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The Anglo File: Game Over for Board Lapses at Eidos

An internal review from the game developer reveals some procedural weaknesses, but the CFO dislikes the way one U.K. newspaper handled the information.




, the U.K. games publisher and developer that brought you

Tomb Raider

, had its way, it would probably like to let its heroine Lara Croft loose in the newsroom of

The Guardian


In today's financial section of the British daily, a report titled "Eidos Reveals Board Lapses" drew attention to an internal review by the firm's new CFO, Jeremy Lewis. That review, which was mailed along with its annual report this week, noted several "weaknesses" in board conduct, including "director's expenses."

A copy of the review obtained by


did indeed refer to problems with corporate governance. It "highlighted a number of areas of weakness, particularly in respect to directors' expenses and directors' authority levels and procedures for certain transactions."

As a result, "management intends to issue shortly a management revision of its procedures and operations manual."

The review referred to credit-card loans belonging to Chairman Ian Livingston and CEO Charles Cornwall of 5,000 pounds and 21,000 pounds, respectively. It said these loans were still outstanding at the financial year-end (March 31) but have since been repaid.

Never the Twain Shall Meet

Eidos, however, took exception to the newspaper's treatment, which it said implied a connection between unrelated issues and also mixed material from the review and the annual report, which are two separate documents.

For example,

The Guardian

noted "concerns among investors about the way Eidos has handled some of its transactions in the past." It continued in the same paragraph by saying that "the shareholders' report also reveals that the director associated with the development of Lara Croft

Jeremy Heath-Smith was paid a 3.7 million-pound bonus last year."

CFO Lewis, the author of Eidos' review, complained to



TheStreet Recommends

The Guardian

had taken a few paragraphs from different reports "and just jumbled them together." The paper's story was picked up by wire services in the U.K.

The Guardian

declined to comment.

Lewis said Heath-Smith's bonus is "well deserved," a comment echoed by analysts and the rest of the U.K. press. As head of

Core Design

, the developer arm of Eidos, Heath-Smith was in charge of the team of people that created

Tomb Raider

and its heroine Lara Croft. The success of this product helped Eidos increase its revenue in the year through March 31 some 65% to $365 million and lift pretax profits 130% to $61.4 million.

Heath-Smith "always attracts media attention because of the bonuses he receives," said Lewis. "But the bonus he receives is arrived at by the remuneration committee, which is a nonexecutive independent body. The board

members aren't just paying themselves."

Moving to the Next Level

While one analyst admits that corporate governance at Eidos had been an issue for the past three years, the arrival of the CFO Lewis, a man widely regarded in London's financial district for his competence, and the company's public disclosure of such issues show the company is addressing the problems.

"They are resolving an issue that needs to be resolved," says the analyst, who wished to remain anonymous.

The market also appeared to be fairly sanguine about the disclosures. Eidos shares closed down 0.7% at 2040 pence.

Hubert Demarliave, analyst at


, points out that Eidos, because it is listed in the U.K. and the U.S., "has to disclose certain information that in many other countries it wouldn't have to."

"If I were a shareholder, I would be a little concerned, but things are getting sorted out and it doesn't change the fact that Eidos is still a very undervalued company," says Demarliave. Eidos is trading at a price-to-earnings multiple of only 11.5 times forward earnings, according to a poll by the U.K. financial information provider

Hemmington Scott

, while the average for similar companies in the U.S. and France is in the mid-30s.

"It is a great takeover target ... because the managers hold only 10% of the shares and the rest is free float," says Demarliave, who has a buy rating on the company. Paribas has no investment banking relationship with Eidos.

Lewis is sure -- and investors are no doubt hoping -- that the issues over corporate governance are now behind Eidos. If not, after Lara has finished with certain journalists, she may be dispatched to the boardroom, leaving certain members as victims of their own success.