City & Business: It's time to support the CBI's capital plan
Sunday 26 January 1997
Most significantly, the new system preserves pre-emption rights for existing investors. Pre-emption rights are regarded as sacrosanct and have proved a stumbling block for earlier attempts to reform the fund-raising process.
Not only does the new system keep them intact, but it also offers a host of other advantages. If adopted, it would certainly head off the threatened reference of the entire underwriting issue to the Monopolies and Mergers Commission. More importantly, it would inject a degree of flexibility into the capital-raising equation, which would provide a tremendous boost for the investment ambitions of British industry.
It is not so much that the cost of raising capital will fall (which it will), but rather that it will allow a much more focused approach to fund- raising by the corporate sector. The traditional underwritten rights issue has tended to carry a stigma akin to that of a negative dividend. It is rarely used as a source of long- term investment capital, because of the view that British institutions take about equity.
The fixation we have with dividends and accounting earnings rather than long-term capital appreciation has often made equity unappealing as a source of long-term investment finance.
That has surely provided an unnecessary constraint on our industrial base, which for the sake of the nation's prosperity must be liberated. The new system proposed by the CBI will allow the corporate sector to raise equity capital more cheaply, but will also impose a strict discipline by demanding clear articulation of why the funds are required.
In the face of such compelling arguments in favour of this evolutionary rather than revolutionary refinement of the capital-raising process, it is hard to establish why it has taken British institutional investors so long to accept that the change is for the better. Could it be that their real concern is that the breaking-up of a cosy cartel will deprive them of the extremely lucrative income stream that comes from underwriting commissions?
What has never been satisfactorily answered is who actually gets the sub-underwriting commission. How is it actually allocated among the funds managed by the institution that performs the underwriting?
Does the commission actually go to the funds owning the shares that attract the rights? Are they allocated pro-rata across every fund in the group? Or are they allocated to the weakest funds to boost their performance? Or perhaps they are salted away in the overall corporate coffers and not allocated to the funds at all.
Nobody really knows. What is clear, however, is that this prized source of income would be eroded significantly if a new system of equity raising were to be offered as an alternative to the underwritten rights issue.
Disappointing though this may be for the underwriters, they should not allow this to stand in the way of a long overdue reform.
Never mind the bung ...
Scottish Amicable has run into flak over its decision to demutualise and ultimately seek a stock market listing. Much of the criticism stems from the worrying "bung mentality" that governs the way we think of demutualisation.
The bung was first brought to us by the building societies and has subsequently been evident in the demutualisation of life insurers. This focus on the immediate hand-outs when judging a demutualisation represents a concentration on the short term that is entirely inappropriate for a long-term business such as life insurance. So crude an analysis might be slightly more relevant if all mutuals were the same, but they are not. In judging Scottish Amicable's demutualisation it is important to look at its decision in the context of its own policyholders, not those at the Norwich Union. If Scottish Amicable had the non-life business that Norwich Union is blessed with, it might have been able to consider issuing free shares of its own. It does not, so it is ploughing its own furrow.
The business needs strengthening and it needs a style of management more appropriate for a fast-changing and increasingly competitive market. The board has decided that a two-stage demutual- isation and subsequent float is the best way to build long-term value.
It would have been more valid to attack Scottish Amicable if it had continued to chug along as a cosy mutual. This proposal can only be judged by looking at the long-term implications not the short-term bung.
Wall Street touchdown
One man stands between Wall Street and the end of the great US bull market. His name is Drew Bledsoe. He is not a gifted stock market guru. He is the quarterback for the New England Patriots, who line up tonight against the Green Bay Packers in American football's Superbowl. It is widely accepted that if Bledsoe has an inspired match, the Patriots, representing the AFC, could beat the Packers, who are the NFC champions.
The significance for Wall Street is that the history of the Superbowl suggests that when the NFC team wins the market rises - the cynic would say that as stock markets tend to rise and the NFC team tends to win the Superbowl this is hardly surprising. But when the AFC last won the Superbowl in 1984, the Dow Jones Industrial Average had hit its high for the year at 1,286.64 on 6 January, just a few days previously. It fell steadily to a low of 1,086.56 nearly seven months later and showed a loss for the year as a whole.
After the losses of the last two days, Wall Street is feeling fragile. Bledsoe could complete the rout.
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