COMMENT : This utility bid makes industrial sense
Tuesday 07 March 1995
Trafalgar's offer is unashamedly about financial (rather than electrical) engineering. Other regional electricity companies offer similar attractions to predators. If Northern loses on Friday, as seems likely, it may prove to be the first of many dominoes to fall to bidders outside the electricity industry. Rightly or wrongly, they are all on the block.
In complete contrast, Lyonnaise des Eaux is a company of high reputation which already owns water companies in the UK and has wide international interests. Northumbrian is quite unlike the Recs, which seem to have money to burn. Like the rest of the water industry the company faces heavy investment on environmental and water quality improvement. It is hard to see any financial engineering motive for a bidder.
Since Lyonnaise owns a big water company right next door, with which Northumbrian shares water from the Kielder reservoir, the issues here are clearly industrial logic, competition and charges to the customer. Efficiency gains are the driving force behind the offer.
No other bidder for Northumbrian makes such sense. Indeed, because of the obvious fit the move has been rumoured ever since Northumbrian was privatised. The only thing holding Lyonnaise back was the Government't golden share, which has now expired.
It is also unlikely that this is the beginning of a great wave of takeovers of water companies, if for no other reason than that the scale of their investment needs makes them generally cash negative.
That does not mean there will be no more bids in the industry. Lyonnaise may have ruled out other takeovers in the UK, but Compagnie des Eaux has similar geographical reasons for taking a close look at Southern Water and there may also be scope for defensive regional mergers.
However, it seems unlikely that anybody is going to buy a water company unless they already know about water. Against this background, it is hard to see much of a case for referring any bid to the Monopolies and Mergers Commission. Whether Lyonnaise is prepared to pay the premium which Northumbrian will demand is another issue.
No surprises in the currency market
The only surprise about the currency crisis is that anybody could claim to be surprised about it. Not only have the same currencies been under pressure all this year after a peaceful 1994, they also have several features in common. Big international investors have focused on several factors in picking which countries to abandon. These include the size of the government budget and current account deficits relative to the economy, how much of the trade deficit is covered by short-term rather than long-term capital inflows, and the cost of servicing foreign debt.
In the nervous times that have succeeded the Mexico debacle, investors have made their usual flight to quality: the mark, Swiss franc and yen. Other influences - such as the likely direction of interest rate moves in different countries - clearly matter too, but it is the financial markets' strict fiscal rules that have determined which currencies nose-dived. Other currencies that have so far escaped attention could be due to fall for the same reasons. Of the other Latin American currencies, Argentina is a candidate. It has so far suffered relatively little Mexican fall- out. The other area due for attention is Asia. The Philippines, Indonesia and Thailand could be at risk. However, the foreign exchange markets have found their main victims, and are continuing to pass judgement on them. The pressure is likely to continue until they become cheap enough for investors to overlook their deficit and debt problems.
Barings events grow more mysterious
The usual pattern is for events to become easier to interprete, analyse and explain with the passage of time. Not with Barings. As more is learnt about this astonishing affair, things become not clearer but progressively more mysterious and incomprehensible. What began as a rogue trader in the Far East fraudulently playing on the roulette wheel of high risk derivatives seems to have become the story of how they were all in it together.
Both explanations seem equally incredible. Barings system of management and control has been exposed as inadequate in the extreme - but had the former been true it would have been non-existent. By the same token, for the latter to be true, there would have to have been a conspiracy of quite staggering proportions among the top brass. They would all have had to sit down together and say; "right, we are going to bet the bank and break the law - putting not only our jobs and reputations at risk but our liberty as well".
The truth is unlikely to be so cut and dried. The probability is that it lies somewhere between the two. What will probably emerge is that Barings and its regulators became victims of a lethal cocktail of fraud, poor management control, conspiracy, cover-ups, greed and neglect. What is clear is that the Bank of England and later the world were told less than the truth when the size of the losses first emerged. The sooner the top people at Barings tell it as it was, the better for everyone.
A number of lessons for the Bank of England have already emerged. The first is that there needs to be more intensive international cooperation between regulators. Simex claims to have raised concerns with Barings some time ago but the Bank of England knew nothing of this. A second is that procedures for checking on standards of control need to be dramatically strengthened. If it is true, as seems to be the case, that Barings breached the Bank's rules on the proportion of its capital it exposed to a single risk, a third lesson is that the system for reporting derivative and counterparty exposure has to be significantly tightened up.
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