COMMENT Worries that could knock the City off the top
"Pensions mis-selling has certainly raised the political pressure for more regulation; Barings will have added to it. This is a vital area for the City's well-being, and requires decisive, but sensitive, handling"
Tuesday 14 March 1995
The upstarts in Frankfurt and Paris can sit back down again, the report concluded, and watch London's pinstripe battalions power ahead to an ever more dominant role in Europe as the world's favourite place for international finance.
This is all fine and dandy, but did we need all those academic brain- hours to say so. Deutsche Bank's decision last year to turn its back on Frankfurt and put all its international investment banking business in London spoke more than any number of reports about the superiority of the City's financial culture, and the attraction of its skills and versatility.
In too many respects, the City Research Project reads like a compendium of what was already known about the City and its prospects. Revelations are thin on the page. Even the much reported section on transport only confirms what any commuter knows, that getting to and from work is not one of London's competitive advantages.
More worrying are the areas where the researchers appear most relaxed. Take regulation. The report argues that the costs of regulation compare favourably with other financial centres. But talk to almost any executive in the City and they will moan about the rising tide of over-regulation, and the confusion of the current regulatory set-up. Continental insurers and bankers express alarm at the growing burden of regulation in London. Pensions mis-selling has certainly raised the political pressure for more regulation; Barings will have added to it. This is a vital area for the City's well being, and requires decisive, but sensitive, handling.
Another issue is a change of government. The City Research Project wags its finger at the bogeymen in Brussels, in apparent confidence that Labour would continue Westminster's benign neglect of the City. The City is now such an important element of the British economy that it could be right, but it seems unlikely. Labour wants a more active industrial role and it accompanies this with barely disguised distaste for the perceived unhelpfulness of the City.
Time to bend the rules for Trafalgar
Only in the wierd and wonderful world of privatised utilities would a board of directors have the presumption and arrogance to think that they know better than their own shareholders. The great bulk of investors in Northern Electric would like to see Trafalgar House given the opportunity to put its new bid of £9.50 a share; a majority would probably accept. In their wisdom, however, directors of Northern seem determined to deny them the chance. Takeover Panel rules stipulate that takeover bids cannot be reduced in value without the recommendation of the target company; Northern has decided to take refuge behind them.
It is never over until the fat lady sings but Trafalgar's only hope now seems to lie either with a change of heart at Northern, which seems unlikely, or with a change in the rules. The indications last night were that the Takeover Panel would resist the latter. A bit like a traffic warden, the executive seemed determined to adopt the approach that rules are rules; even in extenuating circumstances they cannot be transgressed.
The main justification for the form of self-regulation that the panel champions, however, is that it is flexible and adaptable. This seems a prime case for dispensation. Professor Stephen Littlechild has created a new set of circumstances which has undermined both the initial Trafalgar assault and the Northern defence. It is about as close as you ever come to force majeur in a takeover bid.
For that reason, and for the reason that shareholders plainly want Trafalgar's new bid, the principle behind the rules, - that a management should not be laid open to permanent siege - should be laid aside in this instance.
Unproven strategy on the buses
Long-distance coach driving never was the sort of business to make the investor's heart palpitate with excitement but on the whole it has proved steady and reliable. That is not the sort of image managements ever rest content with, however.
National Express, born of the old state-owned National Bus Company, is no exception. Its main attraction to investors is that it commands nearly 90 per cent of the market and has demonstrated an unusually benign relationship with the regulators.
Last year, despite its dominating hold south of the border, it still managed to gain a clean bill of health from the Monopolies and Mergers Commission when it acquired Scottish City Link Coaches, raising its national market share from 70 to 80 per cent. Not content with this commanding position, it wants more - diversification, excitement and recognition.
To be fair to the company, there are perfectly good commercial reasons for adopting such an approach. National Express operates in a market that is in long-term decline and, despite its stranglehold, one that remains fiercely competitive, given British Rail's sharper pricing strategies.
Strip out the estimated £2m windfall benefit from last year's rail strike and profits from the main coach business were up a less spectacular £700,000 to £5.6m last year, which also benefited from the first full year of the Scottish acquisition.
Hemmed in by the lack of excitement in its basic business, it has therefore been forced to look elsewhere for a home for its prodigious cash flow, which reduced gearing from 22.5 per cent to just 5.6 per cent in the year to December. Diversification also seems to be working.The £27.1m acquisition of East Midlands Airport in 1993 has proved a winner. It is now hoping to repeat that success with West Midlands Travel, which it is negotiating to buy from its employee shareholders.
But while there is a superficial logic in combining airports and buses with the long-distance coach business, the City is going to take some convincing. There is no clear reason why investors should want to buy shares in a travel conglomerate like National, when they can gain direct exposure to airports through BAA or buses through Stagecoach.
National's strategy of building up a portfolio of regional airports and growing a third leg to its business based on buses is far from proven.
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