City: Nowhere to go

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SIR JAMES GOLDSMITH used to say that no conglomerate could ever hope to outlive its founders. Nigel Rudd, chairman of Williams Holdings, one of the glamour stocks of the 1980s, has always largely agreed with him. Once the founders are gone, he would say, the conglomerate drifts, withers and starts to die. Eventually it becomes a target for break-up and falls prey to the new generation of conglomerate builders coming up through the ranks; the life cycle of the conglomerate is complete.

Last week, Brian McGowan - co-founder of Williams and its present chief executive - walked out. There was no row; he was just bored and felt there was no job left for him to do. Mr Rudd once described him as the best merchant banker never to have worked for a merchant bank. As a takeover strategist, tactician and organiser, he is brilliant, or at least he was. But there are no deals left for him to do, and he's taken the view that it's preferable to fish in Hampshire, which is probably what he's doing right at this moment, than to sit around twiddling his thumbs in the office. The climate for acquisitive conglomerates has become deeply hostile. More and more alive to the tricks of acquisition accounting and financial engineering, the City just doesn't seem willing to back big contested takeovers any longer. Williams has failed in all of its last three bids. What future for Williams or the other star conglomerates of the 1980s - Hanson, BTR and Tomkins?

The outlook cannot be seen as anything other than grim. Denied the opportunity to do deals, they have become becalmed, but they haven't yet reached that stage of the cycle where there is any value to be had in breaking them up; they all seem to going through some kind of late middle-aged crisis, floundering around in search of new strategies. Williams has chosen to stress that it should henceforth be seen as a pure manufacturing company with good opportunities for growth in its established markets, not as a conglomerate at all. Likewise BTR - which alone among the conglomerates is experiencing something of a renaissance in its relations with the City - also boasts an industrial and management strategy to unite its various engineering acquisitions.

It's possible that some of the conglomerates will make the necessary leap and find a new raison d'etre, but it's much more likely they won't; on the whole leopards don't change their spots. The tragedy for these companies is that with one or two notable exceptions they have outlived their purpose and yet are too highly valued to do anything with. Their market capitalisation tends to be exceptionally high, set against the amount of turnover they generate, such is their ability to extract profit from their operations. In the case of Williams, you pay round about 150p for every pound of sales.

The same is true of Hanson. For the life cycle to be completed and for the likes of Hanson and Williams to become attractive targets for break-up bids, there is going to have to be a further substantial derating of their shares. It may be a slow and long process, but it's already begun.