telegram to his fellow P & O directors: "INCHCAPE AND I DECIDED THIS MORNING INVIEW OF THE RUMOURS IN THE PRESS ABOUT IMPENDING EVENTS THAT IT WOULD BE DESIRABLE TO ANNOUNCE OUR INTENTIONS TO PREVENT UNWISE SPECULATION AND ALSO TO FACILITATE THE BUSINESS OF THE BI MEETING ON TUESDAY WHERE QUESTIONS WILL CERTAINLY BE ASKED. THE NOTICE WHICH WILL APPEAR PUTS AN END TO THE SECRECY WHICH HAS BEEN SO WELL KEPT" The extent to which Sutherland realised Inchcape's intentions at this point is still open to doubt.
The final agreement came on 27th May 1914, whereby the BI duly transferred all its issued stock to the P & O. All twelve P & O directors were now also directors of the BI, and all eight directors of the BI were to have a seat on the P & O Board. At this stage, Inchcape was to continue as Chairman of the BI for a term of ten years only, and there was nothing to say he would be P & O chairman. The BI closed its books on 30th September 1914, and officially ceased to exist. But in reality it was stronger than ever.
P & O Crest.
If the P & O really wanted to cut out rivalry with the BI in an age of fierce competition, and at the same time take over its property and goodwill, why was the BI not liquidated? Sutherland argued to P & O stockholders that the BI stockholders wanted to retain an interest in their own company through the P & O "and we will have a controlling power in both concerns". The BI, he said, was as large as P &O, too big to be immediately taken over, and it needed to be managed separately. Mackinnon Mackenzie would remain managers for at least the next ten years, and its commission business with the BI - although very extensive and remunerative -was necessary for the BI's effective running. The two companies operating side by side would have a wider base of security for future profits than just one.
But this was not the full story. The directors' minutes record that when Sutherland opened negotiations with Inchcape in March 1914, he had advocated the liquidation of the BI, but objections were anticipated from the Board of Trade in view of the monopoly this would create. Also, the P & O could hardly have managed the heavy outlay of capital that would have been necessary to pay off the BI's debenture issue which amounted to £1.6m. So, in a nutshell, the P & O's shortage of funds meant that the future independence and power of the BI, especially combined with the influence of its powerful leader, was assured.
By 10th June, Waltons, the BI solicitors, informed Freshfield, representing the P & O that the P & O offer to BI shareholders had been accepted by the requisite majority, and the acceptance documents were duly issued. In the final proof of the notification to the Press, all references to the P & O having a "preponderating voice" had been eliminated.
The last meeting of the old P & O Board was held on 22nd July. Any hopes of a last-ditch attempt to assert the power of the P & O in the new arrangement were lost at Sutherland's insistence that all the actions of the previous few months should be taken as confirmed so that no minutes would need to be read at the first meeting of the new Board in October. At the new Board meeting, all seemed to go smoothly ahead as planned. There was no immediate cause for alarm. It seemed just a formality when Sutherland successfully proposed that Inchcape's salary as a managing director of the P & O should be the same as that which he received from the BI as chairman - £5000.
Yet this meeting marked a turning-point in P & O history more far-reaching than was realised at the time, except possibly by Inchcape, and to a certain extent, by Sutherland. Inchcape had written to his friend, Lord Kilbracken, "I have, after much labour, fixed it up with the P & O. I think the settlement is an uncommonly good one and perfectly fair to both companies". Sutherland agreed with this, or at least attempted to persuade himself, his fellow directors, and the P & O shareholders that he did. He would have been less happy to read another private letter of Inchcape's, boasting that he now had nearly two million tons of shipping under his control, 'governing a 'single traffic system' which touched 'every conceivable port of the British Empire'
That Sutherland's powers of persuasion were not altogether successful was shown in the reaction of a shareholder at the 24th June Extraordinary Meeting of the P & O. Drawing attention to the high price finally paid for BI shares (£96 when the market price was £83, and the original agreement was £33), he complained that "the British India Company had made a very good bargain indeed. Whether the P & O had done the same was open to doubt".
The steady accumulation of power by Inchcape, his assumption of the chairmanship and 2.5% of the net profits, the new prominence of the BI and Mackinnon Mackenzie men and interests vis-à-vis the P & O, and an overall feeling of usurpation of authority by the BI - described graphically in contemporary oral evidence - confirmed worst P & O fears over the next few years. But none can have considered that this regime would continue for nearly a quarter of a century.