Jeremy Warner's Outlook: Warner Music marshals Pac Man defence in bid to see off EMI. A partnership made in hell

Stan Life: unwanted and undervalued; Turkey: a harbinger of things for the US?
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The Independent Online

The Pac Man defence makes its return. Named after the computer game in which the monster you are pursuing all of a sudden turns around and eats your monster instead, the idea is to counter an unwanted takeover bid by turning the tables and bidding yourself. The flaw in the strategy is that the moment the Pac Man defence is deployed, the industrial logic of the deal has essentially been recognised. The only remaining question is who ends up eating whom.

The same question now confronts shareholders in EMI. On and off, their company has been trying to merge with Warner Music for more than six years now, but one way or another they seem quite incapable of pulling if off. It was competition regulators that thwarted them first time around. The remedies demanded in terms of asset disposals were so harsh that it simply wasn't worth proceeding. The subsequent merger of BMG and Sony, in combination with the way in which the industry has been structurally transformed by music downloads, has encouraged Eric Nicoli, the EMI chairman, to believe that these days regulators might prove more amenable.

Unfortunately for him, there's also since been a change of ownership at Warner Music, now headed by the redoubtable Edgar Bronfman. He's already made himself and his backers a fortune with his private equity buyout of the company. He's on a roll, and although he recognises the synergies and cost cuts that could be derived by merging with EMI as well as any, he's not about to be taken over by anyone. EMI's $31 a share bid has therefore been countered by 320p a share cash offer back by way of raspberry.

Since both these offers are dependent on board recommendation and due diligence, which neither party is willing to give, we seem to have reached something of an impasse. In the great bulk of takeovers, it is shareholders in the company being taken over that gain most of the transaction. The premium required eats up all the synergies, leaving nothing or worse for investors in the acquiring company. On this basis, Mr Nicoli should be scrambling to accept Mr Bronfman's cash.

The EMI share price has been much higher than this in the past, but not for some years now. And although it is fashionable to believe the worst may already be over for the music industry from piracy and illegal downloads, digital music is still only in its infancy.

One thing we do know about downloaded music is that it is much lower margin than CDs. The music industry may therefore have a very considerable further structural adjustment still to come. Would it now be better simply to take Mr Bronfman's money and run? One difficulty Mr Nicoli has in countering this argument is that he is asking for the City's support through a rights issue to fund his purchase of Warner. Mr Bronfman, by contrast, seems to have persuaded his backers that the whole deal can be financed with debt. His financing is therefore more obviously secure, even if in practice it is much higher risk.

You say either and I say eyether, you say neither and I say nyther; either, eyether, neither, nyther... Maybe they should simply call the whole thing off.

Stan Life: unwanted and undervalued

I'm a bull of Standard Life, which floats on the stock market shortly. This is not because Standard Life is an outstanding life assurer. To the contrary, it is hard to point to anything in the company's recent years that counts as industry leading success.

Instead, there has been a litany of mistakes which on occasions came close to plunging the Edinburgh-based society into a similar state of financial ruin to that of Equitable Life. In The Leviathan, Thomas Hobbes describes the life of man as "solitary, poor, nasty, brutish, and short". Given the history, the same might reasonably be thought to apply to Standard Life's likely existence as a publicly quoted company.

Yet this in itself provides a buying opportunity. The City has already beaten the company down to an absurdly low valuation in the book building process. At the mid-point of the 210p-270p range, the company would be priced at little more than embedded value.

Other life assurers trade at a significant premium. The discount might seem to be justified by Standard's lack of experience as a fully commercial company. As a mutual, it was Standard Life's habit to buy business by offering overly generous commission. Risk control in the life fund was also lax compared with rivals. Has Sandy Crombie, the chief executive, yet achieved the change in corporate culture necessary to make Standard Life fly as a publicly quoted company? Despite his Damascene conversion to the idea of a stock market listing, it is not clear that he has. The mutual tradition is not so easily killed off.

Yet the assumption must be that there is at least progress. For the City to be valuing Standard Life, still, despite its travails, a powerful brand which attracts a surprisingly high degree of public trust, on the same basis as the price recently paid by Resolution for the closed life funds of Abbey National really does seem someway anomalous. Investors were perfectly happy to put up money for the pile of junk that Resolution is buying, yet they baulk when it comes to paying the same for the faded old master that is Standard Life.

The London IPO market is said to be in effect closed for the summer because of poor investor demand. But this is ridiculous. Now at bargain basement levels, the Standard Life valuation makes no sense. It also suggests plenty of upside in the price once it starts trading.

Members and customers are being offered a 5 per cent discount on any shares they purchase over and above those they are entitled to as members. In addition they get shares to the value of a further 5 per cent in a year's time. Subscriptions close next Wednesday. Many Standard Life policyholders will feel so disillusioned with the company that the very last thing they would want to do is buy extra shares in it. This would be a mistake. To me, the offer looks a no brainer.

Turkey: a harbinger of things for the US?

It seems like only yesterday that we were in the midst of the greatest emerging markets boom of all time. Come to think of it, yesterday is about right. With frightening speed, the optimism of just a few months back has turned to a mood of deep gloom and crisis. Nowhere is this more more apparent than in Turkey, which yesterday raised interest rates for the third time in a month in an effort to defend the currency and fight rising inflation.

What's going on here? Comparisons are already being made with the emerging markets crises of the late 1990s, but although there are similarities, it is the differences which are more striking. The emerging market traumas of the 1990s began as banking crises and took in whole regions. The latest outbreak are fiscal, economic and debt related and tend to be confined to countries with large current account deficits.

These deficits were tolerated as long as money was plentiful and emerging markets were the investment fashion of the moment. Billions of dollars of foreign money have poured into the Turkish government's various privatisations and infrastructure programmes. As money becomes tighter, and liquidity is withdrawn from global markets, these countries no longer seem so attractive.

The lifeblood of foreign money which sustained the deficits is now fast being withdrawn, causing currencies to collapse. With characteristic disregard for the socioeconomic consequences, never mind the geopolitical ones in a region as sensitive as Turkey, global capital markets have turned off the taps.

At this stage, the effect remains largely locally contained. Some investors will lose a great deal of money, but not enough to cause wider systemic damage. But what happens when the capital markets turn their attention to the biggest debtor nation of them all - the United States? This is the $64,000 question of economics today. We had just better pray that the consequences are not as proportionately great as what is happening to Turkey.

j.warner@independent.co.uk

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