There has been a certain breathless tone to much of the media coverage of Rupert Murdoch's swoop on ITV. Admiration for the sheer audacity of it all in an era where business leaders seem frightened of doing anything remotely controversial has overwhelmed most consideration of its outrageousness. Protest has so far been limited to the snubbed Sir Richard Branson and a few fellow travellers. The Guardian summarised the response perfectly in a headline yesterday which read: "How BSkyB got its tactics spot on".
Rather than highlighting the clearly anti-competitive nature of Sky's acquisition of a near 20 per cent stake in the commercial broadcaster, the press has instead focused on the brilliance of Mr Murdoch's coup.
Normally reasoned judgement has become lost in glowing testimony for the derring-do antics of Britain's most powerful media baron. Only Rupert would have been so bold, visionary and audacious, everyone has said. Like him or loathe him, you've got to admit he's got balls, others observe. Since when did the bully boy of the playground deserve such esteem?
Like admirers of Napoleon, who wax lyrical about his exploits, oblivious to the damage his wars of "liberation" did to Europe and beyond, the sheer cheek of BSkyB's power play seems to have largely blinded everyone to its true purpose. Never mind scuppering NTL's dreams of acquiring ITV, which were never likely to succeed in any case, the main intention is further to extend News Corp's grip on UK media.
Through Sky, Mr Murdoch already enjoys a virtually monopoly of pay-TV in Britain, only mildly bothered by the tiresome but ineffectual challenge of cable. Sky was undoubtedly a brilliant entrepreneurial creation, but it is also vicious in its defence of monopoly. Largely supine regulation allows the company to get away with it largely unhindered.
Mr Murdoch also controls around 40 per cent of the national press. The two interests combined enable him to exert an influence over the body politic which, though an amusing spectacle as the politicians tart themselves to his will, is a danger to democracy and general economic wellbeing.
But let's first lay one particular canard to rest. Sky's move cannot in truth be regarded as anti-competitive merely because it has "cheated" Sir Richard Branson and NTL out of the ITV prize and any prospect of forming a credible competitive counter to Mr Murdoch. Sir Richard has no God-given right to own ITV, and his present outpouring of venom is just the sour grapes of someone who thought he would be able to acquire ITV's cash flow on the cheap. The NTL proposal was in any case driven as much by its supposed tax advantages - NTL has accumulated tax losses that could have been offset against ITV profits for years to come - as industrial logic. In the form outlined yesterday, it could never have succeeded. Not only was it too low, but few ITV shareholders would ever have taken NTL paper.
Even if it had succeeded, it is more likely to have weakened ITV than strengthened it. There is no evidence of NTL, with challenges aplenty in its existing business, being up to the task of the necessary ITV turnaround, which would have been made all the more difficult by the debt taken on to finance the takeover.
Scuppering NTL was no doubt a bonus in Sky's thinking, but the main purpose was to place the company at the centre of a fast changing media landscape. Any deals, any alliances, any rights which are up for grabs, and the players will have to speak to Rupert and his son James first. Rightly, Sky also recognises ITV as an undervalued asset.
Sky insists it won't attempt to influence ITV, but it doesn't intend to be entirely passive either. It has also said it wants to explore ways of enhancing value for all shareholders. The test will be when the two find themselves up against each other for rights. Is it really credible that Sky would tolerate a company in which it has a 20 per cent economic interest bidding against it?
Lord Puttnam, the movie producer and one of the prime movers in the cross-media ownership rules enshrined in the Communications Act, perhaps puts it best when he says: "Look at it in terms of any other form of manufacturing business and you quickly see you cannot have your most significant competitor owning 20 per cent of your business, irrespective of the degree to which they promise not to interfere or even have knowledge of your dealings". Quite so.
Granted, media tends to be a more nuanced competitive environment than other industries, where alliances between rivals on content and distribution are commonplace. For instance, in the US, News Corp's Fox is the leading supplier of independent content to rival broadcasters and platforms. What makes this situation a bit different, however - and therefore makes it a cause for concern - is the already dominant position these companies occupy in their respective markets.
The Communications Act was itself a terrible political fudge around Mr Murdoch's interests. At the last moment, a "Murdoch clause" was introduced which bizarrely partially lifted the ban on newspaper owners acquiring licensed broadcasters by allowing them to buy Channel Five. The Act also sanctioned stakes of up to 20 per cent of ITV. This makes regulatory action over the stake both difficult and unlikely.
As a safeguard, Lord Puttnam managed to get a public interest test built into the legislation, which would be triggered if any dominant UK media owner sought control of ITV. Government ministers, poor dears, now have the unhappy task of deciding whether to apply it. Don't hold your breath. Mr Murdoch's wrath would be mighty if they dared to try.
Cheap debt equals strong equities
For the best explanation of the record levels of takeover activity now taking place, or indeed the strength in equities more generally, look no further than the accompanying graphic, aired at an investment seminar the other evening by Edward Bonham Carter, joint chief executive of Jupiter International. This shows that the gap between the return on equity and its cost is now wider than at any stage since the late 1990s. With profits still rising, it is widening further all the time.
Put another way, with money cheap and plentiful but corporate profits booming, it pays to borrow in the debt markets to buy in the equity markets. Hence the debt leverage applied in a growing number of takeovers. On one level, what is happening is only a simple arbitrage between the low cost and availability of debt and the high returns of equity.
Corporate profits are highly cyclical, so pessimists will view the chart as a clear indicator that these trends are about to go into reverse. Yet it could just as easily be read the other way. There's little sign of the benign conditions in debt markets coming to an end.
To the contrary, most people would think the next downturn more likely to be deflationary, requiring lower interest rates still, than inflationary. As long as corporate profits aren't seriously undermined in the process, equity will continue to look cheap relative to debt. Regrettably, the actuaries who advise on asset allocation in our pension funds don't yet seem to have recognised this. Pension funds are still dumping equities and buying bonds, creating a further opportunity for the takeover kings of private equity.Reuse content