City & Business : Is it worth putting this call through?

The friendliest of mergers can fall to pieces if small misunderstandings are allowed to fester into big disagreements. This is doubly true for cross-border deals, where there are differ- ences of language, culture and media.

British Telecom and MCI have faced this situation in the past few weeks. With hard work and skillful manoeuvring they have hammered out a compromise. They are to be congratulated. Amazingly, the only people to be hurt in the revised deal seem to be the risk-loving arbitrageurs who bought MCI shares and sold BT shares short in the hope of exploiting differences between the share prices and the value of the deal itself. Life can be tough sometimes, can't it?

Now the real work begins. BT executives have poured scorn on those commentators and institutional shareholders who dared question the logic of the mega- deal on the grounds that MCI was going to spend a lot of British shareholders' cash on a wild goose chase into the American local telephone market. While the discount may mollify the critics, BT would be foolish to ignore the substance of the criticism.

The local phone market, worth around $100bn (pounds 62.5bn) last year, is a tantalising prize, but as Tantalus found out to his cost in Hades, that prize can remain maddeningly out of reach. Any liberalisation of the market will be painfully slow, and may not benefit MCI. If the the US local phone companies, the "Baby Bells", drag their feet on providing the technical links to their local networks or, worse still, convince state regulators to allow them to charge the long-distance operators more for leasing space on those networks, any profits for MCI will be long in arriving. At the same time, they may be able to claim access to the long distance market themselves under the quid pro quo outlined in the 1996 Telecommunications Act. For certain operators, such as Bell Atlantic and Nynex, which between them have the East Coast market from Washington DC up to Maine, this will almost be a licence to print money. Already 40 per cent of US long-distance calls go between their networks, but for the moment at least they don't see any of the revenue. With minimum investment, these Bells can pick up a piece of this $32bn market and hurt MCI (and others) in the process.

In MCI's favour is the fact that it is probably a more nimble and experienced operator in competitive markets than any of the Bells, which have had their own monopolies since being split off from AT&T in 1983. With BT's coffers and local phone experience to call on, it will certainly be able to mount an effective challenge. But it would be a mistake for the leaders of BT and MCI to ignore the problems facing their proposed enterprise when they hit the road to sell the revised deal to investors, some of whom are nursing losses and whose patience in the face of renewed hyperbole might fray.

Frock horror

TWO household names in British retailing, two different problems. Or so it would seem. Laura Ashley's well documented difficulties stem from its miscalculation of stock levels earlier this year, and the failure of its "big is better" strategy in the US to pay dividends, for which chief executive Ann Iverson has taken some deserved heat. It is also labouring under the cumbersome image of the frumpy frock shop, which may be an undeserved stereotype but still manages to steer potential customers into Oasis or Next for their dresses and accessories. If they ever made it to Laura Ashley, they might be in for a pleasant surprise. Ms Iverson's mistake has been to change the image without telling the customers about it.

By way of contrast, WH Smith has no problem attracting customers into its many outlets, but cannot seem to get them to spend money. Nearly 40 per cent of the store's visitors leave without buying anything. Thanks to the attentions of outgoing chief executive Bill Cockburn, Smith has got good stock control systems and is rarely oversupplied with HB pencils or greetings cards. But Mr Cockburn's successor, whoever that might be, will be landed with the task of working out why customers do not buy enough of those pencils and cards.

Looked at another way, the retailers' problems are not so different. Neither management has got to grips with the fundamental of retail existence, which is to give your customer good reason to buy from your store rather than anyone else's. Often this is dressed up in "customer focus" manager- speak, without much being done. There are notable exceptions: Next, Tesco and Asda have all aligned their brand images to their offerings, and convinced customers that both are worth having. Laura Ashley and WH Smith have a way to go yet.

Contract or con trick?

A FRIEND passes through town on his way from Peking to Stanford Business School, and offers two pieces of advice for people doing business with China. A contract, he says, may mean a statement of rights and obligations to a westerner, but in China it is merely a sketchy letter of intent, liable to change at any time without notice. A case in point is the General Motors engine plant in Peking, a state-of-the-art factory built with $150m of the US company's money. When the joint venture was signed nine years ago with a Chinese state enterprise, they told GM confidently that this would be "China's engine", and the anticipated production of 300,000 four- cylinder engines a year to power cars, vans and small trucks would be quickly swallowed up by burgeoning demand. The factory was ready to roll in 1991. Six years later the factory has produced precisely 120 engines. Market conditions have changed, say the Chinese, their way of explaining that these engines would were not designed to fit in most vehicles made in China. The western view is more blunt: "The world's largest carmaker believed that the original contract would be honoured, but the Chinese had a different idea," says our friend.

The other piece of advice? Do not hesitate when crossing a busy road. Chinese drivers do not respect traffic lights or pedestrian crossings, but are very skillful at avoiding street-crossers if said pedestrians keep moving at a steady pace. Stop and you are dead. It's a cheery place, Peking.

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