COMMENT : Small victory out of an ignominious demise
Thursday 11 May 1995
With a deal that makes Warburg Group worth approximately 850p per share, SBC seems to be offering something like a 7 per cent premium to the book value of the investment bank. The Swiss have pitched it at a level they hope will make any counterbidder think twice. If NatWest does still want to make a move, and this should not be ruled out, it will have to pay a price which judged against the appalling results announced by Warburg yesterday would be hard to justify to its own shareholders. Paying in hyper-appreciated Swiss francs makes the price a good deal less painful for SBC.
Sir David made it absolutely clear yesterday that he hopes no one will try to spoil his party. "I do not see any reason at all why anyone would seek to interfere or impose themselves on this transaction." Discouraging rivals may have been part of the price he had to pay to secure a decent deal from SBC.
Sir David, moreover, is more aware than most of Warburg's traumatised state. Warburg could not have withstood a second slip-up on the lines of the Morgan Stanley fiasco; it may not even have found it easy to withstand the uncertainty of a drawn-out bid contest. Morgan Grenfell is merrily picking off groups of Warburg's best people, underscoring the need to secure a deal as speedily as possible.
Sir David's hand in the capitulation negotiations was in truth an extremely weak one, and SBC knew this. From that perspective, the small premium to assets secured was about the best that could be hoped for. For Warburg itself, with its independence floating down the Thames, there are relatively few straws for the once proud staff to clutch at. There are going to be heavy job losses, because that is the only way SBC is going to extract value. Much of Warburg's problems go back to the fact that it let its cost base run out of control. There have been closures and cutbacks in recent months, but these will be only a foretaste of what is to come.
The outlook for Mercury Asset Management looks more settled, at least in the short term. MAM will finally be gaining the independence Warburg is losing as a result of this deal. It may be short-lived, however. Without the protective cloak of Warburg, MAM becomes a highly attractive and relatively defenceless bid target. There are not many independently-owned UK fund managers left to buy. MAM is about to expand the species by one.
Wall Street in party mood
All bull markets must pause for breath, and that was how yesterday started on Wall Street, with the Dow Jones index struggling to make headway after its recent run of successive new daily highs. That we are seeing a significant bull market developing in New York seems hardly to be in doubt, however.
As good an indication as any of a bull market is when the stock market is able to absorb repeated doses of bad news without discomfort. This year already Wall Street has learnt to live with the Mexican devaluation, the Kobe earthquake and the Barings crash, events that in less propitious times might have caused lasting scars on market sentiment. Yesterday it was the breakdown of trade talks with Japan that seemed to cause barely a ripple in the unmistakably buoyant mood on Wall Street. To some extent this was because it was offset by the publication of the Fed's Beige Book, a summary of economic prospects in the Fed's 12 districts, which showed comfortingly that economic activitiy has indeed been moderating recently. Even so, the market's resilience is remarkable.
The Dow has been rising steadily since the autumn, give or take a hiccup or two, but the strongest burst has been reserved for the past few days. The headline in the latest issue of one of the most widely followed US business magazines captures the flavour of the moment: 5,000 on the index? Don't laugh, it says. It is after all only 700 points or so away. Although a correction is inevitable in the next few weeks, nobody should doubt that further rises are perfectly feasible. If so, they will doubtless continue to drag the Footsie along in its wake, as Wall Street so often does.
As always with such striking short term market movements, looking for fundamental explanations is mostly a waste of time. Everyone can invent their own post hoc rationalisations, but what is driving the market now is as much sentiment as fundamental economic change. Rightly or wrongly, investors have come to the warming conclusion that a soft landing is feasible and that the Federal Reserve is not going to have to put its foot on the brake as often as we all feared not so long ago. The turnround in the US long bond, now yielding 6.7 per cent, is inviting the stock market to follow, and the flow of cash into the market is creating its own momentum. Only the prospect of rising oil prices seems to cast any gloom over the outlook.
What is striking this time round is that overseas investors are proving themselves so reluctant to join the party. While Americans are partying, the Europeans are playing the role of party-poopers. When smart investors like Tony Dye at PDFM say that Wall Street is moving into unsafe valuation territory, it is worth paying attention.
It is true that the dividend yield on Wall Street is now below 3 per cent, historically a worryingly low level. While the bull market looks set to continue, you can bet that it also now contains the seeds of its own eventual demise.
There will be a sizeable downturn in due course. That is how markets work. But for the moment the party goes on.
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