An outbreak of harmony on inflation prospects

Spirent transforms; ABI outrage
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The Independent Online

Harmony at last. After months of bickering, both about whether interest rates should rise and the outlook for inflation if they do not, members of the Bank of England's Monetary Policy Committee find themselves in broad agreement. The MPC voted unanimously to hold rates at its October meeting. and we must assume the decision was unanimous at last week's meeting meeting too. To complete the hat trick, the latest Inflation Report, published yesterday, displays only marginal disagreement on the inflation forecast.

Harmony at last. After months of bickering, both about whether interest rates should rise and the outlook for inflation if they do not, members of the Bank of England's Monetary Policy Committee find themselves in broad agreement. The MPC voted unanimously to hold rates at its October meeting. and we must assume the decision was unanimous at last week's meeting meeting too. To complete the hat trick, the latest Inflation Report, published yesterday, displays only marginal disagreement on the inflation forecast.

All this seems to be evidence of a new found self confidence on the MPC. The way things are going, the Bank of England will soon be duplicating the Federal Reserve, with only very occasional alternative application of accelerator and breaks. This is as it should be. Since the MPC was launched it has moved interest rates a riotous 17 times. In the same period, the Fed has changed policy only nine times - with the rest of the work done through speeches and formal references to a "tightening" or "loosening" bias in policy.

Hopefully, the MPC is moving in the same direction. Interest rates have now been left on hold for nine months in a row and even Mervyn King, the deputy Governor, jokingly admits that criticism of an unduly activist policy might soon be replaced with accusations of excessive passivity. From a business perspective, this can only be good news. If there is an expectation that rates are likely to stay on hold - and that any moves will be small and infrequent - it makes it easier for companies to plan ahead.

Less clear is whether the next move in interest rates is going to be down. That was the inference many were drawing from yesterday's Report, but don't count on it. There are still risks to the UK's low inflation economy. At the top of the list is sterling, which is forecast to devalue only marginally. A sharper fall would stimulate inflation.

A second assumption is that private sector spending will slow to accommodate the large increases in public spending. The fact that retail sales were not hit by the floods last month may overturn that theory. Lastly a cut in rates must depend on firm evidence that the supply-side benefits in productivity that have been experienced in the US have finally made it to the UK. The jury's still out on that.

The MPC may be more relaxed about inflation than it was, but it is premature to read this as a "loosening bias".

Spirent transforms

A bit like Marconi, Spirent is one of those erstwhile Old Economy rag bags of industrial interests which has been transformed in recent years into a New Economy pioneer. Until last May it was called Bowthorpe and at one time contained as many as 100 electrical component companies servicing a range of different industries. Since Nicholas Brookes, a former Texas Instruments director, moved into the hot seat five years ago, most of these companies have been sold or closed, and instead the group has been refocused on the arcane but high growth world of "network assurance" - the kit that enables companies like Cisco to stress test their internet routers and other cutting edge network equipment.

The £1.1bn acquisition of Hekimian from Axel Johnson takes Spirent into the monitoring of that equipment as well, a logical and natural evolution. Spirent sells to the equipment manufacturers; Hekimian sells to the network service providers. The kit is a little bit different, but obviously it is closely related. Axel Johnson was so impressed by the logic of the fit that it turned down higher all cash offers from rivals in favour of the half cash, half equity bid from Spirent, a deal that gives the Swedish conglomerate a near 12 per cent ongoing stake Spirent.

It is hard to pick holes in Mr Brookes's sales pitch. Equipment spending by overextended network providers is slowing from the near 30 per cent peak growth rates seen earlier this year. However, according to Mr Brookes, it is the old legacy networks that are suffering most from this period of retrenchment. Spending on the future, the new internet protocol networks that telecom companies believe may give them a competitive edge, remains exceptionally high growth. Indeed, for his own "network assurance" section of the market, Mr Brookes is bold enough to predict 35 per cent per annum growth for the next four years. Few equipment manufacturers can be anything like that confident.

So in summary, an excellent deal only slightly spoilt by the fact that Spirent has been forced to underwrite the related £528m rights issue in order to give the Swedes certainty of the cash payment. As usual, the City takes its pound of flesh, despite the fact that the rights issue is deeply discounted and therefore carries little if any risk.

This is a great acquisition, but don't be fooled. Hekimian is an American company, and so are all the other network assurance acquisitions that have transformed Bowthorpe into Spirent. In that sense, the Spirent success story is not an example of "British" New Economy prowess. After the completion of the Hekimian deal, 80 per cent of Spirent's business will be in network assurance 100 per cent of that business will be US based. A clever British transformation, then, but one based on US, not British, technology and markets. The FTSE 100 becomes less of a "British" index almost by the day.

ABI outrage

Is British Airways a better run company for having a separate chairman and chief executive? Has British Telecom done its shareholders any favours of late because it splits the top two roles? Would Luc Vandevelde have a better chance of pulling Marks & Spencer out of the mire if he gave up one of his two jobs? Was Cable & Wireless a happy ship when Lord Young and James Ross were fighting like rats in a sack?

Answers on a postcard, please, to the Association of British Insurers, which has drawn up a hit list of 20 top companies and written to them demanding to know why the jobs of chairman and chief executive are filled by the same person. David Rough of Legal & General, chairman of the ABI's investment committee, thunders that shareholders have growing concerns about "undue concentration of power".

As it happens, Mr Rough can point to a timely example to justify his complaint. After Greg Hutchings was forced to split his roles at Tomkins, the new non-executive chairman quickly discovered a veritable treasure trove of "corporate excess". But Tomkins was a throwback. Its underperformance had as much to do with it being a conglomerate as the executive chairman's use of corporate jets or the presence of his wife and housekeeper on the payroll.

The corporate governance reports that followed the Maxwell, Polly Peck and Brent Walker scandals were born of the noblest of aims. Few would argue that companies tend to function best when the chief executive runs the business while the chairman manages the board. But not always. Sometimes strong single leadership is needed to pull a company out of crisis. In any event, it is still all too easy for a company to fulfill every rule Cadbury, Greenbury and Hampel ever dreamt up but still be dominated by one individual and horribly foul up. The ABI's prescriptive approach to boardroom etiquette could do more harm than good.

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