Comment: British Telecom is marrying on the rebound

`A highly unstable and potentially unwieldy management structure is being created. No company ultimately needs or can live with two chairmen and two chief executives'
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The Independent Online
It is easy to be sceptical about British Telecom's merger with MCI. Easy, but wrong. To begin with, however, let's look at why this might be a bad thing for BT and its shareholders.

For a start, it looks too much like a deal on the rebound to be taken seriously as the claimed marriage made in heaven. If MCI was the perfect partner all along, what were the talks with Cable & Wireless all about? Just a casual fling? It is hard to resist the impression that BT just wants to do a deal - any deal. This, in other words, is expansion for the sake of it, management aggrandisement and all the other reasons companies with big balance sheets and money to burn tend to go awry.

Second, the price being paid is plainly a full one, even if the promised special dividend and share buyback go some way to enabling BT shareholders to participate in their company's show of largesse. The claimed eventual cost savings of pounds 500m a year barely justify the premium being paid. Third, it is hard to see what benefits, other than cost savings, BT derives from 100 per cent ownership that it could not have got from its present 20 per cent holding in MCI. The existing level of investment might seem enough for all the international joint ventures and initiatives BT could possibly want.

Fourth, as with any international merger, a highly unstable and potentially unwieldy management structure is being created. No company ultimately needs or can live with two chairmen and two chief executives, even when its two main businesses happen to be on either side of the Atlantic. The structure proposed by BT is a formula for possibly quite explosive friction.

Fifth, and possibly most important, BT is spending a small fortune expanding in what is fast becoming a commodity service in what is also the world's most competitive telecommunications market. Even the most basic of management textbooks tells you this is about the worst thing you could possibly do.

Okay. These are all good reasons for BT to sit on its hands and do nothing. "Long-term strategies," as Lawrence Hayworth, telecoms analyst at Robert Fleming, remarked over the weekend, "do not make for good short-term shareholder value." BT should have been satisfied, the argument runs, with simply paying back vast amounts of its capital to shareholders in the form of special dividends and share buybacks, as so many of its deeply boring and unimaginative peers among the British utilities apparently are. Never mind the fact that the effect thus far has helped to transform them into some of the most hated institutions in the land, undermining the present Government's electoral chances in the process.

Fortunately, however, this is not the way of the world. The business of managing decline obviously has a place in most large organisations, but those that pursue it as a key objective ultimately fail. BT knows about little else outside telecommunications and related value-added services. What is it supposed to do? Expand into high-margin women's lingerie? Alternatively it might have sat around and awaited the windfall profit tax, or, like British Gas, self-destructed in endless argument with its domestic regulator. Now, that shareholders would really have thanked their board for. This is the strategy of despair and rightly BT is having none of it.

BT is proposing to invest its money in a relatively safe enterprise it knows quite a lot about which should, on a five- to 10-year view, help put the company at the forefront of developments in one of the world's fastest-growing global businesses. What's so wrong with that?

MCI merger a reminder of Labour windfall tax

The fortune BT is spending on MCI is a timely reminder of just what a tempting target it would make for Labour's windfall tax. When it comes to balance sheets, few are as robust as that of BT, as the pounds 5.5bn in cash it is paying out under the MCI deal demonstrates. All this and a 10 per cent share buyback to come.

There is, therefore, no doubt that BT could afford to pay the windfall tax. Whether it actually will depends on how Mr Blair decides to levy it. Even though BT was plainly underpriced and overcapitalised on privatisation, the company will escape the tax if it is calculated on the arbitrary, random and unfair basis of total shareholder return - currently the favoured option.

Labour might just as well calculate the new tax according to how pay scales inside utility boardrooms compare with the national average, for all the difference it would make. Or what about basing it on the combined height of all the executive directors? Better still, levy it in reverse alphabetic order, starting with Yorkshire Water and United Utilities.

There is no decent way of levying this unfortunate tax. All methods suffer from one flaw or another. But perhaps the least bad way might be to calculate it on the basis simply of market capitalisation, since this would at least penalise all privatised utilities in equal proportion to their ability to pay.

Somebody should have a pop at Greycoat

When you are rescued by the likes of Brian Myerson and Julian Treger's UK Active Value Fund, as Greycoat was three years ago, you have to expect the subsequent ride to be uncomfortable. For turnaround funds like this, a year is a long time, let alone three; having watched its 10 per cent shareholding go nowhere in that time, the impatience of UK Active with Greycoat's management is understandable.

At 148.5p, Greycoat's shares stand at a discount of getting on for 30 per cent to the underlying value of the properties it owns minus the debt it took on to develop them. With a heavy exposure to the relatively buoyant central London property market, Greycoat really ought to be trading at a smaller discount.

Something is plainly awry. Bad management say Myerson and Treger, and a radical solution is the only way out - sell all the properties and give the cash back to shareholders who are better equipped to invest it properly.

Bad shareholders, responds Greycoat - our shares have bombed, but what do you expect with the likes of UK Active scaring the horses? Hoisting a "for sale" sign at this stage in the cycle is madness, the company claims. And what becomes of all the tax losses we managed to build up by misreading the last boom and bust?

There's a grain of truth in both arguments. Buttering up shareholders with a 50 per cent dividend hike yesterday, Greycoat tacitly agreed that it was over-exposed to a couple of giant developments and would have partly to unwind its portfolio over time. By the same token, it is hardly helpful to have a potential seller of 10 per cent of the shares crashing around the share register undermining the incumbent management.

The best solution for all concerned would be if highlighting the value gap tempts someone else to have a pop at the company.