City & Business: Gap grows between winners and losers
Sunday 07 February 1999
The hedge manager gave his thin-lipped smile. Don't you weary of being a Cassandra? he asked. Trumpeting the end of the world that never comes. Of course, there's a global crisis. There are always global crises. Maybe the period after the War, from 1945 to the rise of Opec in 1974, was a golden era. But it was the exception, not the rule.
We ended up, as ever, granting each other points. The hedge fund manager, as ever, had better information. Last week at the Ritz he said: "I think we're going to have a bull market and a bear market."
The proverbial light bulb went on above my head. We are, I thought, moving into a new phase of the economic crisis - or chapter in economic history - that began with the implosion of the Asian economic miracle in July 1997. The silencing of economic activity at the rim of the global economy is now eating into the US and West Europe. Swathes of the industrialised economy are falling silent: manufacturing in the UK compared to services; the marginalised small businessman in Indianapolis and Newark, New Jersey, that you never read about in reports on aggregate US figures.
We are not talking here about the comparative performance of different components of the Footsie or Dow. We are talking dual-track industrialised world economy: Old World v New. New World money-making games are hot. Old World money-making games are kaput.
Call it the creative destruction of capitalism, if you like, and consider these three examples of how the game is changing.
The average investor has done well since 1995 buying tracker funds - unit trusts and other instruments that invest in the Footsie or some other stock market index. But now there's a twist. Where stock market indices embrace New World companies such as telecom upstarts Colt and Energis, and eject Old World companies such as the diminished conglomerate Hanson, the funds tracking them will do well. Thus, Footsie trackers should continue to perform.
But Dow trackers better watch out. The Dow is heavy on ageing American blue chips. Silicon Valley has floated itself on the Nasdaq. The 15 February issue of Fortune has an article headlined "Could the Dow Become Extinct?" which begins: "The venerable index still means `the market'. But it's short on tech stocks. Some Wall Street pros just ignore it."
Since the days of Henry Kravitz, his legendary leveraged buyout fund KKR, and its swoop on RJR Nabisco chronicled in Barbarians at the Gate, the City and Wall Street have been busy taking public companies private. The idea is to find undervalued companies, get them out of the hands of unappreciative brokers and fund managers, rev up their managements, beat down costs, then sell off the new, improved version - either to a competitor or through a reflotation.
But that game is getting old. The best pickings are gone. Consider the trouble Cinven is having with its purchase last year of the IPC magazine group. It's beginning to look like Cinven paid too much to get too little.
The new game in Europe - already old to Wall Street insiders - is to find hot technology start-ups and bring them to market. AKA, the internet game. AKA, the internet bubble game. Morgan Stanley sunk $200m (pounds 122m) into the telecoms start-up carved out of the old airlines reservation system three years ago. Today the 25 per cent stake in Equant is worth $4bn and Morgan Stanley is looking to realise some of its profits through Equant's secondary public listing this spring.
It would be nice to think the City will get in on this game in a big way. But it probably won't. Short-termism will be blamed. But the reality is even worse. Britain is full of clever tekkies who understand the convergence of the computing, telecoms and broadcasting industries. But it lacks native money men with the capacity and wit to bring them to market.
In the corporate world, the Old World game is to focus on cost-cutting. This is the Rover story. It is the Ford-Volvo story. This game generates stock market excitement. The idea of getting in early on a mega-merger is an evergreen investing idea. But there are long odds in this game. There are a lot of punters out there getting the M&A scene wrong. Also, the focus on this game - aided and abetted by the business media - locks minds into the Old World v the New.
The new game is strategic. Its winners will be pragmatic visionaries, not accountants. Take Chris Gent at Vodafone. He recognised the limits of Vodafone's home market. So he went international. Going international guaranteed sales growth. Sales growth underpinned a high share price. Vodafone's high share price gave it buying power in the maturing mobile phone industry. The opening to markets outside the UK also brought Vodafone in contact with US rival AirTouch, the company it bought to such acclaim last month.
Today Vodafone is capitalised at pounds 60bn. Cellnet - the other original UK mobile phone company which is 60 per cent owned by BT and 40 per cent by Securicor - is valued at about pounds 6bn, according to insiders. Cellnet has not got its strategy right. It did not go international. Critics say this was because BT insisted Cellnet use BT networks overseas. BT says its global web of strategic alliances has made the internationalisation of Cellnet difficult.
Leaving the Ritz after moving on from tea to the hard stuff, the world looked bright. Riding the 19 bus home, London at dusk in the early evening was a spectacle to behold. Crash or boom, I thought. What a hopeless task to choose. Crash or boom: what an oversimplification. The only thing that seems certain is that the gap between winners and losers - on the financial and industrial fronts as well as the national and individual fronts - grows ever wider.
THE REAL game, of course, is to pick the winners and losers at the margin. On 18 February, Zeneca shareholders will be forced into this position when they vote for or against its merger with Swedish drug company Astra at an extraordinary general meeting. The City expects Zeneca's board, which is recommending the merger, to win hands down. But there are doubts.
Many of the patents on prescription drugs owned by both companies are due to expire between now and 2001. Particularly, the US patent on Astra's anti-ulcer agent Losec, the best-selling drug in the world. Astra has a replacement in clinical trials, perprazole.
But City analysts cannot find out how those clinical trials are proceeding. Zeneca says the findings won't be public until the autumn.
Zeneca/Astra - New World Company or Old? Zeneca shareholders will have to decide without a crucial bit of information.
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