Britain: Pride and pretensions before a sharp fall

Click to follow
The Independent Online

The year 2001 was the year of the hangover. Technically speaking, it started on 21 March 2000, which is when the Nasdaq technology market in the United States peaked and the technology bubble burst. It wasn't too bad to begin with, but as the year progressed it got worse. Last year, rather than subsiding and fading, it got worse still. On 11 September, the coup de grâce came. Until then, it had been possible to believe that recession in the world and US economies could be avoided. Interest rates were falling, taxes were being cut, and public spending was rising. The policy makers responded in textbook fashion to the business downturn that followed the boom of the late 1990s, but even Alan Greenspan, chairman of the US Federal Reserve, couldn't deal with the collapse in business and consumer confidence post-11 September. The US and world economies have fallen into recession, and only buoyant consumer spending stands between Britain and the same. The Chancellor, Gordon Brown, remains confide

The year 2001 was the year of the hangover. Technically speaking, it started on 21 March 2000, which is when the Nasdaq technology market in the United States peaked and the technology bubble burst. It wasn't too bad to begin with, but as the year progressed it got worse. Last year, rather than subsiding and fading, it got worse still. On 11 September, the coup de grâce came. Until then, it had been possible to believe that recession in the world and US economies could be avoided. Interest rates were falling, taxes were being cut, and public spending was rising. The policy makers responded in textbook fashion to the business downturn that followed the boom of the late 1990s, but even Alan Greenspan, chairman of the US Federal Reserve, couldn't deal with the collapse in business and consumer confidence post-11 September. The US and world economies have fallen into recession, and only buoyant consumer spending stands between Britain and the same. The Chancellor, Gordon Brown, remains confident that the UK will escape, but that's not the view of many leading industrialists.

In the US and in Europe, we seem to be catching the Japanese disease. Economic activity is stagnating, and prices are close to deflating. Inflation and interest rates are at their lowest since the 1950s, unemployment is rising, and long-term investment, both direct and indirect, is being cut sharply. We've had two years of falling equity values, and there's every prospect of the hangover continuing next year.

It's hard to think of clear business winners from the last year, but there are a few in the bit of the economy that has remained relatively strong: consumer spending. Helped by historically low interest rates and still low rates of unemployment, the consumer has carried on spending like there's no tomorrow, in Britain at least. While falling prices have made retailing a more challenging business to be in than before, most retail share prices have done relatively well. Two stand out: Marks & Spencer and Arcadia. Both are turnaround situations, and in neither case is it clear the turnaround has been achieved. Even so, M & S was the best performing share in the FTSE 100 in 2001. In these markets, to be up at all is creditable. At this stage, the revival in the share price is more about hope than anything real, and the test will be Christmas and early new year trading. Luc Vandevelde, the company's Belgian-born chairman, gave himself two years to show clear signs of a turnaround when he joined. His time is nearly up.

Shares in Arcadia, which includes high-street formats like Topshop and Dorothy Perkins, are up 217 per cent over the last year, enriching the company's chief executive, Stuart Rose, whose share options were priced close to their all-time low. The year has ended with the shares underpinned by a prospective takeover bid from Iceland – not the company Mr Rose used to be chief executive of, but the country.

For the losers, unlike the winners, a treasure trove of choices awaits. The big losers were in the one-time bubble sectors of the New Economy – technology, media and telecommunications (TMT). By the end of the year, the body bags seem to have been scattered across the length and breath of the economy. Insurance, airlines, shipping, travel, investment banking, life assurance; even energy trading.Railtrack was put into administration, Carol Galley lost her reputation as the City's most powerful woman, and Vodafone calmly wrote off £4.5bn of its new economy investments with barely a murmur of protest from the City.

All business downturns have their defining corporate collapses. For Britain it was Marconi. Three years back, Marconi was a well run industrial and defence electronics conglomerate known as GEC. Its chief landmark was that it had a mountain of cash, which its managing director, Lord Weinstock, had accumulated over years of slog and careful cash management.

Judged ill-suited to the New Economy madness that was about to sweep business and the City, he was retired and replaced with Lord Simpson and John Mayo. They sold off or demerged most of the old empire, and recreated the group around the telecommunications equipment sector – an industry, it was thought, of the future. They made just about every mistake in the book. They sold low, bought high, paid cash at a time of inflated valuations, andbought into a business neither of them had any experience of running. They followed one fee-paying acquisition with another. The cash mountain vanished. So did the cost controls, and eventually all reason. It was an act of extraordinary corporate recklessness, but the City and the financial press only cheered from the sidelines. Simpson and Mayo were widely fêted for transforming Marconi from Old Economy stalwart to New Economy dynamo; the share price rocketed.

Then it started to fall and fall. As bigger industry peers such as Cisco and Nortel warned of plunging order books, Marconi said nothing. Worse, it tried to pretend that, at Marconi, things were better than with rivals. In fact, the reverse was true. Today, Marconi is only alive courtesy only of its bankers and bondholders. Simpson and Mayo are no more.

A lot of corporate heads rolled in 2001. Sadly, there's not enough space to report on all of them. But no account of 2001 would be complete without reference to British Telecom. Like Marconi, BT overstretched itself with its global empire-building pretensions. When the bottom fell out of the communications boom, BT found itself without the profits to support a balance sheet groaning under its debt. To be fair on the duo that ran BT – Sir Iain Vallance and Sir Peter Bonfield – the scale of the mismanagement wasn't much worse than at any of the other former state-owned telecommunications monopolies. But the consequences could not have been more punishing. Both lost their jobs, BT has been broken up, and the finances have had to be shored up with a near £6bn rescue rights issue, the largest such fund- raising ever launched in the City.

Throughout the TMT sectors, the blood is thick on the carpet. Many of the IPOs that floated on a wing and a prayer at the height of the technology boom are members of what is referred to as the 99 per cent club (companies that have lost 99 per cent of their value since the peak) or nowhere to be seen. Even Granada and Carlton, which between them own most of ITV, are struggling with huge losses.

Most business downturns culminate in a corporate scandal, which comes to be seen as a monument to the excesses of the previous boom. To mismanagement and insolvency, addmisconduct and fraud. There have been minor examples of fraudulent collapses in Britain recently; Independent Insurance proved the rule of thumb that if a business looks too good to be true, it generally is. But there's been nothing on the scale of Maxwell in the early 1990s. If history is any guide, that particular treat is yet to come.

Comments