Goldman won't rue the one that got away


Believe it or not, the crucial event that led to Goldman Sachs deciding to turn itself from a partnership into a quoted company was the purchase of Mercury Asset Management by Merrill Lynch. Goldman coveted MAM, seeing it as a way to expand its rather under-nourished fund management business and its European reach in one fell swoop. Unfortunately, as a partnership, it did not have a way of raising the $3bn or so needed to secure the hand of Carol Galley and Stephen Zimmerman, and so the deal went away.

The reaction of senior Goldman partners was to say: "Hey. We need access to capital to compete." And so a process was started that ended up putting almost $1bn into the pockets of the guys who were so frustrated by their inability to buy a London fund manager.

Well, guys, you shouldn't have bothered. Because the hot news on the street is that within a few months it will become apparent that there is less to Mercury than the mighty Merrill had thought. Off come the handcuffs on key staff, and out go the CVs to the headhunters. Or worse. Out go the staff to little offices all over Europe where they start their own fund management businesses.

Because, with the possible exception of internet start-ups, few businesses can have a lower barrier to entry than fund management. All you need to set up a fund manager is an office, a computer screen (you can get all the information you need these days over the internet) and approval from the Financial Services Authority.

Look at Perpetual. A decade ago it had nothing but Martin Arbib and his desire to work in Henley-on-Thames rather than the City. Now it is a business worth north of pounds 1bn.

Given the recent problems MAM has had with some of its larger clients - dare I mention the Sainsbury's pension fund - the loss of a large body of staff will leave it severely weakened. Merrill could react in time- honoured US investment bank fashion - weighing down the employees it wants to keep with gold. This would not only prove that fund managers are becoming like investment banks - organisations run in the interest of their staff not their shareholders - but also, as Sir Alex Ferguson is finding at Manchester United, that paying over the odds for some staff only creates unreasonable expectations among the others.

Moral hazard ahead

Some of these City bonuses could be used to pay off Third World debt. At least it would be a better solution than Gordon Brown's debt-forgiveness plan.

Unlike the Chancellor, Bono, Bob Geldof, the Pope and many of my colleagues, I am opposed to debt forgiveness. Not that I am against helping poorer countries, particularly in sub-Saharan Africa. However, to forgive all debt, leaving the country with no obligation, creates a moral hazard in that the governments just feel it is OK to incur liabilities because they can plead poverty when repayment time comes around.

Mr Brown's plan at least has some strict conditions. But policing those conditions will be close to impossible. This plan will end up enriching the least deserving while storing up problems for decades to come.

Vote for a Tartan takeover

I KNOW this is the season of good- will and all, but there are some people who seem to think that NatWest will survive as an independent company, with share-holders rejecting not only the Bank of Scotland bid but also the much more attractive Royal Bank offer. Well, I have two things to say to all of you. The first is Exco. The second is 1,037p.

Exco becomes relevant when you look at the career of NatWest's saviour, chief executive Ron Sandler, who arrived at the bank from Lloyd's of London (would that it were Lloyds TSB). There he had come to the attention of Sir David Rowland who, looking for a scapegoat for the failed Legal & General deal, was willing to ditch the able Derek Wanless as soon as Bank of Scotland bid.

However, going further back in his history, we find a brief and not terribly glorious time as chief executive of moneybroker Exco Inter- national. Now I know a few people in the moneybroking fraternity, and what they say about Mr Sandler's stewardship of Exco cannot be printed in a family newspaper. I'm sure there are investors who would flee from NatWest if it continued to be run by Mr Sandler.

The price of 1,037p, it should be noted, is where NatWest shares were before Bank of Scotland bid. They might have fallen back to 1,306p on Friday, but that is still 25 per cent higher than before the predators struck.

It is all well and good to wish NatWest a happy Christmas. But if investors want a prosperous New Year they should chose one or the other of the bids, and I personally think Royal Bank's will prove to be the better long-term bet.


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