Microsoft's link-up will not worry customers
Thursday 10 August 1995
What CompuServe and America On-line, just two of the Microsoft Network's competitors, would give for that kind of instant client base. Though the US Justice Department insists that its investigation will continue, giving Microsoft the go ahead to proceed with the Windows launch as planned on August 24 is tantamount to approving the link. Forcing Microsoft to unbundle now would have been just about feasible; closing the door after the horse has bolted is going to be virtually impossible. It is the sort of fudge you might expect from Japan or some European countries, but in the Land of the Free?
There is a counter-argument, however. Immediate competitors may be disadvantaged but is it really so bad for the consumer? Microsoft is providing an easy access to near-limitless information for computer users. It is providing very little information on its own, but is merely a conduit for other information providers to distribute their wares. Plenty of suppliers, not least MAID, the UK company that yesterday announced it would provide its services on the Microsoft network, are very happy indeed to piggyback on Windows 95. In the end, customers still get to choose what they want to use, and what they are prepared to pay for. Microsoft is just providing the means.
There are, of course, advantages in controlling the gateway. Microsoft can load its own pages and those of close partners nearest to the gate, thereby getting greater attention. That this is an advantage is proven by the experience with Sabre, the airline scheduling guide owned by American Airlines. Travel agents using the service tended to pick American Airlines flights to offer their clients simply because these were the first options provided on the screen for any particular route.
The DoJ might want to look at this issue, and reach an agreement with Microsoft about the administration of the network. But it is probably wise not to enjoin the company from bundling its services altogether. On the whole, customers and suppliers are likely to be happy with their preloaded network access.
How much for Northern's rump?
What price regional electricity companies? With the current spate of bids in the sector, it is a question now occupying some of the City's cleverest minds. The poor old taxpayer can only muse on what a shame it is that it didn't occupy them more four years ago, when the RECs were privatised at what we now know was a gross undervalue. Still, that is now water under the bridge; division of the spoils is now the order of the day. Next Wednesday, shareholders in Northern Electric meet to approve the first stage of the company's plans to give them back a cool pounds 500m. Some serious questions need to be asked about the value of what is left behind in the rump company. The City's number crunchers are coming up with some very different answers.
The rump will have the same management and the same businesses, but its capital structure will have been altered radically, because borrowings will rise sharply after the payments to shareholders.
The only common ground in the dispute over Northern's value - which foreshadows similar arguments over South Western and any other REC likely to be bid for - is that if you take the pounds 5 a share the giveaway is worth from the current share price of just under pounds 9, the rump must be valued at just under pounds 4 a share. So far so good.
According to Northern and its advisers, that is a serious undervalue of the rump, which ought to be worth at least pounds 5 and possibly as much as pounds 7 a share. South Western will be saying much the same. At the other end of the arguement, it is claimed that anything more than pounds 4 a share - the level implied by the market - is quite unjustified, and even that might not be sustainable.
Northern has forecast steadily increasing annual dividends from the rump company. At pounds 4 a share, the dividend yield will be a handsome 11 per cent, which is more than twice the current going rate for the RECs. Surely the rump shares should rise to bring the yield nearer to the typical level for a British utility?
The counter-arguments take several forms. The valuations used for US utilities, which average 90 per cent gearing, imply an 11 per cent yield for Northern anyway. Since Northern's peak gearing will be even higher, an 11 per cent yield does not seem an unreasonable level.
Furthermore, there should be a hefty allowance for risk in the Northern rump's price, to reflect the fact that interest payments will reduce its dividend cover substantially and because dividends will therefore be much more vulnerable to force majeure, such as changes in interest rates, messing about by Professor Stephen Littlechild, the electricity regulator, or political interference from a Labour government.
Northern will certainly have to produce cost savings to the limit of what is possible and make a tremendous success of its non-distribution businesses to finance its dividend promises.
The company's supporters in the City are certainly giving shareholders the impression that two and two makes five, that a scorched earth policy will leave more fertile ground behind. Common sense dictates that high gearing is more likely to weaken the company than strengthen it. Delivery on the dividend is by no means guaranteed. On that basis, the market is right to demand a yield on the rump that exceeds by quite a margin even the income on a conventional long bond, unflattering though that might seem.
MAID is vindicated
MAID, the business information company, was one of those flotations that seemed to mark the top of last year's new issues boom. Nobody could take the company seriously, or its youthful chief executive, Dan Wagner, and the shares have consistently traded below even the much reduced issue price sponsors were eventually forced to settle for. Yesterday's extraordinary 75p rise to 157p, seems finally to have vindicated Mr Wagner and his supporters.
In itself, the Microsoft deal couldn't possibly warrant that kind of price movement. Becoming a Microsoft network information provider only weeks before the launch of Windows 95, which will hugely expand the network's pool of users, is certainly a coup with possibly quite substantial commercial benefits. But it is not going to transform the company. The deal does, however, help to close the credibility gap; MAID, it seems, is not after all the-fly-by night operation many had assumed. A Microsoft endorsement is still a mighty thing.
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