Irrational exuberance could evaporate quickly
COMMENT; `Whatever popular measures Mr Brown announces to help young people into work or boost families on low incomes, the bottom line as far as the City is concerned will be the net increase in the tax burden compared with last November's Budget'
Wednesday 02 July 1997
Whatever popular measures Mr Brown announces to help young people into work or boost families on low incomes, the bottom line as far as the City is concerned will be the net increase in the tax burden compared with last November's Budget. If it looks as if that burden is going to fall on consumer spending rather than companies, then that's good news, the markets figure.
The reckoning is that if this tax increase exceeds, say, pounds 5bn, there will be less need or excuse for the Bank of England to raise interest rates again. Most of the City is firmly convinced that it is the expectation of rising base rates that accounts for the uncomfortably strong pound. The theory is that if rates do not need to climb much further because tax hikes can head off a boom, then the pound will stop climbing too. This argument makes a few questionable assumptions. For one thing, the level of base rates is only one possible explanation for the strong pound, and it might therefore stay strong even if the prospects for UK interest rates change.
For another, it takes a net pounds 10bn rise in taxes to do the same cooling work as a 1 percentage point rise in base rates, according to most economic models. It would take at least this much tightening in policy to return the economy to a steady path. It is just about possible that Mr Brown would be prepared to add this much to the personal sector's tax bill, but it would be an extraordinary turnaround from Labour's manifesto.
Even so, the markets are probably right to anticipate a tighter Budget than anybody expected at first. On the other hand, they are equally likely to be overdoing it. Yesterday's high expectations may well be disappointed today. Similarly, the expectation that base rates will peak at a level below 7.5 per cent and stay there, implied by the short sterling futures market, is also likely to be disappointed in the longer run. Even in the best inflation environment since the 1960s, the business cycle peak for interest rates will almost certainly be higher. When that realisation sinks in, the exuberance could evaporate rather swiftly.
Merger should be good for Amersham's health
Amersham International is a curious company. Most people have heard of it, but hardly anyone outside the City and the medical profession knows what it actually does. Even fewer can tell you the purpose of what it does. It was also the previous government's first privatisation, and if you've held the shares since the beginning, you would have done spectacularly well.
Now it's merging with Nycomed of Norway to create the world's largest supplier of in-vivo diagnostic imaging agents. This is the highly specialist but, in parts, fast-growing business of supplying hospitals with chemical agents, some of them radioactive, that assist in medical diagnosis. Well, all right. Let's start again. It's the business of... Oh, forget it. Amersham helps doctors find out what's wrong with you. Let's leave it at that.
Despite doubts, this is probably a good deal for Amersham. Bill Castell, chief executive, has been pursuing it for some years and together with the recently announced link-up with Pharmacia & Upjohn, it completes a carefully planned assent into a world leading position in these markets. Amersham is still the smaller of the two companies, but in recent years it has been far more successful.
By contrast, Nycomed, operating at the maturer end of the market, has had a troubled few years. Though this is no rescue takeover, Amersham is certainly ending up with a much larger share of the action - 47 per cent - than it could have hoped for when Mr Castell first began to run his slide rule over the company a few years back. It also seems to be getting the more important executive jobs, so much so that the deal could almost be characterised as a reverse takeover by Amersham.
Doubts none the less remain. Is Amersham reversing into a dog? The pounds 40m of annual cost savings anticipated from the merger could easily be wiped out should Nycomed lose a couple of big Health Management Organisation contracts in the US that come up for renewal over the next six months. However, both companies seem to have some promising new products and applications in the pipeline. Both companies are also in the hyper trendy field of providing alternatives to invasive surgery, thus offering the prospect of real reductions in health care costs. The fact that they complement each other geographically is an added bonus. So although Nycomed Amersham will probably remain, for most people at least, a deeply obscure company, it looks destined to carry on quietly earning its shareholders an excellent return.
No easy way to resolve Anglo-French standoff
What does Bernard Arnault, the mercurial head of France's LVMH, really want? George Bull and Tony Greener, chairman of Grand Met and Guinness respectively, are flying to Paris today, hoping to find out. All they know for sure is that he doesn't approve of the planned merger of the two companies, so much so that he's spent nearly pounds 1bn stake building in Grand Met and has launched an all-out legal assault on the deal through the French courts. He also mutters inscrutably about the need to bring his own Moet Hennessy into the planned get-together. But how, and under what terms? Until he puts something on the table, it is hard to know how Grand Met and Guinness, or their shareholders, should respond.
Mr Arnault's original idea was that the Grand Met/Guinness merger should be abandoned in favour of a separate get-together of the three companies' branded drinks subsidiaries, IDV, United Distillers and Moet Hennessy. But although this might industrially seem like the sounder approach, it is hard to see how it would result in enhanced value for either Guinness or Grand Met, given that both companies would have ended up with minority holdings in the new super-drinks group. That might be the way things are done in France, but even Mr Arnault must realise that Anglo Saxon investors are just not going to buy that kind of a deal.
So what does he hope to achieve? One possibility is that he is trying to lever up the price of Moet Hennessy. Let's be clear about this. He has no intention of selling outright for cash to Les Ros Bifs. That would be too much of a betrayal. But for paper, maybe. One of his newspapers in France has already speculated that Mr Arnault might end up with 45 per cent of GMG Brands. That's obviously an exaggeration, but a stake large enough to exercise control is certainly very possible.
Unfortunately, that too would have Anglo Saxon investors screaming sell orders down their phones. Mr Arnault is a brilliant and determined businessman, but can he be trusted to run GMG Brands not just in his own interests, but in those of his outside shareholders too? At this stage, it's hard to see how this Anglo-French standoff is going to be resolved.
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