A bad deal being made for the wrong reasons
COMMENT: "Sir Desmond's belief that combining the two companies will open up significant opportunities in fast-growing international markets should send out a full siren warning to investors; this normally amounts to code for money down the drain"
Saturday 09 September 1995
At this stage, however, it is hard to see what is going to stop it, other than the political furore it has stirred up. There are plainly substantial regulatory issues involved, but nothing insurmountable. What ever may be said about Sir Desmond's vaulting ambition, there is no doubt that he has been clever and astute in spotting the fault lines in the Government's regulatory and mergers policies. There is little case on the competition grounds recently spelt out by Ian Lang, Secretary of State for Trade and Industry, for referring this takeover to the Monopolies and Mergers Commission. Having already cleared four bids in this sector, it might seem inconsistent to stop North West. This is more especially the case, since if North West was referred, a potential foreign bidder waiting in the wings might sneak in and steal the prize from under its nose. Nor, apparently, is there any legal redress against Sir Desmond's pledge (designed to keep the City sweet) that for the first five years at least, all efficiency gains derived from the takeover will be kept for shareholders. If this had been a bid for a water company, it would have been different, for the law requires automatic reference of such bids to the Monopolies Commission. As with the French bid for Northumbrian Water, the MMC could have extracted concessions for the consumer. Not so bids for electricity companies. There is apparently a logical explanation for this legal anomolay, though civil servants were hard-pressed to remember it yesterday.
In summary, it looks at least possible that Sir Desmond might steer his way through the regulators. Unless, that is, Mr Lang thinks this such a ridiculously conceived merger that he decides to give up his legalistic approach to mergers policy and refer the bid, anyway. Certainly there is a case for it and a gathering head of steam behind it in the highest political circles, for in the final analysis this takeover amounts to little more than empire building. Critically it depends for its success on quality of management; in that quarter North West still has a great deal to prove. If it goes wrong, and is mismanaged, water and electricity consumers in the North West will pay a heavy price.
The shared facilities management company which provides the central cost- cutting justification for the merger, is a good idea, but it is by no means certain to deliver the efficiency savings supposed. North West is long on cost-cutting rhetoric, very short on practical detail. Nor do you need to go through a full-scale merger to have a shared management facility. The ITV companies have already shown the way with joint venture companies for key selling and management functions.
True, there are tax benefits, but the lesson of mergers made for tax reasons is that they end in tears. If North West were forced to share any efficiency benefits with customers, this takeover would not even pass muster. It is already quite fully valued - rather better, for instance, than the agreed bid from SEI for South Western. Management needs to deliver if it is going to justify the price; there is nothing in what has been said so far to suggest it can. Furthermore, Sir Desmond's belief that combining the two companies will open up significant opportunities in fast growing international markets should send out a full siren warning to investors; this normally amounts to code for money down the drain.
Japan standing at the crossroads
Is Japan at a turning point? Received opinion in financial markets is that it is, with the economy expected slowly to recover from here on in and the days of the super yen - below 100 to the dollar - now over.
The warm and cosy glow about Japan in financial markets has been fanned by decisive signals from the Bank of Japan that it will do what it takes to sort out the bad debt problem and keep the currency at a level exporters can live with. Yesterday brought a three-pronged attack: the official discount rate cut, lower overnight money market interest rates, and foreign exchange intervention. When they're in the mood for it, the markets like that kind of leadership.
The Bank of Japan has had to wait for this moment. At the start of the year the Japanese public still tended to see the debt problems of banks and credit unions as just desserts for their late 1980s greed. Any individual who had been splattered by the bursting of the financial bubble was in no mood to back steps to help out the banks with public money.
Eight months later, a stagnant economy and handful of bank failures has created a greater public consensus for decisive action to sort out the financial crisis. The Japanese authorities have also persuaded other world financial leaders of the necessity and the possibility of joint action. Crucially, America has accepted both that it cannot neglect the dollar and that it must cut the budget deficit.
The decisive moment for the exchange rate occurred when the Fed, Bundesbank and Bank of Japan jointly pounced to buy dollars in mid-August. If the authorities' actions do send the dollar decisively above Y100 and keep it there, it will be the first time since the Louvre Accord in 1987 that international co-operation has successfully shifted exchange rates. Certainly, there is a good chance of it working - at least for some months, which is the long term as far as currency dealers are concerned. The economic fundamentals, liquidity flows and the determination of the central banks all augur well.
Even so, there are potential hitches. Bar forcing yen depositors to pay for the privilege of putting their money in the bank, with interest rates now at a nominal 0.5 per cent there is not much more the Japanese authorities can do on the monetary front. Furthermore, US politics in the 14 months before the presidential election could easily spook the forex markets. The US government is due to run out of cash next month and hit the national debt ceiling in November. Republican politicians can hardly contain their excitement at the opportunities for battle. Traders might well take some of the posturing seriously.
Japanese politics, too, could prove unsettling, particularly if trade hawk Ryutaro Hashimoto becomes the next prime minister. What's more, the Japanese bank debt problem has not yet been solved. We know only that the Bank of Japan is determined to do so. Longer term, only trenchant action to open up Japanese markets to foreigners will solve the problem of the overvalued yen.
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