Outlook: Logica falls prey to curse of New Economy - over-optimism

Britain's trade deficit; IPO gloom
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The Independent Online

Logica's fall from grace looks like a case of "Marconi: the sequel". Since December there have been three profits warnings, and with each passing statement, the over-optimistic forecasts with which the company started its financial year last July look more and more exaggerated. Investors have been hopelessly misled. Such is the degree of anger in the stock market about the consequent, calamitous decline in the share price that some go much further in their accusations. Top management looks to have been not just asleep at the wheel, but positively disingenuous in their view of the future.

Is Martin Read, chief executive, guilty as charged? The evidence certainly looks damning. Last July, the company predicted that revenues in the group's once fast-growing mobile networks division would increase 40 per cent over the year ahead. In December, that forecast was reduced to 30 per cent and in February it was slashed further to 10-15 per cent. Mr Read's latest prognosis is that the numbers will be down 15 per cent. After all that's happened, he might perhaps be wiser to admit he hasn't got a clue.

For all that, the calls for Mr Read's head echoing around parts of the City yesterday look misplaced. Logica is not another Marconi. Its core business of IT services is solid and successful, it's got no debt, it is cash positive and the dividend looks safe. The business that has caused all the trouble, mobile phone text messaging software, wasn't bought at an inflated price right at the top of the market, unlike most of Marconi, but was developed internally, and although it now seems to be disappearing almost as fast as it arose, Logica's inability to see the deterioration coming is at least understandable. In the late 1990s, the business doubled in size every year. Just as few foresaw the spectacular nature of the telecommunications boom, few anticipated the spectacular nature of the bust that followed either. Logica certainly didn't and even now it continues to live in hope that some of the big orders is was once anticipating will eventually come good.

Mr Read only has himself to blame for the dressing down he got yesterday. The Logica chief has a notoriously low opinion of investment analysts, and many of them are taking some pleasure in seeing him get his comeuppance. But to throw him overboard entirely just when the business needs him most would be unfair, unnecessary and very probably counter productive. Up until the last year, Mr Read's track record was pretty much flawless. Trained in the Weinstock school, Mr Read's management style is meticulous and dogged, perfectly suited, in fact, to the very difficult conditions he now finds himself in. What's more, IT services may in future come to be so much based around mobile telephony that to exit the mobile business entirely, as some in the City are now urging Logica to do, might prove ill advised.

After months of fighting it, Logica's ejection from the FTSE 100 is now inevitable. Mr Read's hope will be that away from the limelight and the demands of the City, Logica is able to become an ordinary business once more, and get on with what it does best – selling customised software systems. Mr Read and other overly optimistic New Economy CEOs make convenient scapegoats for financial markets attempting to deflect blame for the disaster of the technology bubble, but as we all know, it was much more complicated than that. The lesson to be drawn from the Logica débâcle is that managements should manage and analysts should forecast. Mr Read wouldn't be in this mess if he had stuck to the present and left the future to the City.

Britain's trade deficit

Time was when a trade deficit of the size announced yesterday would have triggered a fully blown sterling crisis. These days it produces barely a murmur of protest from the foreign exchange markets. In part, that's because the numbers aren't actually as bad as they seem. The deficit is a record, and the figure looks frighteningly large, but relative to the size of the economy, it's much smaller than the deficits run up in the 1970s and 1980s.

What's more, deficits are much more easily funded by movement of capital than they were in the past. The deficits of history were real imbalances. If a country was importing more than it was exporting it was not paying its way and it would be punished in the foreign exchange markets until the imbalance was cured. These days, a deficit doesn't matter as long as foreign investors are prepared to fund it with inflows of capital. None the less, the latest figures contain some worrying features, not least the burgeoning size of the deficit with Europe.

The strength of the pound against the euro in combination with Britain's runaway consumer boom is causing us to buy more from the Continent and export less. The effect is that companies interested in fully exploiting the opportunities of the single European market will eventually start shifting capital and investment to the Continent. Britain won't look like such a great place for foreign capital any more and the currency will sink. So perhaps the old rules of economics haven't been entirely suspended after all. The short, sharp, shock of a currency crisis may be a thing of the past, but a longer, drawn-out currency correction looks all too possible.

IPO gloom

The window for IPOs, which lurched open only a few weeks ago, is suddenly letting in a good deal less light. So much depended on the performance of HMV Group and, with shares in the music retailer trading at an immediate discount to the issue price, people are rightly feeling nervous. This is unfortunate because there are an astonishing number of new flotations waiting their turn on the slipway. After HMV comes Punch Taverns, Wood Group and Intertek in the next few weeks. Also waiting their turn are Focus Wickes, William Hill, Yell, Homebase and Burberry.

Can there really be room for them all? The short answer is probably not. At least one of these big listings is likely to be pulled. Some have already decided that discretion is the better part of valour. Jessops, the camera retailer, ditched the idea of an IPO a few weeks ago in favour of a trade sale. Spectel, an Irish communications company, scrapped its £50m float plans earlier this week.

What's the problem? The cash is there alright as we saw with the number of successful rights issues and placings earlier in the year. ICI, HBOS, Centrica and Imperial Tobacco all managed large fund raisings. But the markets were able to be choosy. We are likely to see the same picky approach with the new issues. With so many to choose from, investors can afford to be selective. At the very least they will be able to force issue prices to rock-bottom levels.

At that point it becomes a question of how desperate the seller is to get out.All too many scheduled IPOs are in the retail/consumer goods sectors, where the past year has been fantastic but the outlook is less certain. Punch Taverns is a collection of pubs other operators didn't want and Focus Wickes is hardly a stellar brand name in the DIY constellation. William Hill will have the benefit of scarcity and brand strength and so too should Burberry, as long as it doesn't try to push its luxury brand credentials too hard. But prices will be hammered low and some may find they are better off staging an orderly retreat with a view to trying again when the waters are calmer. It's going to be a rocky ride.

jeremy.warner@independent.co.uk

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