Outlook: Paying back capital the Marks & Spencer way

Andersen lessons; Talking to God
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Companies that end up in possession of large amounts of surplus capital, either by selling assets or by generating it in the normal course of business, nearly always end up squandering it. Which is why so many companies are under pressure to return their cash piles to shareholders, rather than spending it themselves. The market is much better at allocating spare capital than managements are, the theory goes, and generally speaking it is right.

Even the mighty Microsoft is being urged to start paying out from its vast reserves of cash, this despite the fact that Bill Gates can reasonably claim to have generated more value for investors than any other businessman alive.

These things go in cycles, of course, and it wasn't that long ago that investors were saying "please don't pay us a dividend" to the likes of Marconi and British Telecom; you just go and spend it on whatever hare-brained internet or mobile phones strategy takes your fancy. Today they'd rather have the cash than the risk, thank you very much.

Paying back the capital isn't always as simple as it seems, however, so two-and-a-half cheers to Marks & Spencer for coming up with a reasonably fair and transparent way of doing it. Instead of the usual buyback, which generates commission for the investment bankers but can often seem like a complete waste of money to small investors, a special class of share is being created, redeemable for cash. If you've used up your capital gains tax freedom for this year, you can redeem at a later date. M&S isn't the first to try such a mechanism, but it may have set the pattern for others.

Andersen lessons

The Enron collapse took place in early December under cover of the Afghan war and it is only now, with the conflict largely over, that the affair is getting the public exposure it deserves. What has emerged is a scandal on two levels. On one level, it is a story about Enron's corrupting political influence. Crony capitalism, legalised bribery, call it what you will, but Enron has exposed a disturbing corrosion at the heart of the American political system.

Enron seems to have bought legislative favours and political influence on an hitherto unprecedented scale. The only thing that has prevented it damaging the Bush administration more than it has is the apparently indiscriminate nature of the process. Democrat or Republican, judge or regulator, if you weren't on the Enron payroll in some shape or form by the end, you'd want to know why, because just about everyone else of influence in Texas and Washington was.

For most ordinary Americans, the sheer scale of the cash for favours endeavour will none the less come as an eye opener. More extraordinary still, it was all, as far as we know, perfectly legal and, provided you knew where to look, publicly disclosed.

It is hard to say the same about the accounting scandal which lies at the heart of the Enron collapse, and it is perhaps here that the affair will have its most lasting repercussions. It may be alarmist to believe Andersen is finished as an accounting practice, but what self respecting Fortune 500 or FTSE 100 company is going to want to have Andersen as auditors after this?

For the record, only Amvescap among Andersen's six FTSE 100 clients seems to be in the least bit concerned. British Sky Broadcasting and the others profess themselves either to be happy or non committal, but assuming they are not the kind of companies that would regard the shredding of evidence as a positive boon, that's only because they haven't thought through the implications.

The key point about the Enron scandal is that the accounts were a fiction and couldn't be trusted. Management pretended that the company was a much more successful and financially robust enterprise than it was. What's more, we now know that at some level or other Andersen was complicit in this cooking of the books and was aware of its dangers. If the capital markets begin to believe that accounts audited by Andersen bear no relation to reality, that reflects badly on its clients, regardless of whether it's true or not.

Cynicism about audited accounts has long been rife. It's hard to recall the last time a big company had it's accounts qualified, giving rise to the view that they are always to some degree the result of compromise between management and auditor. For better or worse, they are none the less all that investors and creditors have to assess a company's financial affairs, and as such they are one of the cornerstones of the free-market capitalist system.

As it happens, Britain seems to be ahead of America in imposing adequate standards and ensuring their professional application. In the 1980s and early 1990s, Britain had a whole host of collapses from BCCI, Robert Maxwell and Brent Walker at one end of the scale to Coloroll and Burnett & Halamshire at the other. All involved audit failure to some degree and reform was swift to follow.

That doesn't mean the British audit is perfect. There's almost certainly a British Enron out there somewhere waiting to happen. Even so, there are in Britain standards already in place to address off-balance sheet finance, connected party transactions and other accounting fiddles that enabled Enron to maintain its pretence of rapid, conservatively financed growth.

New international standards are now inevitable. Measures to prevent auditors becoming too close to their clients also seem likely, in particular defined-term audit contracts so that auditors are changed every so many years, and a crackdown on consultancy work for audit clients. And the profession will find it hard to resist a higher degree of external regulation. Enron is proving a humbling experience for all concerned, but it could yet prove a cathartic one as well.

Talking to God

Talking to God on the big white telephone has taken on an entirely new meaning following the announcement that Thames Water and Lattice are planning to pipe broadband telecom services direct into the office via the loo – well, the sewer system to be precise.

It's a dirty job but someone has got to do it. By not having to dig up the roads, the two partners reckon they can cut the conventional cost of laying broadband networks in half and give BT a run for its money in the process. Most alternative telecoms carriers have had to rely on BT for their "last mile" connection to customers. But Urband, the name for the new Thames/Lattice service, will give them a choice, at least in London, where the network is being laid first.

Given that most alternative network operators are struggling to survive in today's austere environment, and that for the time being capacity far outstrips demand, Thames and Lattice might reasonably be thought to be throwing their money down the drain. Thames is now part of the German utility giant RWE and Lattice is the parent company of the gas pipeline operator Transco. Both of them sometimes seem to have more money than sense.

Then again, where there's muck there's sometimes brass. Even in markets where there is overcapacity, nimble operators can make a buck provided they act quickly and offer a cheap enough service. Just look at Ryanair, which is expanding like topsy in a falling market. Another 75 jets are being bought from Boeing today to prove it.