Comment: One of the last bastions of inefficiency falls
Saturday 04 May 1996
Insurance remains one of the last great bastions of inefficiency, arrogance and outdated practice. Insurers tend to regard themselves as professionals with policyholders, rather than commercial businesses with customers, and until the last few years the great British public has rather allowed them to get away with it. The result is overmanning, Spanish practices and a positively 19th-century attitude to organisation and technology.
Things are changing, however. Insurers are being forced to wake up to what most of us realised long ago: these days the world doesn't come to you. If you want to compete, you have to go out to the world.
The advance of low-cost telephone insurance and the giant insurers of America and Europe is badly rattling our own molly-coddled industry. Competition is becoming intense and prices are tumbling. As in any price war, costs have to tumble too. It is a sad truth that, although this merger creates Britain's largest insurance company, Royal Sun Alliance will still rank no higher than ninth in the world league.
Nor, apparently, are the powerful egos, strong dynastic tendencies, and differing City allegiances of this industry the barrier to change they once were. Individual insurance companies have traditionally retained strong links with particular banking dynasties - Barings, Rothschild, Hambros. As with so much of the "old" City, these divisions are being swept away. Both Robert Taylor and Richard Gamble, respectively chief executives of Sun Alliance and Royal Insurance, found the logic of this merger inescapable. A way of accommodating two fiercely independent management teams under one roof had to be found.
As it is the solution proposed, with the top jobs shared out between the two boards and the position of chief executive in effect split, is probably untenable long-term. One will eventually come to dominate the other. But there is no doubting the sense of the merger. Royal Sun Alliance will be uniquely placed to deal with the growing competitive pressures of the domestic and international market. Others will surely be forced to follow.
Mindscape displays Pearson's deep problem
"It wasn't managed as effectively as it might have been. We are going to narrow the focus of the business and concentrate on those areas where we have a strong position in the market." So said John Makinson, Pearson's finance director, and, while he was only talking about Mindscape, the fast-expanding Californian black hole on which Pearson squandered pounds 300m two years ago, his words might apply to the whole empire.
Mindscape has been an unmitigated disaster and Pearson has been at best economical with the facts about its problems. The City was led to expect break-even last year and ended up with a pounds 7m loss. Even that bombshell, however, could not have prepared anyone for yesterday's pounds 46m stunner.
Fortunately, Mindscape appears to be an isolated howler, even if it rendered somewhat hollow Lord Blakenham's remarks at yesterday's agm about the integration of the recent Harper Collins educational books purchase and the brighter news on the television front. But it is symptomatic of a deeper problem - Pearson's inability to put much focus on the corporate manoeuvrings of the past few years. There was never any logic in the collection of oil, banking, china and leisure businesses that Pearson once was, but there hardly seems to be any more to the current mish-mash of education, entertainment and information interests.
When you are up against the likes of Reuters, in the provision of information, and Disney, in the world of entertainment, mounting an effective challenge requires a marshalling of resources. It is simply asking too much for a business the size of Pearson to try and fight a war on so many fronts.
Pearson has to decide what it wants to be and go for it with conviction. With luck the arrival of a triumvirate of bright new directors two months ago could act as the catalyst the company needs to change. But they will have to chuck a large pile of sentimental baggage overboard in the process.
Getting rid of Madame Tussaud's and Westminster Press and spinning off the book publishing arm might be a good first step. Because, at the risk of sounding like a scratched record, if they don't do it someone else will.
A happy honeymoon for the AIM
The flurry of new issues this week, including the glamorous if loss-making La Senza, is a reminder that the Alternative Investment Market is very nearly a year old, and a bonnier baby the Stock Exchange could not have hoped for. It would have been a brave forecast that predicted 142 companies trading on the new market by this early stage and a positively foolhardy one that promised that not one AIM stock would have gone bust in the first 11 months.
Just like its ultimately ill-starred predecessor, the Unlisted Securities Market, AIM has enjoyed a benign trading environment in which to put down roots. But that should not take away from its main achievement, which has been to convince institutional investors that it was worth a second look. Only that has created the circumstances in which companies such as the satellite TV equipment group Pace Micro could consider floating with a market value approaching pounds 200m. This is now a serious market.
The cynical view of all this is that the last few months have actually been little more than a honeymoon period. The size of most AIM companies, the narrow spread of their activities and the limited management experience of many of their directors, mean that a disaster is only a matter of time. What will matter then is the extent to which the limited due diligence companies' advisers are forced to carry out will be found wanting. The market is strong enough to survive, but if the exchange's light regulatory touch is the cause, that might well finish it.
More of a concern is the lack of liquidity and the usurious spreads imposed by the few market-makers willing to take on the risk of dealing in AIM shares. Even before you factor in dealing costs, the difference between buying and selling prices means a stock has to rise between 5 and 10 per cent just to recover the initial investment.
That is not an AIM-specific problem, however; it is the price you pay for investing in any small company. And it should not distract from the attractions of a good old-fashioned punters' market. As long as there is the prospect of picking the next Cafe Inns, up 48 per cent in March, or Firecrest, a 31 per cent rise last week alone, investors will rightly accept the risks.
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