Distinguishing fact from fiction in BT merger

Already in a pickle over the BT/MCI merger, the arbitrageurs were put even more heavily in the red yesterday by a statement of clarification from the two sides. Far from being close to resolving their differences and ploughing ahead with the merger on the original terms, it appears the two companies are still poles apart. BT is continuing to push for renegotiation of the terms, to take account of the unexpectedly high costs of MCI's assault on the local telephone market in the US, and MCI is refusing to countenance any such thing.

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.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Books should be for everyone, says Els, 8. Publisher Scholastic now agrees
booksAn eight-year-old saw a pirate book was ‘for boys’ and took on the publishers
Life and Style
Mary Beard received abuse after speaking positively on 'Question Time' about immigrant workers: 'When people say ridiculous, untrue and hurtful things, then I think you should call them out'
Life and Style
Most mail-order brides are thought to come from Thailand, the Philippines and Romania
Life and Style
Margaret Thatcher, with her director of publicity Sir Gordon Reece, who helped her and the Tory Party to victory in 1979
voicesThe subject is being celebrated by the V&A museum, triggering some happy memories for former PR man DJ Taylor
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Day In a Page

General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
Public relations as 'art'? Surely not

Confessions of a former PR man

The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

Bill Granger's luxurious sweet treats

Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

The mother of all goodbyes

Paula Radcliffe's farewell to the London Marathon will be a family affair
Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

Steven Naismith: 'We know we must do better'

The Everton forward explains the reasons behind club's decline this season
Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

Michael Calvin's Last Word

Praise to Wenger for having the courage of his convictions