Comment: Muddled thinking in the building societies Bill
`Takeover rules are usually designed to protect the rights of investors, but Angela Knight's half-baked suggestion appears, by contrast, designed more to protect building society directors'
Tuesday 19 March 1996
Certainly the Government's Mutuality for the next Millennium proposals might better have been presented by Virginia Bottomley than Angela Knight. As Heritage Secretary, Mrs Bottomley is at least meant to tend those threatened corners that everyone wants to keep forever England. Given the alarming rate at which societies have been abandoning mutuality and opting for conversion to quoted company status, the Heritage Secretary's time may yet come.
For the moment, though, it is Angela Knight at the Treasury who is hoping to hold back the tide by offering societies which soldier on a bit more freedom of manoeuvre and some protection from the big, bad world of competition outside. The Government wants the stalled process of mergers between building societies kick-started again in the hope that this might produce some powerful mutuals to revitalise the movement. The trouble is that any society that announces a merger is as likely as not to be picked off by predator banks offering tempting windfall profits to their members. Hence the suggestion of a one-year moratorium for merging societies, shielding them from predatory advances so they can consult their members in peace and quiet.
But just how is this meant to work in practice? Mrs Knight clearly does not know. If the Bradford & Bingley and Northern Rock, say, were to announce a merger, does this mean Barclays would not be allowed to tell members what sort of alternative deal they might get? Takeover rules are usually designed to protect the rights of investors. Mrs Knight's half-baked suggestion appears, by contrast, designed more to protect building society directors.
Retail financial services in this country have undergone dramatic change in recent years. Competition is intense, and increasing. To survive, building societies must be able to compete on the market's terms, by offering the best deals. This Government, of all, should know that. In the end, it will be market forces, not legislation, that shapes the future of this industry. That would be true even if this draft Bill makes it onto the statute books, which looks a long shot given the likely timing of the next election.
Unlocking value at Pearson
Pearson is a fine company in many respects with some wonderful assets. Like all big companies, however, it occasionally has embarrassments. Right now there could be a big one developing in its midst. It is called Mindscape. However good Pearson's general record in acquisition making might be, this one looks like turning into a real howler.
On the whole, Pearson's acquisition strategy has been well thought out. It has moved impressively to extend its television programming, notably through the acquisition of Thames Television, Grundy Worldwide, and ACI, all of which have added to profits. Publishing has been expanded through the $580m acquisition of HarperCollins's educational publishing operation, injecting better balance into its range of products for schools and universities.
However, Mindscape, a publisher of CD-Roms, cartridges and floppy discs, for which Pearson paid a handsome pounds 312m in 1994, falls into an altogether different category. This was always meant to be a long term acquisition, a bet on the future. Nonetheless it was also meant to at least break even last year. That is certainly what Pearson told the City to expect. As it is, Mindscape lost pounds 6.9m.
When Pearson carefully warned analysts as recently as December 1995 that operating profits were likely to be below City estimates, it uttered not a word about Mindscape.
The house line is that returns of unsold stock in the new year were higher than expected, and that the bottom fell out of market for floppy discs. Tight pricing in the original equipment manufacturing end of the CD-Rom market contributed to the malaise, Pearson says. There is clearly more to it than that, however. Evidence of this is in the team of external consultants who are now to comb through the operations and make recommendations for change.
Pearson went to great lengths yesterday to deny persistent reports in the press that Granada had considered mounting a bid for the company last year. But the fact of the matter is that Granada did; it was not an invention of the press. Pearson seems as determined to ignore this unpalatable truth as the persistent losses at Mindscape.
Pearson management is clearly very sensitive about the possibility of a takeover bid. And no wonder. There is much value to be unlocked in a company with such a range of attractive assets.
The Mindscape mistake only increases the company's vulnerability. Unless Pearson itself does something to unlocking value (and admittedly recent management restructuring suggests it may do) then someone else will do it instead.
Encourage the French - up to a point
Hackles rise whenever it gets out that a French company has its eyes on a British public service. The idea of Generale des Eaux taking over railway services to Brighton, among other Sussex gems (as reported on our news pages), will have seasoned commuters choking on their kippers. It is only a few years since the scandal of the season was the French move into the water industry, which culminated last year in the takeover of Northumbrian Water by Lyonnaise des Eaux.
But the reality is that the arrival of the French has had a positive impact on the water industry - witness the 15 per cent price cuts which were agreed as a condition of the Northumbrian takeover - and there is no reason why they should not be of benefit to the rail industry as well. Lyonnaise and Generale are members of a French breed that appear to have no UK equivalent - large utility companies which specialise in public works and construction projects.
British companies of similar size and capitalisation to these two giants, with the resources to invest on a comparable scale in public works projects and services just do not exist. Generale employs 215,000 people and has turnover of pounds 18bn, of which nearly a third is outside France.
Given the capital resources of the group, it is likely to be at least as good an owner of a railway franchise as the management buyout teams that predominate in the bidding. The French deserve to be encouraged - but only up to a point. There is a long way to go before French service industries are as open to outsiders as Britain's railways are now.
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