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75th stories: Rich diversity – Roger Gibbs and the Trust’s endowment

1 Jul, 2011
Roger Gibbs

Roger Gibbs

To mark the 75th anniversary of the death of Henry Wellcome and the founding of the Wellcome Trust, we are publishing a series of 14 features on people who have been significant in the Trust’s history. In our tenth piece, business writer Perry Gourley looks at Roger Gibbs, the Chairman who transformed the Trust’s finances.

The fact that the Wellcome Trust headquarters building bears the name of a man who admits his knowledge of science and medicine is rather rudimentary perhaps tells its own story about the scale of Sir Roger Gibbs’s contribution. His background was in the London money markets rather than in science, but Gibbs oversaw a dramatic transformation of the Trust during the 1980s and 1990s. When he joined the Trust in 1983 its assets were worth £250 million; by the time he left in 1999, they had risen to over £14 billion – even after having donated huge sums to medical research.

The diversification of the Trust’s assets, which up until 1986 had been almost exclusively tied up in its 100 per cent ownership of the Wellcome Foundation pharmaceutical company, unlocked billions of pounds and ensured that the Trust was no longer reliant on a single asset for its annual income. The three-stage process – the 1986 flotation of the Foundation on the stock market, the subsequent further reduction in the Trust’s stake in the company in 1992, and the eventual sale of its remaining holding to drugs giant Glaxo in 1995 – were some of the biggest financial transactions ever seen in the UK and catapulted the Trust from being a relatively small grant-making charity to being the world’s largest.

The first steps on the path to diversification were taken by Sir David Steel, a former Chairman of BP who became the Trust’s Chairman in 1982. The following year he recruited Gibbs, who he knew through their involvement in a high-profile campaign to save the Mermaid Theatre in London, to join him on the board of Trustees. Gibbs had enjoyed a highly successful 35-year career in the City, culminating in a role as Executive Chairman of the financial group Gerrard & National, but, as he admits, his knowledge of the Trust at the time was limited. “I knew it was a medical charity but very little else about it. I didn’t even know Sir David Steel was Chairman until he asked me to become a Trustee,” he recalled.

The need for diversification

Steel and Gibbs brought a fresh perspective to a board of Trustees traditionally dominated by individuals with a scientific background. From the outset the two men had begun to look at the relationship between the Trust and its main asset, the Wellcome Foundation, which had remained broadly unchanged for decades.

The vast majority of the Trust’s assets were tied up in its 100 per cent ownership of the Foundation, with its only other investments being around £30m lent to local authorities. “We were all too aware that we effectively had all our eggs in one basket, and there was the risk that if something were to go wrong with the Foundation, such as a Thalidomide-style disaster, the Trust and the work it funded would suffer badly,” said Gibbs.

He had seen at first hand the risks involved with such a reliance on a single asset. His father, Sir Geoffrey Gibbs, had been Chairman of the Nuffield Foundation for more than two decades and had repeatedly tried in vain to persuade Lord Nuffield to allow diversification away from the Morris Motors business it depended on. The subsequent collapse of the British Motor Corporation had a devastating impact on that Foundation.

The second issue was the relatively small dividend the Trust was receiving from the Wellcome company, which for many years had ploughed 70 per cent of its net profits back into its work rather than distributing it to its sole shareholder. While that arrangement had enabled the company to grow significantly, it also placed considerable constraints on the Trust’s income and its ability to fund medical research.

“Sir David was adamant that if the Trust didn’t start to get a much larger annual dividend from the company then we would have to look at going public,” said Gibbs.

But such a move would not be straightforward. Henry Wellcome’s 1932 will had been written on the presumption that the company would remain permanently owned by the Trust, although it did allow for the possibility of a sale in “unavoidable circumstances”.

Paving the way for change

Steel and the Trust’s long-serving Director, Dr Peter Williams, approached the Charity Commissioners for guidance on the issue. They were met with a sympathetic response based on the fact that the fiduciary duty of the Trustees meant they had to actively consider diversification of the Trust’s assets. When efforts to convince the Foundation’s board of the need to increase its annual dividend did not bear the desired fruit, the Trustees took the decision to float the company.

The preparation for what was likely to be the largest listing of a private company the London Stock Exchange had ever seen would be a long and intricate process. The move also faced opposition from the board of the company, who were keen to retain the status quo and the continued protection from its 100 per cent shareholder. In addition, many of those who worked for the company in the UK and USA felt uncomfortable about what looked like the end, or at least the beginning of the end, of its special relationship with the Trust.

Gibbs recalls that it was not a comfortable time for the Trustees. “It was difficult to communicate to the senior individuals working in the Foundation, who were almost all from a scientific rather than a financial background, why the flotation was necessary. Some of them felt we were selling the company from under them and couldn’t understand why. The reality was the world had changed since Henry Wellcome’s will had been written more than 50 years previously. Our responsibility was to the Trust and its ability to fund research, and we had a duty to act in the best interests of its beneficiaries in the present and future.”

The depth of feeling in the run-up to the flotation was demonstrated by the resignation of two key directors of the Foundation in protest. “That was a particularly difficult period, but Sir David’s response was that these things happen and that we will press ahead regardless. He was the most understated individual but a very determined man. He always did what he thought was right and in this case he couldn’t have been more so.”

The flotation was indeed the largest of a private company ever seen on the London Stock Exchange; the £1.20 share price valued the company at more than £1bn. Demand for the shares saw the offer heavily oversubscribed and by the end of the first day’s trading the price had soared to £1.75.

By reducing its stake from 100 per cent to 74.9 per cent in the company – now Wellcome plc – the Trust raised £200m, almost ten times the value of its existing reserves. Its remaining holding in what was now a publicly listed and more commercially focused business would also generate a significantly larger income from annual dividends in the future.

In the years following the flotation, demand for the shares remained strong, largely driven by excitement around Wellcome plc’s Retrovir drug, which at the time was seen as being the only defence against AIDS on the market. By the end of 1989, the shares had risen to £8.60, more than seven times the original flotation price, and providing further justification for the Trust’s initial diversification move.

“The decision to go public was extremely important in the history of the Trust and the company, and an awful lot of credit must go to Sir David for that,” reflected Gibbs. Steel retired from the Trust in 1989 and was succeeded as Chairman by Gibbs. There had also been changes at the company, with John Robb, formerly Chief Executive of Beecham, appointed as Chief Executive and Sir Alistair Frame, a former Chairman of mining group Rio Tinto Zinc, as Chairman.

The second share sale

While the flotation had succeeded in its initial aim of diversification, the success of the company on the stock market had again brought into focus the issue of over-reliance on one asset. By 1991 the company had come to represent some 95 per cent of the Trust’s income-producing assets.

Although the dividends the Trust was receiving had increased, the level of income continued to be a concern. Discussions between Gibbs and Frame ensued over the issue, and over the course of the next year the dividend almost doubled.

While Gibbs believed Frame and Robb were doing an excellent job at the helm of the company, he and his fellow Trustees were keen to further reduce the stake in the company and in 1992 applied to the High Court for permission to cut it to below 50 per cent. The move was opposed by the company, which argued that the Trust had a duty to maintain a majority holding. The court judgement in favour of the Trust paved the way for the holding to be reduced not just below 50 per cent but even to under 25 per cent if the Trustees believed it appropriate. With legal permission secured, Gibbs pressed ahead with plans to sell part of the holding.

By any measure, the sale would be huge: the maximum allowable sale of 417m shares owned by the Trust would have been larger than the £3.2bn raised by the privatisation of BT and involved extensive promotion of the offering to institutions around the world. During one day alone, Gibbs and a group of the company’s advisers and directors had visited four European centres – Amsterdam, Paris, Madrid and Frankfurt – to meet potential investors.

On 27 July 1992, the sale went ahead. Although the Trust could have reduced its holding to 25 per cent, such a large sale would have been difficult for the markets to swallow and it eventually sold 270m shares to cut its stake to 40 per cent.

The sale, described by the ‘Financial Times’ as a “remarkable success”, raised £2.3bn, almost 12 times the price realised from the first sale in 1986. It also represented the largest cheque ever written in the UK. The sale dramatically reduced the Trust’s dependence on the company, with its holding there now representing 26.5 per cent of its total assets; this gave it significant funds to invest elsewhere.

It also enabled it the Trust to make a $400m endowment to the Burroughs Wellcome Fund in recognition of the huge contribution that the US arm had made to the Trust over many years. Overnight, the gift catapulted the Fund into one of the top 50 charitable foundations in the USA. “We announced the donation at a small dinner in London with the Burroughs Wellcome people. The scale of it came as a complete surprise to them. Howard Schaeffer, then President of the Fund, said that it was beyond their wildest dreams, but then joked that we could have got away with $100m – but only just!” said Gibbs.

Oil painting of Roger Gibbs by Andrew Festing, 2000.

Oil painting of Roger Gibbs by Andrew Festing, 2000.

The bulk of the money raised in the share offer was quickly invested in what was at the time a depressed stock market. The decision was to prove extraordinarily well timed as on Black Wednesday, the day in mid-September 1992 when sterling was finally withdrawn from the European Exchange Rate Mechanism, share prices began to rise sharply. By Christmas they were up by more than 20 per cent.

Away from the stock market, the Trust made a number of other investments that were to prove highly profitable. In 1994 Gibbs personally negotiated a deal to buy 56 acres of freehold properties in South Kensington for £243m. At the time, the transaction attracted adverse press comment that the price paid was too high, but given the appreciation in property prices since, it has been one of the best investments the Trust has ever made. Another noteworthy move was taking a stake in eBay in 1997, before it became a household name; the eventual return was 632 times the initial investment. “We owe a lot to our advisers for that, notably John Govett of Schroders and Jim Bailey of Cambridge Associates,” said Gibbs.

The approach from Glaxo

While the diversification of the Trust’s assets was proving more successful than those involved could have realistically expected, the industry in which Wellcome plc found itself in the mid-1990s was undergoing significant change, and talk of consolidation among larger companies in the sector was rife.

Drug discovery and development required increasingly deep pockets. Patents had become harder to establish and protect and the company would need to look at acquisitions to build greater scale or risk becoming a target for others.

It was an issue very much on the minds of the Trustees, if not the directors of the company. “We continually warned the company that one day someone could come along with what bankers term an ‘incontrovertibly’ large offer,” said Gibbs. “Encouraging a potential suitor was never on the Trust’s agenda but if such an offer did materialise we would have to consider it.”

Unbeknown to both the Trust and the company, an ‘incontrovertibly’ large offer for Wellcome plc was already being hatched.

In December 1994, Richard Sykes, the then Chief Executive of Glaxo, had contacted Gibbs through Flemings, the Trust’s corporate advisers, and suggested they meet for lunch in January. “At the meeting I played a straight bat and told Richard Sykes what we had been telling everyone else: that the share sales had achieved our aim of diversifying the Trust’s assets and that we were totally content with our 40 per cent holding and indeed how the company was being run,” says Gibbs.

For his own part, Sykes stressed his view of the changing pharmaceutical industry and his belief that it would become dominated by a handful of major players within five years. At the end of the lunch, Sykes accepted Gibb’s insistence that the Trust was happy with its shareholding in Wellcome plc but added: “but you do have your fiduciary duties” – a factor Gibbs and his fellow Trustees were all too aware of. Within days, Sykes contacted his own advisers who initiated discussions with Flemings.

The offer that followed on Friday 20 January was £10.25 a share, made up of both cash and shares in Glaxo.

“We were very keen to have a substantial part of the deal in Glaxo shares,” said Gibbs. “They were yielding 6.4 per cent at the time, incredibly cheap, and went on to treble within two years.”

The offer valued the company at £9.1bn, a level seen as a ‘knockout’ bid. But the bid came with two conditions – that the Trust had to sign an irrevocable agreement to sell its holding to Glaxo and that it would not contact the company before the bid went public.

Acceptance of the Glaxo offer

The Trustees had a weekend to make their decision. The offer was hugely attractive, with the Wellcome share price at the time standing at £6.80, and particularly given concerns over Wellcome’s growth prospects – its two biggest profit generators, Zovirax and Retrovir, appeared to be at or past their sales peak. Although there were other drugs companies who had clearly run the rule over Wellcome, none had the deep pockets that Glaxo had. An alternative bid was highly unlikely but the Trustees told Glaxo that they could not ignore a higher offer if one was forthcoming.

Late on the Sunday evening, the Trustees agreed the £10.25 offer, made up of 70 per cent in cash and 30 per cent in Glaxo shares.

The following Monday morning was to be a difficult one for the Trustees, who faced breaking the news to an unsuspecting Robb – by then, Executive Chairman of Wellcome plc following Frame’s retirement. “I and Sir Peter Cazalet, the other lay Trustee who had played a telling role in the 1992 and 1995 sales, had gone to Wellcome’s head office in the Euston Road to break the news to John Robb before the stock market opened,” said Gibbs. “He was understandably stunned by what he was told and clearly, under the surface, extremely angry. It was a very awkward meeting.”

As soon as the market opened, traders reacted positively to the news of the proposed deal and Glaxo’s share price rose, making the offer even more valuable and weakening any prospect the Wellcome plc board had of repelling the offer.

The company did launch a legal challenge, in an attempt to enforce a Memorandum of Understanding that had been drawn up between it and the Trust after the second share sale. Under the Memorandum, the Trust had agreed not to sell further shares without first consulting the company, but the Trustees had later been advised that their fiduciary duty should override that. The challenge to the sale failed and notwithstanding the slim chance of a rival offer it was effectively a done deal.

Robb, a highly respected executive who had ambitious plans for the company to expand and to be predator rather than prey in the industry consolidation, was extremely disappointed by what he regarded as the company being sold behind his back.

“I didn’t see John Robb for some years after the sale but when I did meet him he told me he believed that I had done the right thing as Chairman of the Trust, although it obviously didn’t suit his own book at the time. I thought that was pretty magnanimous of him,” said Gibbs.

An independent assessment of the way the Glaxo approach had been handled was later provided in a case study in ‘The Art of the Deal’, a book examining some of the 20th century’s key corporate deals by former director of investment banking at CSFB Robert Lilja. He concluded: “While it was John Robb’s duty, as the chairman of Wellcome plc, to procure the best possible offer for all his shareholders, he is not justified in attacking the Trust. First, the 1992 Memorandum was not legally binding. Second, neither the Memorandum nor the Deed of Covenant could result in the trustees having to do, or omit to do, anything which they considered contrary to the best interest of the Trust. Sir Roger Gibbs undoubtedly demonstrated that he had carried out his fiduciary duty to the very highest standard. He put aside all personal wishes and feelings, however strongly held, in the best interests of the Wellcome Trust.”

Gibbs also believes the Glaxo offer was just too good to turn down. “I think, quite rightly, that we squeezed just about everything we could have out of Glaxo.” At a stroke, the deal had created the largest pharmaceutical company and the largest grant-making charity in the world – and both were British.

It was also arguably the most significant event in the Trust’s remarkable growth story over the past 75 years. Its current portfolio is now worth around £15bn and it has already given away £10bn, which in total is a sum 23 000 times greater than the original £1.1m that the Trust was founded with.

Although he retired from the Trust more than a decade ago, Gibbs still takes a keen interest in its progress. “For me, one of the best parts of my time at the Trust was working with countless highly intelligent and distinctly amusing people. It was hard work at times but we also had the greatest fun.

“Sir David Steel set the Trust off on the right road to diversification and was very much the architect of it, but we two lay Trustees also couldn’t have been more supported by the medics and the scientists, notably two of the Deputy Chairmen, Dr Julian Jack and Sir Stanley Peart.

“And without the extraordinary achievements of the many scientists in the Wellcome company in the UK and overseas, particularly in the US, the Trust would not be the highly regarded and substantial medical research institution it is today.”

Find out more about activities marking the Wellcome Trust’s 75th anniversary, including links to other features as they are published.

Perry Gourley is a freelance business journalist. Based in Edinburgh, he writes regularly for publications including the ‘Scotsman’, ‘Scotland on Sunday’ and ‘Scottish Business Insider’ on subjects including the stock market, international trade and renewable energy.

Image credits: Wellcome Images

Further reading

Hall R, Bembridge BA. Physic and Philanthropy: A history of the Wellcome Trust, 1936-1986. Cambridge: Cambridge University Press; 1986.

Lilja R. International Equity Markets: The art of the deal. World Publication Service; 1997.

Williams P. The Story of the Wellcome Trust: Unlocking Sir Henry’s legacy to medical research. Hindringham: JJG; 2010.

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