W H Smith, whose money-making magic endured for two centuries, is today "strategically challenged" by a pincer movement of supermarkets and bookshops such as Waterstone's

Poor old Smugs. The game could soon be up for W H Smith, the retail group which has had to endure Private Eye's taunts for decades and the moans of disappointed shareholders for even longer.

Two hundred and twelve years after Henry Walton Smith had the bright idea of piling a cart high with newspapers and hawking them around Mayfair, the company's independence looks close to ending. The investment group Permira has made an informal offer of £940m and the shareholders, while not yet biting Permira's hand off, won't need much encouragement.

A string of other investment groups - known as private equity houses - is also taking a look. This is a fast-moving story: W H Smith and Permira are already squabbling over the terms of engagement. But at present we appear to be close to a full-scale auction. Whoever buys W H Smith will probably dismember it. Smith's new broom Kate Swann insists she sees a bright future for the company as an independent concern, but her job seems increasingly to be about securing the highest possible bid and then vacating the premises.

Smith's finest years were before 1914. It flourished, providing the newly mobile, literate public with stuff to read on trains, selling cheap novels by the yard. It was a pioneer, introducing the first private lending libraries to the public in 1860 (the

last one closed in 1961). It was paternalistic

and enlightened, setting up its first staff pension scheme as early as 1894. But the past 50 years have been one long saga of decline. Almost every foray outside the news distribution and newsagent businesses has ended in tears. Ventures in DIY products (remember Do It All?), cable TV, American airport shops, office supplies, book clubs, music megastores have all been closed or sold. The firm sacked its greatest potential saviour, Tim Waterstone, who promptly founded the most exciting new format to hit the book trade in years. W H Smith eventually bought Waterstone's - only to sell it a few years later.

No wonder Swann admits that the company is what she calls "strategically challenged". But it is the poor performance of the core chain that has shareholders throwing their hands up in despair. W H Smith is caught in a pincer movement between the supermarkets, busy nibbling away in areas such as newspapers, magazines and music, as well as bestselling books and DVDs, and the specialist book and music retailers with bigger ranges, better availability and staff who actually read books. Even Swann struggles to convince us that she believes the core chain has a future.

The company still has a solid news wholesaling arm and a decent publishing offshoot, Hodder Headline. But there seems little logic in keeping these bundled together. Even if shareholders give Swann a chance to prove herself, she will probably be forced to oversee a break-up.

W H Smith was once an entrepreneurial business, but lost its way as each generation got posher. The Messrs Smith were succeeded by the Viscounts Hambleden. For a while the group was run by charming ex-Guards officers who gave you a jolly good feed at their delightful head office off Sloane Square. The company has since turned its back on those blue-blooded years (relocating to Swindon). The last remaining family member left in 1996. But regaining the money-making magic of two centuries ago is proving elusive.

The story again illustrates the extraordinary influence of the private equity houses. These are investment groups that invest either in private (that is unlisted) companies or in buying publicly listed companies, which they then take private.

Numerous previously quoted household names have disappeared into private equity hands in recent years - from Debenhams to Halfords on the high street and Weetabix to Typhoo on the breakfast table. By shedding jobs, introducing better management disciplines and - let's be honest here - sometimes pulling stunts that would be frowned upon in a listed company, they have turned around the most unpromising businesses. Smith's stalker Permira made a £600m profit by buying the DIY products retailer Homebase from Sainsbury and selling it a few years later. Private equity is now regarded as mainstream. Most pension funds are dabbling. The Norfolk County Council pension fund has just revealed plans for a £55m flutter.

With a wall of money now chasing a finite number of deals, the returns are bound to come down. Many deals still owe their success to low interest rates, not to the supposed genius of the private equity houses. Companies are loaded up with cheap debt, which has the effect of multiplying the potential profit or loss.

The policy has paid off in these years of low interest rates, but as money gets tighter, the scope for profits diminishes and the risk of losses gets greater.

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