Jeremy Warner's Outlook: Chapter closes on defining City takeover battle

M&S/equities; Manufacturing jobs
Click to follow

"It's over: there'll be no gloating". Hard to believe but it was only last week that Philip Green made this remark believing he had won the bid battle for M&S. Now the tables are turned. For Mr Green the tragedy is that he only has himself to blame. Tactically his assault was mishandled from the start. His bullying, belligerent approach was entirely inappropriate for an offer that needed both a due diligence and a board recommendation.

By making his offer final and conditional on these two things, Mr Green badly boxed himself in, making it easy for the M&S board to deny him access knowing that without it he would be unable to make a proper bid. Handled differently, Mr Green could have succeeded at £4, but the conditions made it impossible for him to make progress against a board determined to repulse him. Even with 34 per cent of the stock apparently behind the Green machine, the board remained intransigent to the last, and rightly so.

Too often Mr Green has taken assets from the City on the cheap. With M&S, shareholders have chosen to draw a line in the sand and say enough is enough. It is surely possible for the City to find managers for these businesses that can extract the same sort of value from them on behalf of ordinary shareholders as Mr Green has been able to for himself and his small coterie of backers.

All the same, Mr Green has done shareholders an enormous favour. The management and approach is changed, and the pressure is on to deliver as never before. Call it, if you like, payback for all the value Mr Green has taken out of the City in the past. There's little room for error by Stuart Rose and his team now. They must perform big time. If the share price is still under £4 in a year's time, the credibility of the board will be shattered, and many will be asking themselves how it was that they came to deny Mr Green his chance. It is only possible to speculate on how different M&S might have looked.

In Mr Green's eyes, directors have behaved outrageously in defying the wishes of such a large body of their own shareholders. But you can see why they did it. They were not prepared to recommend an offer they thought undervalues the company, so what was the point of allowing the due diligence he needed to secure his finance? M&S has been a defining takeover battle, a hostile, phantom bid that sought to take advantage of the wall of hot, speculative money that now seems to dominate activity in the capital markets. That it failed is a victory for the old fashioned values of long investment, the belief that bidders should pay a premium not just over the market price of the shares but over the fair value of the company, for the privilege of control. Whether this is a turning of the tide, or just a temporary staging post in the long-term decline of the joint stock company remains to be seen.

M&S/equities

I'm sticking with my bullish view on equity markets, but my faith has been badly shaken by some of the big picture issues raised in the Marks & Spencer bid battle. This might seem an odd thing to say, as thanks to Philip Green's mooted offer, M&S has been one of the few bright spots in the stock market this past month. Yet the broader canvas is much more concerning.

The bear market of the past four years has crystallised some seismic changes in the investment landscape. Most final salary pension schemes, for nearly 50 years now the mainstay of equity investment in the UK, have fallen into substantial deficit. New accounting standards and solvency requirements have served to deepen and highlight these deficits, making them into major news stories and sorely testing the willingness of companies to keep funding the schemes that lie behind them.

In substantial numbers, these so-called "defined benefit" schemes are being closed to new members. As they mature, they progressively shift out of high-risk equities into low-risk bonds and cash, where it is possible with more certainty to match future liabilities with current assets. Whenever equities recover sufficiently to close the deficits, there's a new wave of selling as funds move to take advantage of higher prices further to switch into low-risk bonds. Fast back 10 years or so, and a very substantial proportion of British industry was owned by its pension funds. That position is now changing fast. A mainstay of British equity markets has been removed. As a case in point, the M&S pension fund has said that were Philip Green's highly leveraged bid to succeed, making the company financially less secure, it would have been forced to switch even more heavily into bonds.

Growing aversion by final salary pension funds to equities is mirrored by the big life offices. More than a quarter of the industry is already closed to new business, with the switch out of equities compounded by stringent new FSA solvency requirements which are causing the life funds to dump shares wholesale on the markets.

In theory, the removal of these two traditional sources of support for equities should be cancelled out by the rise of alternative defined contribution pension arrangements and other forms of saving, only we all know this isn't happening. The Government has so disincentivised thrift that the nation has largely given up on it. As a consequence Britain is facing a growing savings gap. Another consequence is to make equity markets cheap. Remove the buyers and the prices go down. This in turn makes the cost of capital to British industry higher.

It also provides a buying opportunity for overseas investors and, of course, our dear friends in the private equity world, overflowing with capital as it is, including the human dynamo, Philip Green. It is no accident that M&S's largest shareholder is Brandes Investments, based in of all places San Diego and servicing not the pensioners of Middle England but of Orange County or some such other pool of prosperity on the other side of the Atlantic. The other buyers are the short-term speculators, who treat equities only as sophisticated gambling chips. Slowly but surely, ownership of Britain's publicly quoted companies is being given up to foreign, private equity and speculative ownership to the disadvantage of the pension savers that once owned them. That doesn't look healthy to me.

Manufacturing jobs

The TUC touched a raw nerve with its lament last week that 750,000 manufacturing jobs have been lost since Labour came to power. Today marks the start of the counterattack.

At a TUC-sponsored conference, Patricia Hewitt, the Trade and Industry Secretary, plans to lay into the "doom and gloom" mongers in the union movement for giving the shopfloor a bad image. Right behind her in the queue will be the Engineering Employers Federation, telling the TUC to wake up and smell the axle grease.

The numbers themselves do not lie. Since May 1997, manufacturing employment has dropped from 4.2 million to 3.4 million and yesterday there was a further decline in manufacturing jobs to go alongside a surprise upward blip in unemployment.

Yet as John Philpott at the Chartered Institute of Personnel and Development points out, whilst manufacturing employment is going down, manufacturing output is going up, demonstrating that British industry may at last be getting to grips with its great bugbear ­ poor productivity.

The TUC wants more state aid and more tax breaks. Unfortunately, jobs created by state aid tend not to outlive the taxpayers' subsidy. In the end, the only jobs that stand the test of time are those which create real wealth. The TUC will have to get used to the fact that this requires fewer hands but increasing amounts of brain power.

It is a hard message for the trade unions to take on board and an even harder one for a Labour politician to deliver. At least Ms Hewitt can take comfort in the knowledge that Labour still has a long way to go before it emulates Mrs Thatcher, who managed to get rid of more than two million manufacturing jobs before she lost her own one.

jeremy.warner@independent.co.uk

Comments