Flirtation may not end at the altar

It's easy to see the value of a merger to the Pru; the benefits to Halifax are much less clear
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The Independent Online
OVER THE past two or three years, Prudential has been linked by stock market rumour with so many merger and takeover candidates that it's hard to keep track. Some of this speculation is pure fantasy, but quite a lot is reasonably well informed. All the same, little of substance has so far emerged from the frenzy of gossip. The question is: will the mooted merger with Halifax be any different?

Like all big financial services companies with an eye to the future, Prudential has talked to virtually everyone in some shape or form about consolidation. Most of this has never got past the stage of idle "what if" tittle-tattle. In other cases, such as the merger talks with National Westminster Bank, the two sides got as far as instructing lawyers, and for a brief while it looked as though a deal would be struck.

In that case, it was management ego as much as anything else that led to the termination of talks. The two sides couldn't agree terms, certainly, but nor could they agree on a division of top jobs. From a management perspective at least, this is invariably the big drawback to industrial consolidation. The consequent cost cutting must start at the top. There are also fewer jobs for management at every rung of the executive ladder.

To some extent, this would also be a barrier to a merger with Halifax. But it might be a less serious one than would occur in many alternative combinations. Mike Blackburn has mysteriously quit as chief executive of Halifax and Jon Foulds, the chairman, will be bowing out in a year or two. John Crosby, Mr Blackburn's successor, is able and highly thought of, but he has also come from nowhere and at just 42 he's young for the top job in such a large company. Plainly there is something of a vacuum into which Sir Peter Davies, the Pru's chief executive, might reasonably step.

Even so, I have my doubts. Both companies share the same vision. They aim to be one-stop financial services companies encompassing the banking, savings and insurance markets. Put together the Pru's brand name in traditional life assurance, pensions and savings with Halifax's extensive branch network and you would have an unbeatable combination, the argument goes. The main purpose of the merger, then, would not be that of cost cutting, but the pursuit of cross-selling opportunities.

However, what on the face of it seems a compelling rationale doesn't really stack up on closer analysis - or rather, it's hard to make the sums work. Plenty of cross-selling takes place in financial services, although it is limited by regulatory constraints, and with improvements in information technology, the cost benefits of cross-selling are going to get steadily greater.

But "bankassurance" - the selling of insurance products through a bank's customer base - has not been the unmitigated success once predicted. Bankassurers have yet to take a significant proportion of the market, so plainly there is a degree of customer resistance.

More importantly, while it is easy to see the value to the Pru of gaining access to Halifax's distribution channels, the benefits to Halifax of such a merger are less clear. If it could buy the Pru at a discount, as with Clerical Medical, that would be a different matter, but what is proposed is a marriage of equals. I'm not saying this merger won't happen, but like so many other flirtations in financial services, the chances of it falling apart before reaching the altar are rather higher than those of a successful marriage.

Investment trusts

THE INVESTMENT trust sector has rarely been in worse shape than it is now. Since early 1994 it has underperformed the rest of the market by a quarter, and the average discount to net assets among investment trusts is now 13 per cent. The discount was already high before the bear market began in mid-July. As the market fell, it widened further. More worrying, it has failed to narrow with the return of more settled market conditions.

What's wrong, and what are the solutions? When a price is depressed, there is generally an oversupply of the product. That has certainly been the case with investment trusts. In 1994 there was a glut of new issues, many of them in high risk and now depressed emerging or other specialist investment markets. So that's part of the problem; too many of them, and inappropriate specialisation.

However, this doesn't explain the high discounts now common among more conventional and long established investment trusts. Part of the answer must lie with the industry's failure adequately to target its natural customer base - ordinary private investors. Fleming Claver House is one of a small number of investment trusts that consistently trade at a premium. Presumably it is no coincidence both that it specialises in UK blue chips and that it is 80 per cent-owned by retail investors, many of whom invest in the trust as part of a regular savings plan, thus creating sustained demand for the shares.

Simon Colson and Hamish Buchan of BT Alex.Brown argue for root-and-branch reform in their latest annual assessment of the investment trust sector. Corporate governance is the critical issue, they suggest. Investment trust boards are too often beholden to the investment management house that created the company. They must be more independent, more willing to refocus, liquidate or reallocate to better-performing management.

In many cases, more immediate surgery is called for. Buybacks, unitisation or liquidation would seem very much the order of the day for some. Aberdeen European Investment Trust yesterday countered Gartmore's hostile pounds 42.3m cash and shares bid with liquidation proposals. It is to be hoped that this is just a harbinger of things to come in this sector, for it is hard to disagree with BT Alex.Brown's central conclusion that a radical cull is called for.

What thereafter remains of the sector needs urgently to find a way both of improving on its investment performance and of marketing itself more appropriately and aggressively to retail investors. Investment trusts still have plenty of advantages over open-ended investment funds such as unit trusts. As things stand, they are being squandered.

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