<preform>Jeremy Warner's Outlook: Hedge funds may hold key to M&S's future</preform>

Collins Stewart/FT; Equities becalmed; Triple witching
Click to follow
The Independent Online

Marks & Spencer's fate may end up being determined by what happens to the company's share register between now and 6 August, the deadline imposed by the Takeover Panel for Philip Green either to put up or shut up.

Marks & Spencer's fate may end up being determined by what happens to the company's share register between now and 6 August, the deadline imposed by the Takeover Panel for Philip Green either to put up or shut up.

Long gone are the days when takeover battles would be decided by gentlemanly argument with a well defined set of shareholders who could be presented to and lobbied in a structured way. Today it's hard for a company to know who its shareholders are at all. The rise of the hedge funds and other short-term speculators, trading in and out of the stock, often using derivative instruments such as "contracts for differences" (CFDs), has given unprecedented fluidity to the shareholder base of most big companies.

The effect may be to give Philip Green's bid for M&S the piston it needs to succeed against an intransigent board. The short-term traders are in it only for the turn. If Mr Green walks, they'll get burnt, for their trading strategies are dependent on Mr Green's proposed £4-a-share bid eventually being recommended by the board. Yesterday Mr Green announced that he had the backing of hedge funds representing 7.9 per cent of the stock for the due diligence he's demanded as condition of his bid. As the weeks progress, there is a real danger for M&S that this already substantial constituency of holders will grow, until it reaches a level where the board is forced to engage with Mr Green.

One problem with these positions is that they carry no votes. A contract for difference is only the right to the upside in shares held by somebody else. Even so, the more powerful the hedge funds become, the more difficult it is for the board to resist. It's a massive gamble for the speculators, for as things stand, the bid is heading for failure. Mr Green says he'll only bid if the board recommends, and the board says it won't. Mr Green has also said his bid is final, so he cannot raise it further to win a recommendation without incurring the wrath of the Takeover Panel.

The more shares the speculators buy to force the board to come to water, the bigger the gamble becomes. This is poker on a grand scale.

Collins Stewart/FT

It is comparatively rare for a libel action between a big, publicly quoted company and a national newspaper to go all the way to the High Court, if only because of the punishing legal costs of doing so. Normally such matters are settled well before in a manner which allows both sides to walk away without undue loss of face. It is generally only with celebrities and politicians, where there is a good chance of salacious copy, that newspapers will want to have their week in court, and even here the appetite for such confrontations has faded in recent years.

But when the national newspaper in question is the City house journal, The Financial Times, and the company is one of the Square Mile's fastest growing independent investment banks, it is virtually unheard of. The FT is simply not meant to get into irreconcilable stand-offs with the companies is it supposed to be writing about. Moreover, it hardly ever pays for companies to get into a serious fight with the media, however unfairly they have been treated. Ill feeling is created, which is bound to be damaging to the company's PR.

Unfortunately, that's precisely what's happened with Collins Stewart. This is in part because Terry Smith, the stock and money broking firm's pugilistic chief executive, is absolutely determined to have satisfaction. He wants his day in court, and won't settle for a penny less than the record £240m in damages he has claimed - unless, of course, Pearson, the FT's owner, would like to give him the newspaper instead. He believes passionately he has been wronged, and wants vengeance.

The case concerns a former analyst, James Middleweek, who was sacked for alleged misconduct. Mr Middleweek countered by alleging all kinds of naughties at Collins Stewart, which the FT regurgitated more or less in full, claiming that the document containing the allegations carried legal privilege. Few other newspapers took the same view. So instead it is forced to rely on "public interest" privilege, which is a notoriously difficult defence. As for the truth or otherwise of the allegations, they seem to have got lost somewhere along the legal wayside. I'm not sure the FT intends to argue that kind of justification at all. Nobody believes Mr Smith can win £240m in damages, a figure which is arrived at by simply calculating the company's loss of stock market value relative to peers over the period after the articles were published. But if this does go the full 12 rounds, then one or other of them will end up pulverised, if not completely out for the count. Ding, ding.

Equities becalmed

The London stock market has stalled badly over the last month, with the FTSE100 index falling back to below where it was at the start of the year. Is this just "sell in May" summer blues, with a robust pick-up in prospect from the autumn onwards, or is there something more sinister at work?

Recent falls have been unnerving, yet the really striking thing about equity markets since the start of this year is just how stable they have been. The FTSE100 has been trading up and down within a tight, 8 per cent band, for seven months now, which I'm told is one of the longest ever such periods of relative tranquillity. Normally, the stock market is more volatile. The downward lurch of recent weeks isn't therefore anything to get too worried about just yet. The FTSE100 was lower still since the beginning of the year.

Stock markets are influenced by all kinds of factors, but in the end it comes down to just one thing - what investors think is the outlook for corporate profits. The worry is that we've already had the best of the recovery in earnings. No one's too sure where they head from here. With interest rates rising, and governments around the world beginning to rein in on public spending after a prolonged period of profligacy, it's hard to see much beyond the next few months.

Add to that a still high oil price and fears that the Chinese economic miracle is at the very least going to take time out, if not stall completely, and it is easy to see why investors are holding off. Yet personally I'm staying with the bullish stance I adopted three months ago. Nobody can tell you with any certainty where the stock market is heading in the short term, but on any long-term perspective, the fundamentals continue to underpin a positive view.

We are very probably already at the stage where the economic recovery in America and Britain is self sustaining. Interest rates are rising, but even here in Britain where rates are historically quite a bit higher than anywhere else, the base rate is unlikely to peak at any more than 5.5 per cent in the present cycle, and I'm sceptical it will go even as high as this. The only circumstance in which it might go higher still is if growth accelerates markedly again, and if that happens, then I imagine the stock market will be motoring with equal vigour.

Triple witching

It's triple witching hour on Monday, with one of the most highly charged conflations of economic and corporate news stories we've seen in years. Stuart Rose is going to have to deliver the presentation of a lifetime if he's to see off the unwanted attentions of Philip Green. Just down the road, the Sainsbury annual general meeting promises a humdinger of a row over the board's decision to pay its ex-chairman, Sir Peter Davis, a £2.4m bonus ahead of a year when profits may halve. If you've still got the stamina for it, the chancellor's spending review is published in the afternoon. A day of storm force 10 winds is promised. As ever, the best coverage, analysis and comment will be found here on these pages.