A curious move that will boost City coffers

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The Independent Online
Hostile takeover bids are always going to be a necessary and inevitable feature of any free market economy. Naive and misguided is the man who believes everything can and should be agreed by civilised negotiation. The real world doesn't world like that, And in the Anglo-Saxon world at least, hostile bids are one of the few effective ways of bringing about management change or forcing the pace of corporate evolution.

Less clear is whether they actually ever produce any real economic benefit. What little serious research there has been on the issue is at best ambiguous. As a bargaining tool, a way of extracting fair value for shareholders in the target company, they may have something to commend them. Nor can companies in a free society ever be compelled to agree a takeover, however much it might be in their interests to do so. But "hostiles" are also essentially a racket, deliberately encouraged and fostered by City and Wall Street advisers as a way of earning fees.

This is a not undue exaggeration of the way it works. The predator is deliberately advised to bid low. Only in part is this motivated by the possibility of a bargain. No, what the advisers are really thinking about is turning the bid hostile, which in turn means higher fees. It also generally means two sets of fees, for the first bid is unlikely to succeed. Inevitably, it has to be followed by a second, higher offer. The same is true of the defending company's advisers, who generally get little out of an agreed deal. If they can turn it hostile, their fee is immediately enhanced. If they can extract a higher offer, a multiplier sets in. If they successfully defend the company, it's like winning the Lottery.

To suggest that takeover battles are wholly motivated by such considerations is taking the argument too far. But City fees are certainly a large part of the equation. With Southern Company's approach to National Power now more or less certain to turn hostile, another barrowload is heading in the City's direction. It would plainly be unfair, as well as possibly libellous, to suggest that National Power's unambiguous and strongly worded rejection of Southern's approach is even in part the result of conspiracy to boost the City's coffers. But its refusal to talk in any shape or form about the possibility of an agreed deal is a curious thing. Even by its own admission, it hasn't seen what Southern has to offer yet.

To be fair on John Baker, chairman of National Power, in any merger proposal, shareholder value is not the only consideration. He doesn't accept the logic of the American proposal, he worries about their ability to finance such a huge deal and he genuinely believes his own alternative tie-up with a British Rec to be the better way forward. Commendably, he also wants to see National Power as its own force on the international stage, a powerful, British-run international energy group. But before closing the door entirely, he should at least listen to what the Americans have to say and offer. If they launch a hostile bid and after 60 days of cut- and-thrust, invective and lobbying, they end up victorious anyway, the only real winners are going to be City investment bankers.

BA finds a US feeder

Hindsight is indeed a wondrous thing. Had British Airways possessed such a facility, it is plain that it would never have forked out $400m to acquire a minority stake in USAir.

While the benefits of the alliance itself continue to flow through to BA's bottom line - they are now reckoned to be worth some $150m a year - the investment itself turned into a lemon a long time ago. BA has been forced to write down the value of its holding by half and has forfeited any number of preference share dividend payments as USAir piloted itself into one bout of severe turbulence after another. So much for BA's guiding principle that in all joint ventures it is the cement of equity holdings that binds the partners together and makes the alliance work. It did not need 20:20 vision then for BA to decide that when it came to searching out another partner in the good ol' US of A it could dispense with the Readimix.

The deal signed yesterday with America West Airlines will provide BA with feeder traffic from a dozen south-western cities initially without it having to share the pain of spiralling losses should the US airline industry go into a fresh tailspin.

Code-share agreements, such as the one that BA has stitched up with America West, are all the rage these days. They enable one airline to use another's services, flight codes and aircraft as if they were its own. There are some who believe this to be a massive deception on the travelling public. But it is nothing like the deception worked on shareholders when airlines believe the only way they can extract benefits from international alliances is by buying into one another.

Clarke works the smoke and mirrors

The good citizens in the City of London looked at yesterday's public sector borrowing figures and concluded that it would be hard to justify tax cuts this year. There is a hole of pounds 3.2bn in the Government's finances compared with what the Treasury expected as recently as November, and pounds 10bn compared with its forecast a year earlier.

Before we all get carried away by this tide of civic responsibility in the Square Mile, however, it is as well to remember that this is exactly what most of the same analysts were saying at the same stage last year. When they were looking at the public borrowing outturn for 1994/5, the numbers were different but the record was the same. There was an overshoot and therefore no scope for tax cuts. It did not stop Mr Clarke cutting taxes, nor, in the event, did the markets seem to think he had been wildly irresponsible. We will get tax cuts this year too. Perhaps not on the bonanza scale the right-wing of the Tory party might prefer, but Mr Clarke will be able to surprise us with a few billions' worth.

He is likely to dress up the fiscal arithmetic in the same way as last November. Planned spending totals for future years will be sliced even further. This technique was greeted with scepticism last year, when spending plans had slipped. However, the Treasury has cracked the whip this year, so 1995/96 spending was only pounds 1bn above its target. If it succeeds as much during the course of this year, reducing future totals will look a bit less like pie in the sky.

The second element will be the usual reduction in the contingency reserve as the year to which it applies draws closer. The 1997/98 reserve stands at pounds 5bn and could respectably be halved.

The third source of money for cutting income tax will be increases in other taxes. In last year's Budget Mr Clarke raised about pounds 500m from "anti- avoidance measures". He will do the same again. Thus, through a combination of smoke and mirrors, promised though not delivered cuts in spending, the never-never of the private finance initiative, and a bit of help from the corporate sector, the Chancellor will find pounds 5bn to hand back to the voters. And when the time comes the City will greet it as a responsible Budget.

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