City: Bold BT makes the right connection

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The Independent Online
FEW industrialists have had such a consistently poor and hostile press as Iain Vallance, chairman of BT. With only brief periods of respite, he and his company have variously been ridiculed, pilloried and lambasted ever since he took up the post some six years ago. First there was the appointment itself, much criticised as a missed opportunity; better, many commentators said, to have given BT a good kick up the backside by bringing in a new broom from outside rather than appointing a career BT man like Mr Vallance. Within months of taking up the reins he had run into a great outpouring of public rage over poor quality of service and faulty call boxes. More recently he has been roasted over his salary - which is high, but hardly excessive for a company of BT's size - and for profiteering in the depths of recession. And in what can only be seen as the ultimate insult, the FT's Lex column last week described him as 'the John Major of the telecommunications industry'.

Much of this comment is unfair, and it certainly misses the point about BT, which, against the odds, is being dramatically transformed under Mr Vallance from a backward monopoly with many of the worst public sector practices into what a few years from now will be one of the most efficient modern telecommunications players in the world - one, moreover, at the cutting edge of international developments in its industry.

The message, however, is slow in getting through. Mr Vallance's latest initiative - a dollars 5.3bn headlong plunge into the US telecommunications market - was received with the usual, faintly predictable degree of hostility and scepticism. The FT said in a leader that: 'Government, shareholders and consumers should be concerned that wealth generated by a regulated monopoly whose management is under little external discipline may be frittered away in unwise foreign ventures. Shareholders in particular should be asking tough questions.' Undoubtedly, they should. History is littered with examples of companies that have lost their shirts on expensive overseas expansion. Nor has BT's international record to date been an enviable one. So far, the search for overseas expansion has been largely fruitless and, in one particular instance, exceptionally costly. Mitel, the Canadian telecoms equipment manufacturer, was a disaster. The case for buying into McCaw, the largest mobile phone operator in the US, was a good deal better, but BT was never going to be allowed to obtain the management control it needed to make a go of the deal. In the end it was lucky to extract itself without substantial loss.

This latest alliance, however, is an altogether different kettle of fish. You can argue about the price - which looks on the expensive side - but the underlying logic is compelling. The idea came out of an almost casual remark Mr Vallance made some three years ago to Bill McGowan, the now deceased founder of MCI of the US. 'Wouldn't it be great', Mr Vallance said, 'if we could do in the international telecommunications market what you've done in the US.'

MCI pioneered the challenge to AT&T's monopoly of long-distance telephone traffic in the US - it is the US equivalent of our Mercury Communications - and in so doing it has become one of the outstanding business success stories of the past 20 years.

In almost every respect it is the perfect partner for BT, everything BT aspires to be - thrusting, entrepreneurial, successful, mould-breaking and technically innovative. It is always possible the MCI tie-up will turn out to be some grand overseas folly, but it's much more likely it won't. Both Deutsche Telekom and France Telecom would dearly have loved to do the same deal. These big strategic alliances are going to become increasingly common. In MCI, BT has undoubtedly got the best of what is likely to come on offer in the US market.

It is easy to see why, as national monopolies break down, airlines like British Airways should want to become truly global operators by forming partnerships and links with overseas carriers. Enormous marketing and cost-saving benefits can be achieved. The customer also gets a better and cheaper service. Exactly the same thing is happening in telecommunications, though it is harder to grasp. All the main operators are pursuing the same prize - the ability to offer big international clients cheap one-stop telecommunications. The MCI deal will help position BT well ahead of its European counterparts in the quest for 'seamless' international services. If Mr Vallance is right in his vision, global telecommunications will come to be dominated by three or four companies and he aims to make BT one of them.

What is BT supposed to do? Sit on its hands and watch its domestic profits franchise slowly eaten away by a combination of ever fiercer regulation and competition? It is obviously not only in shareholders' interests that BT should aspire to greater things, but in Britain's, too. BT's latest overseas foray should be seen as adding to the attractions of the Government's forthcoming pounds 5bn BT3 share offer, not as the deeply negative influence that some are condemning it as.

Hot property

GEORGE SOROS, the man who broke the Bank of England, is one of the undoubted investment geniuses of the post-war period - a man of great courage and vision, prepared to take huge risks and back his judgement with enormous sums of money. Over the years, his 'trade-in-anything- that-moves' investment philosophy has made those lucky enough to get in on the act rich beyond the dreams of avarice, and he has spawned a whole generation of imitators. But he is also, in the final analysis, just another speculator, albeit a highly successful and effective one. As his fame spreads he is able to make increasing use of one of the ancient speculator's arts: buy, puff and sell into the upswing. Everything Mr Soros does these days becomes a self-fulfilling prophecy. Mr Soros is selling the pound so everyone else sells it and he makes a packet. Mr Soros is buying gold and the price takes off. Mr Soros is selling Treasury bonds, but buying equities; the markets move accordingly. It is very close to manipulation, though I guess you could argue that the markets are the mugs for following him. Another worry about Mr Soros and many of the other hedge and short funds operating on Wall Street is that they are based offshore in a manner that is far from transparent. Investors have little or no protection if things go wrong. To these two basic concerns must now be added a third.

Last week Mr Soros announced a pounds 500m joint venture with John Ritblat's British Land to buy assets in the depressed British commercial property market. As ever, his timing is immaculate: news of his interest was enough to electrify property shares and, in the words of one estate agent, add a good 5 per cent to prime site values. But this is not the sort of investment that made Mr Soros rich. He has dabbled in property before, most recently with the Reichmanns in North America, and to Mr Soros the Ritblat venture is small change. Nevertheless, I doubt very much that Mr Soros has held any investment much beyond six months before; in property the pay-back times tend to be much longer. Is Mr Soros losing his touch? Maybe not, but there is a serious top-of-the-market feel to anyone who says, as apparently Mr Soros did in a recent interview, that he feels comfortable about being God.

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