City & Business: Not guilty - here's your penalty

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The Independent Online
The Takeover Panel is quite rightly launching an early examination of whether or not brokers and advisers should be allowed to buy, during the course of a bid, shares in a firm they are defending against a hostile takeover.

This is an issue that is best discussed in a neutral environment well away from live bids. Otherwise, as just shown by the Northern Electric case, intense stresses and vested interests get hopelessly entangled in points of principle.

Last week, the bid by the US company CalEnergy for Northern Electric ended in the US predator's narrow victory. And it was the purchases (with the Panel's permission) by Northern Electric's broker, BZW, and its adviser, Schroders, of their client's shares which contributed to that tight finish.

The 2.4 per cent the two firms had collectively amassed in Northern Electric was enough to ensure that when the bid closed on 20 December, CalEnergy was just a few shares short of victory. The Americans only managed to muster up the additional support they needed to win control of Northern when the Panel extended the bid deadline to Christmas Eve.

The consequence, for the Panel, is that this case has in effect confused the broader question of share support by advisers. And worse, that confusion has largely been generated by the Panel itself.

The abject failure of the Panel to produce a clear ruling on why it chose to extend the closing date for the receipt of acceptances of CalEnergy's offer, in the knowledge that this would change the outcome of the bid, has created a great deal of uncertainty in City offices.

At the heart of the matter is the link that people are making between advisers buying shares and the question of fee arrangements.

BZW has been singled out for attention because it failed to disclose to the Panel a discretionary performance-related fee of pounds 250,000 when it first discussed the question of buying shares in Northern. The broker volunteered the information two days after those discussions, but that did not seem to make a difference. And the Panel's actions seemed irrational. It says that it accepted the fees were entirely unconnected with the share purchases, that there were no irregularities, and that had it known about the pounds 250,000, that would not have affected its permission for the advisers to buy Northern shares. Yet still it ordered the crucial extension of the bid timetable.

It is not surprising then that people are making a connection between the question of fee arrangements and the issue of advisers buying shares in their clients' companies.

The problem is that the Panel has handed out a punishment while saying that no crime was committed - a response which was bound to raise eyebrows and indeed has done so. The difficulty for the Panel, now, is that if it moves to publicly exonerate BZW, that action would make a mockery of its decision to penalise the firm's client through the loss of its independence.

That is some punishment and does not equate easily with the "justice" which, the Panel said, required it to allow CalEnergy more time to garner the additional acceptances it needed for victory.

At the same time, the Panel has also imposed, in effect, a penalty on BZW by freezing permanently the pounds 250,00 fee payment which had been agreed with Northern Electric. Again there is a punishment but still there is no crime.

The worry is that the views which are forming in the City on the broader issue of share-buying by advisers are being shaped by the perception of what did happen during the Northern bid.

It is easy in these circumstances to argue that if share-buying had been outlawed then the confusion would never have arisen in the first place. The danger, though, is that if you do ban a practice you can merely drive it underground, which is altogether more unhealthy.

The Panel is quite right to advocate openness but punishing those who are open, as BZW ultimately was, is hardly the best way to encourage others to follow suit.

Midsummer Santa

I Can never quite remember whether it was the great pop singer Roy Wood or the great retailer Sir Stanley Kalms who first uttered the immortal words, "I wish it could be Christmas every day".

Both characters have had a vested interest in the phrase. Roy, as a member of the popular music combo Wizzard, presumably benefits from the endless re-airing of the tune in the run-up to Christmas. Sir Stanley, as chairman of Dixons, is well aware of the huge importance of Christmas sales to his company's performance.

I wonder,though, whether it is Christmas or the following "sales" period which is becoming more important to Sir Stanley and his fellow members of the retailing fraternity. Initial soundings suggest that Christmas spending was "steady" rather than "stunning" in the high street. However, there is great optimism that the sales will represent something of a bonanza.

If this is the case then it might explain why my local Dixons began its sale on 23 December. It was long ago that I gave up believing that the January sales ought to be in the year's first month. Yet, there is something faintly disagreeable about sales beginning before Christmas.

Dixons, of course, was not alone in its pre-emptive price reductions. House of Fraser, with clothes and shoe shops, was pasting sales stickers on its merchandise and in its windows well before Father Christmas had finished loading his sleigh this year.

I am not convinced that this is a sound retailing strategy. Since the recession of the early Nineties, consumers have become extremely high- street-wise. Having grown used to shops holding seemingly permanent "sales", consumers are no strangers to the art of value seeking.

In fact, this year there were signs that some shoppers were deferring their spending to the last minute to take advantage of the bargains, real or imagined.

This habit will only become more widespread if the retailers overtly encourage it with a flurry of premature "sales". That would mean more Christmas sales at lower margins and presumably fewer sales in the "sales" proper.

My big fear is that all this might become the first step by the retailers towards making Christmas appear every day. With seasonal merchandise already appearing in the shops some time in the late summer, we could start seeing our first "January sales" in September. This is not to be encouraged.

Happy New Year.