Distinguishing fact from fiction in BT merger
Friday 22 August 1997
It was a statement quite at odds with what has generally been appearing in the press over the past week or so. Fearing that the market was being manipulated into believing the wrong thing, that's why BT put it out. So where did all these stories come from that the two sides were close to agreeing the go-ahead on the same terms? The finger must obviously point towards the arbs, who have big money riding on such an outcome.
On the face of it, this was a deal that looked liked an arbitrageur's dream. Because there was some possibility that regulators would scupper the deal, MCI stock was trading at a discount to the value of BT's share offer. Buying MCI and shorting BT therefore looked like a sure-fire way to make money. From George Soros to Goldman Sachs and Salomons, every arb worth the name has been playing the opportunity for all its worth.
Then with MCI's spot of bother in local telecommunications, it all went horribly wrong. With BT threatening to pull out if the terms were not renegotiated, it suddenly looked as if the deal really wouldn't happen after all. Since then, it has obviously been in the interests of the arbs to talk down this possibility. The more the market believes it will happen, and on the same terms as before, the better the chance of unwinding these positions without serious loss.
If that is what was happening, it has badly backfired. The effect of yesterday's statement was to send MCI stock slumping even further and BT shares soaring, putting the arbs even more seriously into loss. Nobody is going to shed much of a tear for the punishment Mr Soros and others are taking. This is "risk" arbitrage, after all, and big losses come as much with the territory as big profits.
But it does rather point up the difficulty of distinguishing fact from fiction in markets these days. Perhaps it was ever thus. The existence of such big players in the markets, however, does seem to have made it rather worse. The market speculation and press reports that had BT pushing ahead on the same terms in return for a rethink of MCI's investment strategy seem to have been just plain wrong. So wrong, in fact, that BT's lawyers had to insist on a statement of clarification being made to the Stock Exchange.
So what is going to happen? The odds on this merger going ahead at all seem to have lengthened quite markedly following yesterday's statement. If BT is still pushing for lower terms, the implication is it no longer thinks MCI is worth what it was originally offering. MCI plainly thinks otherwise and is sticking to its guns.
It would be a dreadful humiliation for Sir Iain Vallance and Sir Peter Bonfield to pull out altogether, but by the same token they will be punished for overpaying. Since MCI seems to be in no mood for compromises, it is hard to see how this impasse might be resolved. One way or another, both the big proposed transatlantic business alliances - British Airways with American Airlines, and British Telecom with MCI - seem to be running into the sands.
Raising pensions for all is not a sensible idea
Newspapers will always need something to sustain them through the barren summer months; the Whitehall policy option document generally makes a reliable fallback. However absurd or whimsical the idea, a civil servant will at some stage have written a paper on it, thus allowing newspapers to write, with truth, that ministers have considered it. Thus we had the Guardian this week splashing on a story that ministers were considering reintroducing the state pension's link with growth in average earnings. This was abolished in 1980 by Margaret Thatcher in favour of a simple link to prices.
Earnings tend to rise faster than price inflation, so it actually makes quite a difference. The basic state pension would now be 32 per cent higher than it is had the earnings link been maintained.
Since Lady Castle and other Old Labour troopers have been lobbying for restoration of this perk ever since Mrs Thatcher removed it, Harriet Harman was almost bound to consider it as part of her pensions review. This is the sort of thing that sends civil servants wild with frustration, for it amounts to an instruction to cost and draw up proposals for funding something ministers are never likely to do. Or at least if they are going to do it, they will truly have lost their marbles.
This is not just because of its costs, or because it would go against what every other government in Europe is doing. In an effort to get to grips with the rocketing costs of pensions, even Germany is in the process of removing the link with earnings. As it happens, the cost of restoring the link in Britain, although high, is not prohibitive, if only because state pension benefits are so miserly.
According to the Institute for Fiscal Studies, the effect would be to raise the cost of the state pension by 2030 from pounds 42bn annually to pounds 72bn.
Though this sounds a lot, it shouldn't make any difference to the taxpayer; as a proportion of income, the costs of funding the state pension remain broadly the same ignoring demographic factors, since incomes will be rising at the same rate as the pension. As things presently stand the cost of the state pension as a proportion of income will shrink quite significantly.
So in theory this is by no means an unaffordable thing to do. But is it something anyone would want to do? If the Government is going to raise an extra pounds 30bn a year, does it really want to spend it on the basic state pension?
Obviously not. The spread of wealth and income among pensioners these days broadly mirrors the spread elsewhere in society. There are well-off pensioners, for whom this change would make little difference, badly off pensioners, for whom it would make some difference, and poverty-stricken pensioners, for whom it would make a sizeable difference.
It is impossible to escape the conclusion that the way to tackle the pensions problem is not through pay-as-you-go state arrangements, but through the introduction of some form of compulsion in the savings market. Plainly the benefits of any compulsory funded arrangements are going to take time to feed through to the pensioner's pocket.
In the meantime the Government needs to find ways of targeting state benefit at less well-off pensioners. Raising the basic state pension for all beyond the rate of inflation is not a sensible use of government money. And to tell the truth, the poor civil servant instructed to draw up this particular policy option document will already know that a snowball in Hades would stand a better chance than this of seeing the light of day.
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