Michael Harrison's Outlook: Smart idea would be to say auf Wiedersehen

Go-Ahead reckoning - Digital divide - Cash shells
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The Independent Online

The smart move might have been to stop production, draw a line under the losses and drive on. But Jürgen Schrempp, the boss of DaimlerChrysler, is not the sort to admit defeat easily. Ever since he bulldozed through the value-destroying merger of Mercedes Benz and Chrysler in 1998, the result has resembled a slow-motion car crash. But like a crash-test dummy, Daimler keeps coming back for more punishment. The Smart is the small car with the very big losses. Since production began eight years ago, it is reckoned to have lost the company €2.5bn (£1.7bn). The overhaul announced yesterday will cost a further €1.2bn. If Smart achieves its new target of making profits from 2007 onwards, then the gamble will just about have paid off. But there remains a strong argument that Daimler would have been better off to take the pain now of complete closure. That, however, is not the Schrempp way. His ego is as large as the Smart is small.

The smart move might have been to stop production, draw a line under the losses and drive on. But Jürgen Schrempp, the boss of DaimlerChrysler, is not the sort to admit defeat easily. Ever since he bulldozed through the value-destroying merger of Mercedes Benz and Chrysler in 1998, the result has resembled a slow-motion car crash. But like a crash-test dummy, Daimler keeps coming back for more punishment. The Smart is the small car with the very big losses. Since production began eight years ago, it is reckoned to have lost the company €2.5bn (£1.7bn). The overhaul announced yesterday will cost a further €1.2bn. If Smart achieves its new target of making profits from 2007 onwards, then the gamble will just about have paid off. But there remains a strong argument that Daimler would have been better off to take the pain now of complete closure. That, however, is not the Schrempp way. His ego is as large as the Smart is small.

If the diminutive motor was the only spot of trouble under the Daimler bonnet, it would not be so bad. But the engine is misfiring on several cylinders. Mercedes, once a byword for quality, has slumped to the lower regions of the JD Power reliability survey, the bible of the US auto industry.

It began with the A-class, Mercedes' misbegotten attempt to establish a presence in the super-mini sector of the market. There then followed a less than convincing entry into the sports utility sector with the grisly M-class. Now the disease has spread to Mercedes' bread and butter saloon, the E-class, culminating in this week's recall of 1.3 million cars to replace faulty electrical and braking circuits.

Meanwhile its arch rival BMW has quietly overtaken it on the inside lane, outselling Mercedes last year for the first time in its history. The shares are performing as sluggishly as the product and fell again yesterday after the profits warning tucked inside the Smart announcement.

Having ousted the top brass at Chrysler within 12 months of the so-called merger of equals, Herr Schrempp has no one to blame but himself. So far he has been impervious to criticism or self-doubt, even when the cost of cleaning up Chrysler resulted in Daimler reporting the biggest loss in German corporate history.

If this were an Anglo-Saxon business, the Schrempp era would by now be ancient history. As it is, he chugs along. But how much longer before the shareholders finally say auf Wiedersehen?

Go-Ahead reckoning

Go-Ahead, the operator of the Thameslink rail franchise, has been very generous with boardroom salaries and share options over the years. Its directors, who also own substantial stakes in the company, have benefited additionally from handsome dividends. In February the interim payout was increased by 36 per cent and investors were further rewarded with the promise of an £80m share buy-back.

Passengers, however, have waited in vain for their dividend for nine long years. Appalling levels of punctuality, abject standards of customer service and overcrowded and shabby rolling stock have justifiably earned Thameslink its reputation as the country's worst commuter railway.

Yesterday, the company's investors and directors paid the wholly predictable price when the Strategic Rail Authority decided that from next April someone else will run Thameslink services. To rub salt in the wound, Go-Ahead was also excluded from bidding for the new Greater Western franchise which begins operations in a year's time.

If ever there was a chicken coming home to roost, then this was it. Keith Ludeman, the chief executive of Go-Ahead's rail division, succeeded in ruffling more feathers with his highly vocal and public criticisms of the way the SRA has taken to micro-managing rail companies. He recently suggested that a strimmer be taken to the regulator's new franchising agreements.

This cannot have won him many friends at the SRA but the root cause of Go-Ahead's failure to retain Thameslink was its inability to provide a decent service. The inadequacy of its past performance has deprived it of future business. While profits marched ever upwards and the dividend tap stayed turned on, investors chose to ignore the trouble that Go-Ahead was storing up for itself.

Yesterday the shares lost 7 per cent of their value and there could be more pain to come if Go-Ahead also fails in its bid for the new Integrated Kent franchise. The strimmer is indeed in operation but it is Go-Ahead which is being cut down to size.

Digital divide

Another day and another empty soundbite from New Labour. Patricia Hewitt has declared her determination to close something called the "digital divide" which is the gulf apparently between those who have internet access and those who don't. What's more she has come up with a seven-point action plan to turn it into reality.

The idea is to ensure there is universal access to online services in every region of the country within three years. That will involve plugging every school pupil in the land into a laptop to help with their homework. There's also a plan to create "communal access points" to aid learning and guidance promised on public sector broadband content procurement. Naturally, there's no mention of what this will cost and whether there is any government money upfront.

Tony Blair put his name to the document, promising to "create a country at ease in the digital world" but he couldn't make the launch. Perhaps it's just as well. He might have been asked what happened to New Labour's great pact with BT before the 1997 election to connect every school and library in the land to broadband. Did they ever actually deliver? Presumably not, which is why we have a digital divide still to close.

Cash shells

No one floated a cash shell on the AIM market yesterday, compared with about five a day earlier in the week. That should count as a success for the London Stock Exchange, which yesterday imposed new rules to deter shells and protect the good name of the market.

In many instances, shells are simply get-rich-quick schemes for directors and their friends. Founders can receive shares at a knock-down price before a flotation at a higher price and - with a light dusting of bulletin board hype - an immediate premium in the after-market. A shell might lie dormant for years while managements harvest a fee for limited efforts to find an acquisition.

The new rules will dramatically cut the number of shells coming to AIM, it is true. The requirement to raise £3m on flotation puts them out of reach of many small-time chancers. But the rules have strange wrinkles, not least of which is the requirement for existing shells to make a major acquisition within 12 months, which ought to make for some desperate deals in 11 months' time.

And the exchange ought not see the rules as an alternative to demands for greater disclosure in prospectuses. The price founders have bought shares at ought to be more clearly signposted, so potential investors can measure their greed. Investment strategies need to be clear on flotation and adhered to. AIM will always have a "buyer beware" policy, but it must also have a policy to make sure the buyer can be aware.

m.harrison@independent.co.uk

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