Jeremy Warner's Outlook: As Sanofi tilts at BMS, it should remember big mergers are hard to manage. Just ask GSK

Why dollar is not yet a busted flush; Little sense in Stansted boost
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Another round of consolidation in Big Pharma seems to be looming, with Sanofi-Aventis said to be in talks about a possible merger with Bristol-Myers Squibb to create the world's largest pharmaceuticals company by market capitalisation and revenues.

BMS has long been everyone's favourite takeover target in the pharmaceuticals sector. Having suffered two serious scandals in recent years - involving both accounting and anti-trust violations - the share price has been flat on its back. Paradoxically, however, the company has a relatively good pipeline, which arguably makes it good value to those that have managed to keep their noses clean but have less exciting products under development.

If Sanofi does manage to agree a deal, there are bound to be others just itching to spoil the party. One might be Britain's AstraZeneca, which recently announced a collaboration on new diabetes drugs with BMS. Another is Pfizer, which is desperate to find replacements for the gaping hole in its revenues that will open up once Lipitor, the company's blockbuster anti-cholesterol drug, comes off patent.

If one of their number manages to pull off a big cost-cutting merger, others will almost certainly want to follow suit, sparking a chain reaction of similar deals. The more drugs that can be pushed through a single distribution platform, the more profitable you become, at least in theory.

Yet I doubt we'll be seeing GlaxoSmithKline joining the scramble any time soon. The lesson of Glaxo's turn-of-the-century acquisition of Smith Kline Beecham is big cost-cutting mergers don't always create the value they are supposed to. An unavoidable side effect is plunging morale and key staff departures. Despite their cost-cutting potential, mergers can frequently end up doing more harm than good, with the company becoming distracted from its purpose in a clash of alien corporate cultures.

Glaxo is only now emerging from its dark night of the soul with one of the most promising pipelines in the business. But it has taken an awfully long time and it is not entirely clear that the current success with research and development has anything to do with the merger. Rather, the improvement has been in the way Jean-Pierre Garnier, the chief executive, has ordered and prioritised his R & D. He's also been highly effective at buying in, incrementally, interesting prospects. Smaller bolt-on acquisitions and collaborations have proved more effective than the blockbuster merger.

Why dollar is not yet a busted flush

"If something is unsustainable", Herb Stein, economic adviser to the late President Nixon, once said, "it will stop". Why then have the global capital and trade imbalances, which economists around the world have been describing as unsustainable for more years than anyone can remember, not yet stopped? Perhaps stranger still, the dollar's collapse so widely forecast as the inevitable consequence of America's burgeoning current account deficit hasn't really happened either.

To the contrary, though the dollar may look weak against the pound, against the Japanese yen it this week went to a four-year high, and even relative weakness against the euro has gone into sharp reverse over the past two months. It cannot in any case fall against the renminbi because the Chinese currency is effectively pegged to the dollar. Nor is it altogether clear the dollar would fall very far against the renminbi even if China abandoned its capital controls. Let me explain why.

The weakness of the yen has again become a talking point this week because Jean-Claude Juncker, chairman of the eurozone's 13 finance ministers, has been sounding off about it as a growing cause for concern.

In a leaked "speaking note" prepared for next week's G7 finance ministers' meeting in Essen, Mr Juncker is sharply critical of the Bank of Japan for leaving interest rates low, leading to "distortive effects on the currency and increased risk of disorderly adjustment of the global imbalances".

This is so much poppycock. There are actually extremely good and sustainable reasons both for the present alignment of currencies and for the capital imbalances. It's called globalisation and it works like this. Let's take the yen first. Interest rates, both short and long, are still exceptionally low in Japan but quite high in the US. This sets up an arbitrage opportunity which has been exploited by hedge funds through the so-called "yen carry trade". With such a wide interest-rate differential, it makes sense to borrow in yen and lend in dollars.

But it is not just hot, hedge fund, money which has been pursuing this course of action. Ordinary Japanese savers have been doing it too, and who can blame them when they are getting next to no real rate of interest on their money in Japan. According to Simon Derrick, head of currency strategy at Bank of New York, Japanese investors have poured 20 trillion yen into overseas bonds and notes since 2005.

This massive export of capital is the flip side of Japan's trade surplus with America and the rest of the world. If it wasn't taking place, then the yen would indeed strengthen quite considerably and eventually correct the trade imbalance with the US.

China conforms to the same pattern, if for slightly different reasons. The Chinese generate a huge surplus of savings, which for the time being cannot be spent. Instead it goes overseas, helping to sustain a comparatively weak renminbi and a strong trade surplus with America. There is nothing abnormal about these trends, even if from a moral point of view it seems perverse for relatively impoverished China to be lending to finance the consumption of already rich American consumers.

Rather it is a factor of demographics and development. The Chinese and Japanese have surplus money to invest which cannot go into their own economies without creating overheating and overcapacity. So it goes instead to the US, and to a lesser extent to the UK and anywhere else where there is a rule of law, together with deep and liquid markets that can absorb such flows by investing them safely and effectively.

I'm not sure about Japan, but it can be said with some certainty about China that the saving will eventually stop, allowing the imbalances to unwind. What seems quite unlikely, barring a cataclysmic geopolitical event, is that the imbalances will unwind in a disorderly and rapid manner, plunging the global economy into recession.

The yen carry trade may look like an accident waiting to happen, but how likely is it really that US interest rates will suddenly collapse and that Japanese ones will rise correspondingly? Not very, is what I would say. Sometimes the best advice about the world economy and the financial markets is just to quit worrying about them. What's going on at the moment is not irrational exuberance which is bound to end badly. To the contrary, it couldn't be more rational.

Little sense in Stansted boost

Michael O'Leary, chief executive of Ryanair, is absolutely right to call for a break-up of BAA, and unless the Competition Commission takes leave of its senses that's exactly the course of action it will eventually settle on.

The point was brought sharply into focus yesterday by BAA's announcement of a £2.2bn expansion at Stansted, including a second runway. No one wants this investment other than the Government and BAA. The users don't want it, nor do they fancy very much paying for it through higher landing charges, and certainly anyone living nearby doesn't want it. By trying to satisfy environmental objections, BAA only makes the project more expensive still, further alienating the airlines that use the airport.

If the ownership of airports was separated by breaking BAA up, there would be a better matching of investment and expansion plans with likely demand. Who will pay for this runway if climate change makes it a white elephant? The passenger, of course, through higher charges on top of the carbon costs that will soon be loaded on to this industry.

j.warner@independent.co.uk

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