City: Fleming fiasco

THIS is the story as Invergordon, one of Scotland's last remaining independent scotch companies, would like you to see it.

With the active support of Robert Fleming, an eminent City firm with strong Scottish connections, Invergordon managed two years ago to fight off a pounds 350m bid from Whyte & Mackay, part of the giant American Brands cigarettes- to-insurance empire. It was a glorious victory, both for Invergordon's management and for Robert Fleming, which triumphed against the odds.

Now Whyte & Mackay is back again, attempting to capitalise on a temporary setback in Invergordon's performance by launching a new bid. There's nothing official yet, but W & M is doing the rounds of shareholders, offering up to 300p a share to anyone prepared to play Judas. It has even had the cheek to approach Robert Fleming, which, through its fund management arm, owns the largest single stake in Invergordon, amounting to 13.6 per cent. As you would expect, Fleming hasn't given the proposal the time of day.

That is what Invergordon and its advisers would have you believe, anyway. The truth is a good deal more embarrassing and quite the most bizarre City story I have heard in a long while. What actually occurred was that Whyte & Mackay was minding its own business when it received an out-of-the-blue approach from Fleming Investment Management, offering to sell the entire stake for 275p a share (the value of the original bid) plus a 20p dividend. In case you've missed the point, let me spell it out. This was Robert Fleming, merchant bank adviser to Invergordon, offering to sell a crucial stake in its client to the very company that it had helped to fight off just two years ago.

Fund management and corporate finance functions within a merchant bank are meant to be separated by Chinese walls, so that fund management can operate independently of the interests of corporate finance. That, however, doesn't stop clients expecting banks to wield all their powers - including those of their fund management arms - in support of the client's interests. Generally speaking, the Chinese walls don't mean a great deal when the chips are down.

Unfortunately for Invergordon, the people at Fleming Investment Management - being a bit wet behind the ears when it comes to these matters - took the existence of the walls all too literally. With even Invergordon's own broker, BZW, slashing its forecast for this year from pounds 40m to pounds 27m, FIM took the view that it was time to take the money and run.

The bulk of the FIM stake - about 9 per cent of the company - is held through Fleming Mercantile Trust, a publicly quoted investment trust. Invergordon shares have underperformed the market by more than a quarter over the past year, and this was hitting the performance of the trust. Being locked into such a poorly performing investment when the rest of the market was booming just wasn't on.

At this point, the Chinese walls crumbled rapidly. Senior directors at Fleming got to hear about what the investment arm was planning and, realising the embarrassment it would cause, hit the roof. Too late. The truth is out despite attempts by Invergordon and others to distort it. In an attempt to limit the damage, Fleming has appointed Warburgs to advise FIM, hoping against hope that Warburgs will say 295p is not enough, or that a friendly purchaser might be found at a higher price. I'll be amazed if one is. Warburg's own top-rated analyst, John Spicer, is forecasting that profits will remain depressed for at least the next two years. Oh dear. I wouldn't fancy being David Paterson, the main investment manager at Fleming Mercantile Trust, right now. He's damned if he sells and damned if he doesn't.