COMMENT : Policyholders get much more from a takeover
'The implication of all the interest being shown in ScotAm is that few other life mutuals are going to survive the present shake-out as independent entities'
Thursday 06 February 1997
The charitable view is that ScotAm executives sincerely believed that their proposals to demutualise and then float on the stock market, thus remaining independent, were likely to be in the better long-term interests of policyholders than a straight sell-out. The explanation that everyone is going to remember, however, is that the proposals promised to enrich senior executives with free shares. The benefit to policyholders looked poor to insulting by comparison.
To accept the charitable view you had to believe that management could turn its unflattering record on its head. In essence what the proposals said was: "We've been so poorly managed in the past that we now need a wodge of new capital. Just give us a bit more time and we'll trade our way out of this." The scheme perhaps never deserved to succeed. In the meantime, an awful lot of policyholders' money has been wasted trying to make it do so. Nobody is going to try this route again in a hurry.
For the Prudential, as for Abbey National, taking over ScotAm makes perfect sense, which is why both companies can offer so much more to policyholders than the management can on its own. By closing the life fund the Pru makes the deal largely pay for itself, for the pounds 400m of up-front cash payments to policyholders comes out of the life fund's own accumulated surplus. Nor do Prudential's shareholders have to worry about the pounds 1.1bn loan that forms part of the deal; that comes from the Pru's life fund and can apparently be justified on actuarial grounds.
Whether Abbey National really wants to turn this into an auction remains to be seen but the implication of all the interest being shown in ScotAm is that few other life mutuals are going to survive the present shakeout as independent entities. The two obvious exceptions are probably Standard Life and Scottish Widows. Well managed and financially sound, these two alone seem to have the luxury of choice between floating on the Stock Exchange or remaining mutual. The rest are for the vultures.
This could be the new Merrill Lynch
The theory of the Morgan Stanley and Dean Witter merger appears to be that it will result in a bigger and better version of Merrill Lynch, a vertically integrated securities house with enormous clout in every business it tackles. A huge network of branches on main street, USA, will be allied with a powerful investment banking business and, sitting in the middle, feeding off both activities, will be the biggest investment management organisation owned by any securities firm in the world.
Thus Morgan Stanley neatly avoids the bloodshed that would occur if it had merged with another, overlapping investment banking operation. On the face of it this would appear the more logical approach. However, the cost savings so achieved can pale into insignificance beside the loss of business if morale sags and talent walks out the door. The offer for SG Warburg in 1994 therefore appeared an aberration until it emerged that what Morgan Stanley was really after was Warburg's fund management offshoot, Mercury Asset Management. It was MAM's opposition that scuppered the deal.
The benefits of a powerful fund management arm are a sound argument for the Morgan Stanley and Dean Witter, Discover merger, because while the Wall Street and main street businesses are very different, there are strong similarities between what the fund managers do in the two organisations.
This might well prove to be a new Merrill Lynch. But remember that the credit card company American Express lost $4bn trying to pull off the same trick in the 1980s, when it combined the retail business of Shearson with the investment banking of Lehman Brothers, both of which it has now sold.
Credit cards, retail broking and investment banking simply did not hang together. It is certainly hard to see how the Discover credit card will benefit Morgan Stanley. The key to this new deal is whether the deep understanding and friendship claimed yesterday by the two chiefs who will run the new organisation - John Mack of Morgan Stanley and Philip Purcell of Dean Witter - is more than hot air.
Sparks will fly in electricity revamp
The nearer we get to the launch of a competitive electricity market next year the more obvious it becomes that the exercise will make the liberalisation of the domestic gas market look like an absolute breeze.
In the case of gas, there was just one incumbent supplier and the initial competition trials were limited to 500,000 households in the South-west corner of the country. And yet 12 months on the industry is still trying to iron out the billing problems and agree a code of conduct to stamp out dubious marketing practices.
When electricity goes the same way there will be 14 separate companies with 22 million customers all attempting to interface with each other as well as any new entrant that thinks it can make a turn by selling juice through the local supermarket or bank.
The 12 RECs, the two Scottish suppliers, the Electricity Pool and the regulator, Professor Stephen Littlechild, have been a regular hive of hyper-activity, setting up committees, appointing consultants and establishing disputes procedures.
Alas, all this heat and energy is not propelling the great venture along at the required speed. Despite agreeing to a six-month phasing-in of competition, the Professor could not give MPs a cast-iron guarantee yesterday that the computer systems would be ready in time when the button is pushed next April. What's more the cost could easily be nearer pounds 500m than the original estimate of pounds 250m. As a contingency plan, the RECs may have to carry out transactions with each other by hand until the engineers turn up to fix the software. Don't even ask how they will deal with the millennium change.
With the cost of implementation mounting, the arithmetic begins to look interesting. Offer reckons it could work out at pounds 2 a customer a year. Since the cost of supplying electricity only accounts for 6 per cent of the average annual bill of pounds 270 that leaves pounds 16.20 to play with. Assume that competition will cut 20 per cent off and the saving to customers is pounds 3.24 a year.
The Prof reckons it will be much bigger than that because competition in generation will reduce fuel costs. But that has more to do with the ending of RJB Mining's guaranteed coal contracts.
If liberalisation produces such slim pickings for consumers, then they will be justified in asking why anyone bothered when the downside risks of the entire system collapsing into chaos are that much greater.
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