Jeremy Warner's Outlook: Pru's Mark Tucker left with egg on his face after costly about-turn in selling internet bank

Microsoft has big hopes for Vista; British Airways averts strike threat
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The Independent Online

Mark Tucker, chief executive of Prudential, was putting as brave a face on it as he could, but there is little doubt that, in selling Egg to Citigroup, he has performed what David Miliband, the Environment Secretary, might have called "a vaulting, full-on, 180-degree U-turn". Little more than a year ago, Prudential bought out the 21 per cent minority at a valuation which is getting on for double what he is now selling the internet bank to Citigroup for.

The much lower carrying value of the majority holding means that when Prudential comes to publish its accounts, it will be able to show a £255m profit on the deal. The price is around two times book value, which for a bank that lost £145m last year, is not bad.

Yet this fails to disguise what is a really quite humiliating climbdown for Mr Tucker. The minority was bought in pursuit of a multi-brand strategy similar to that so successfully applied by HBOS. To be forced into retreat so soon doesn't look good. Wouldn't it have been better to have sold sooner? Mr Tucker makes the point that selling the majority was not an option when he bought the minority as there were no other buyers around.

What's more, Citigroup has signed a five-year contract to extend present cross-selling arrangements between the Pru and Egg. That's got to be worth something. Whether it is worth the difference between what Prudential is getting for Egg now and the £1bn offered by Royal Bank of Scotland a couple of years back - admittedly before Mr Tucker's time - seems somewhat doubtful.

It's all very well to cite deteriorating credit quality - much of Egg's push into consumer lending seems to have been sub, sub-prime and very poorly monitored indeed - but Pru must have been aware of these risks when it bought. Mr Tucker perhaps deserves some credit for grasping the nettle and admitting he was wrong. Buying out Egg was his first big call after becoming chief executive. It's brave of him to cut his losses and reverse ferret so quickly.

Even so, in combination with new-business figures which compare quite poorly to what rivals have been announcing, the sale can only revive questions about the future of Prudential's UK business more generally.

This is currently under review by Nick Prettejohn, head of the UK operation. I continue to be somewhat suspicious of calls in the City for the Pru to break itself up by selling the rest of its UK business too. Pru has struggled in the UK over the past ten years. A once-dominant position in sales of long-term savings products has given way to that of just another also-ran.

Yet many of these calls come from rivals keen to play out what would be one of the biggest consolidation opportunities in years. It is hard to imagine the Pru without its UK franchise. What would the company stand for? The God of shareholder value will eventually decide the issue, and if there is anything to be salvaged from yesterday's climbdown, it at least shows that Mr Tucker is unsentimental about such matters.

In any case, the bigger story is perhaps the push by Citigroup further into the UK retail banking market. Citigroup already has a credit card, current account and sub-prime lending business. It also has a small number of branches.

We can now expect to be hearing a great deal more of Citigroup in the UK, much to the horror of incumbents, who are already seeing market shares eroded by the aggressive expansion of HBOS. Egg has so far disappointed those who thought the internet would sweep the old banking cartel away. It began life as a deposit bank, which Pru hoped would provide a new distribution channel for its other savings products.

Yet all it attracted was the "rate tarts", who were about as sticky as a wet fish. They were pleased to take Egg's relatively high rates of interest, but very little else, and when rivals started to offer better, they just went elsewhere.

Egg also has no current account business to speak of, which is probably what has caused its problems with unsecured consumer lending. Without the intelligence a current account provides on customers, there is no reliable way of judging credit-worthiness. With Citigroup's balance sheet and expertise behind it, Egg may quickly become a more serious and credible proposition.

Microsoft has big hopes for Vista

Bill Gates is in London this morning to launch Microsoft's new operating system, Vista, complete with an updated version of Office. Yet there will be no queues round the block for this one, which is a comparatively low-key launch with little of the build-up or razzamatazz that greeted, for instance, Windows 95. Even Mr Gates concedes that the take-up will be more gradual, though counting new computer sales he still expects most PCs to be Vista-enabled within a year.

All the same, to judge by the rise in the Microsoft share price over the past six months, investors think Vista a life saver. At the very least, the upgrade ought to give a significant short-term boost to revenues. Early experience of Vista - it has already been quite extensively rolled out prior to the official launch - suggests a considerable improvement on XP. Many of the things that had to be downloaded separately on XP are built into Vista, which is a lot more user-friendly and organised in its approach. It also promises to be less vulnerable to all those pesky bugs and crashes. We'll see on that front.

Yet even if Vista enables Microsoft to maintain its near-monopoly in desktop operating systems, the company is plainly losing the battle quite seriously in the potentially much larger market of the internet.

My father, who was a computer software pioneer, first started saying more than 15 years ago, before the internet in its modern form was even invented, that networking would ultimately destroy the Microsoft desktop monopoly. He was somewhat ahead of his time, I fear, for although the old bones are creaking badly, the industry dinosaur still looks pretty dominant to me. Yet interestingly, it is the growing power of Google which today exercises anti-trust regulators more. Microsoft is judged to be old hat.

The truth of the matter is that having crushed all opposition before it in browsers, Microsoft then lost sight of the ball. Microsoft was late into search engines, for which it is now paying the price. Nor, unlike Apple, did it spot early enough the market opportunities presented by music and video downloads. Even its dominant position in desktops, servers and Office is now under fierce attack from opensource software providers.

No one should ever underestimate Microsoft. It remains a considerable and hugely impressive company, which I imagine will remain so for a long time to come yet. All the same, the departure next year of its creator and driving force, Bill Gates, to devote himself full-time to his Foundation, will I am convinced come to be seen as a turning point for the company. Information technology is a hugely entrepreneurial, constantly innovating and intensely competitive industry. In the sweep of things, no single player is likely to remain dominant for long.

British Airways averts strike threat

British Airways shares went up yesterday on news of a peace deal with unions. Yet despite the fact that significant damage to the bottom line has now been avoided - the deal in any case came too late to prevent hundreds of cancellations - is this really the right response? BA's Willie Walsh has had to make significant concessions to avert a strike, including an inflation-busting pay deal of 4.6 per cent and a climbdown over sick leave.

With low-cost and emerging-market carriers snapping at his heels and a still-massive pension fund deficit to meet, this is a price which in the long term the BA chief executive can ill afford. Mr Walsh's predecessor, Sir Rod Eddington, was widely thought a great guy for navigating the airline through turbulent times, yet he ducked many of the things that need to be done to keep BA ahead of its game. Mr Walsh may be shaping up to be more of the same. The move to Terminal 5 at Heathrow next year provides the real test.

j.warner@independent.co.uk

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