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Decisions which should create world leaders

One of Michael Heseltine's most recent madcap ideas was to suggest to his officials that BT should take over the BBC so as to create a multi- media national champion encompassing both production and distribution. The suggestion was perhaps not meant seriously but it is indicative nonetheless of the President of the Board of Trade's approach to mergers policy; provided the deal creates a world leader capable of taking on the best of the foreign competition, anything goes. No-one should have been too surprised therefore by Mr Heseltine's decision to go against the majority recommendation of the Monopolies and Mergers Commission and clear GEC's bid for VSEL, Britain's obscurely named builder of nuclear submarines. This despite the fact that in the majority view of the MMC, it will lead to higher defence costs.

Trade Secretaries rarely do this kind of thing - the last time was eight years ago - and the incident was bound to provoke controversy. He may be justified, however. Sir Bryan Carsberg, the former director general of fair trading, made the case last week for taking politicians out of competition policy. The VSEL affair provides an excellent reason why this is both unlikely and undesirable.

The decision faced by Mr Heseltine was a difficult one, whichever way it went. On the one hand was the ambition of GEC to rationalise the warship yards and then the defence industry, leading long term perhaps to a merger with British Aerospace itself. On the other - if Mr Heseltine had found for the majority - was the status quo, leaving Britain's warship yards under three separate owners. This would have been a slap in the face for the Ministry of Defence and would have highlighted competition as the main thrust of defence procurement policy, rather than greater efficiency through rationalisation.

Mr Heseltine's less interventionist predecessors would probably have chosen to put competition above industrial strategy and rejected the GEC bid; his decision confirms a break with the past at the Department of Trade and Industry.

Under one version of the reformed competition regime advocated by Sir Bryan, these issues would be dealt with by experts at a new competition body subject only to appeal through the courts. Far better, in the real world, to know where the buck stops: a politician answerable to the electorate. In this case, Mr Heseltine's decision to side with two commission members against four is not the scandal it was painted in the Commons, but a reasonable assumption of political responsibility.

So who will win the new bidding war? Since the the two bids were put on ice by the referrals, BAe's share price has recovered, it has solved several outstanding industrial problems and stocked up its financial war chest. Even so, BAe will be fighting a company whose pockets are much deeper. The odds must be in GEC's favour. On the other hand Lord Weinstock is notoriously mean. If in the end he merely forces BAe to overpay, it may further his long term ambitions as much as an immediate VSEL victory.