City has reason to worry about Labour

COMMENT "The City is right to worry. When it comes to City matters, the Shadow Chancellor seems more interested in the ballot box than the truth. There could be fireworks to come."

Christopher Walford, the Lord Mayor of London, plans to stomp the country this year on a charm offensive, waving copies of a new series of research reports, commissioned to show that the City helps, not hinders, British industry.

This could be a dangerous mission in Birmingham and on Tyneside, since the City ranks somewhere near the British Gas chairman in popular demonology. A recent survey showed that its denizens were rated lower even than politicians.

Labour is still officially committed to abolishing the Corporation of London and all its trappings, but that is not what the new City campaign is about. In any case, the corporation believes Labour leaders plan to leave abolition out of the next manifesto.

What really hurts the City in political terms is that the tedious and almost entirely circular argument about short-termism in the financial system - one that Lord Wilson, the former Labour prime minister, reported on at great length and to little effect nearly 20 years ago - has revived with a vengeance.

The fear is that an enthusiastic Labour government will ride the tide of public opinion, which generally regards financiers as rogues, and decide that something - anything - must be done.

The biggest risk, as the corporation sees it, is a new series of badly thought out regulation that puts a stop to the influx of new businesses that have been so successfully attracted into the City in the past few years, such as Deutsche Bank's investment banking operations.

The City is right to worry. Alistair Darling, Labour's City spokesman, understands how things really work. But when it comes to boardroom and City matters, his boss, Gordon Brown, the Shadow Chancellor, seems more interested in the ballot box than in the truth. There could be fireworks to come.

The research reports the Mayor will use are by London Economics, chaired by John Kay. The first one, published yesterday, tackled the question of why Germany has far more medium-size companies - the famous Mittelstand - than Britain.

Mr Kay turns the usual argument that UK financiers do not support medium- sized companies on its head. The report says finance is more easily available in Britain than Germany so our medium-sized companies are more likely to grow into large ones. We have 41 of the world's top 500 companies to Germany's 32, though our economy is half the size.

No amount of clever analysis is going to turn the tide, however. The Barings fiasco has only served to reinforce the image of fat cat incompetence out of tune with the real needs of the British economy. The City and Labour never enjoyed a good relationship and it does not look like getting any better.

Money speaks louder than mutuality

However much building society heads may deny it, merger fever seems to have gone up several degrees in temperature since last week's double blow for mutuality. The Cheltenham & Gloucester borrowers failed to rebel against the proposed acquisition by Lloyds, which will be complete by August, and the courts have smiled on the Halifax/Leeds plan to become Britain's third-biggest bank.

The Building Societies Commission (BSC), the sector's regulator, must be feeling faintly giddy as it sees roughly a third of the assets under its control swept away into the clutches of the Bank of England. No wonder the BSC is making noises about reforming the legislation to make it more difficult to ditch mutuality.

It is difficult to see how the BSC can win, however. Millions of customers are looking forward to their cash payouts and free shares. Even if the Government felt minded to halt the stampede, it is not going to if there is any chance of such action costing votes.

Under current forecasts the Halifax free share payout is worth around 2p off income tax for the economy as a whole. What government would spurn that in the run-up to a general election? Mutuality may still have much to commend it but its case is unlikely to be heard above the noise of hard cash.

Now Aegis must execute as well as devise

The media buying specialist Aegis, back in the black after years of red ink, is another of those 1980s media wonder stocks still attempting to come to terms with the excesses of the past. It is also a classic example of how easy it is to get your strategy right and your execution terribly wrong.

Its main operating subsidiary, Carat, built an impressive specialist business in the 1980s, paying over-the-top prices and promising handsome earn-outs for the executives of the competing companies it swallowed up throughout Europe. Its founder, Peter Scott, rightly assumed that international clients would be enticed by a single company's ability to plan and buy media space in several markets, leaving the creative work to traditional ad agencies.

Unfortunately, the debts incurred, not least the liabilities represented by all those expensive earn-out deals, put the company on a highly tenuous footing just as the French government began to crack down on what had long been a less than pristine clean business. The "loi Sapin" made it illegal for advertising agencies to receive income from sources other than their clients, thus ending the lucrative trade in backhanders that had typified relations between media companies and media buyers. Aegis was lucky not to go belly-up.

Backed by US investors, the company has now staged quite a comeback. Costs have been cut, debt levels lowered dramatically and the company's operations diversified geographically. Its new chief executive, Crispin Davis, vows not to repeat the mistakes of the past.

While the turnaround looks real, investors may want to wait to see how the company progresses in 1995. Margins are still under pressure, and costs may need further trimming. In addition, the company is not yet a player in the US market, where its large international clients are eager for media-buying support. With the shares still languishing at just over 20p investors need further assurances. The strategy is probably right: in the hackneyed phrase of ad men everywhere, we must all think global, act local.

Aegis Group's new management must now prove that they can execute strategy as well as devise it. The 1994 results are a definite step in the right direction; another set of positive figures may be needed to prove the point, however.

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