NEWS : Sink or swim for BSkyB as armbands come off

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The Independent Online
IT WILL be a hairy moment for BSkyB and its main adviser, Goldman Sachs , when the stock market re-opens tomorrow morning. Although BSkyB floated a full month ago, Goldman has been supporting its share price ever since. Only now are the inflatable armbands being removed, and the company left to fend for itself in the choppy waters of the stock market.

Bearish media analysts believe the satellite broadcaster will promptly sink. I spoke to two on Friday who believe the natural place for the BSkyB share price is 200p, not Friday's close of 246p, nor the issue price of 256p.

Only the intervention of Goldman, which has been a heavy buyer of the shares almost every trading day since the float, has prevented substantial falls already, they believe. If they are right, the shares will plunge, wiping up to £800m from the company'sstock market value.

But the company has plenty of supporters still. It was able to announce some good news on subscriptions last week. And Michael Evans, Goldman's partner in charge of European equity capital markets, told me on Friday that the buying over the last few dayshas been on behalf of customers, not on Goldman's own account.

Legitimate share support arrangements (not to be confused with the Guinness variety) are a recent import from the United States. But they are rapidly becoming the norm for large international share issues. They were used after BT2, BT3, Wellcome and TeleWest, and they are planned for the forthcoming issues of National Power and PowerGen.

They form part of complex arrangements, known as "the greenshoe". Issuing banks create over-allotment options, whereby they can issue extra shares if the demand is there. To the extent that shares are over-allotted, the rules then allow the bank to repurchase shares in the 30 days after flotation.

The benefits are twofold. Vendors can sell extra shares if there is excess demand. And the subsequent stabilisation powers can prevent a jittery, volatile aftermarket.

The danger, however, is that a false market develops in the shares. An over-zealous sponsor may choose to support the share price, no matter what. It potentially has hefty firepower - up to 15 per cent of the issue size. The result can be a nasty bump onday 31 when the stabilisation period ends.

The problem is compounded by the lack of disclosure. For example, Goldman has scrupulously announced every day when it has bought shares as part of the stabilisation arrangements. But it never says how many.

Nor do we know the size of its war chest: this depends on the number of over-allotted shares, which it need not and has not disclosed either. All it is required to disclose is the net effect (over-allotment minus stabilisation purchases) at the end of the 30 days.

So far the market has accepted greenshoe arrangements. But it would only take a couple of disasters to bring them into disrepute.

Meanwhile, investors must learn that a float cannot be assessed until day 31. The price in the first few days of dealings is virtually meaningless. The true aftermarket is simply postponed by a month.

Sulking at Saatchi

Last March I wrote in this column that I'd be amazed if Maurice Saatchi and Charlie Scott were both still working at Saatchi & Saatchi by the end of the year. The chairman and chief executive had patched up one row, but there was still bad blood between them. I couldn't believe the relationship would last.

I was wrong by three days. Maurice, who resigned last month as chairman, finally quit the business on Tuesday.

It was anything but a quiet departure. In a widely publicised letter to staff he accused a minority group of shareholders, led by the American fund manager David Herro, of hijacking the company to the detriment of its clients and employees.

"I have watched in dismay as some of our longest client relationships have been jeopardised, the wishes of key clients ignored, and the loss of their business assessed as a price worth paying,'' he wrote. "I have listened in despair as the views of leading executives of this company were dismissed as `irritating' and `irrelevant'."

It was an extraordinary outburst. Ousted executives usually keep mum. It is almost always a condition of their pay-offs. And anyway, an unseemly row is hardly likely to endear them to any prospective future employers.

Apart from George Davies and Terry Maher, thrown out respectively from Next and Pentos, I'm hard pressed to think of any other such bitterly noisy exits.

But Maurice has yet to negotiate his pay-off. As for future employers, he need never work again, and if he does it will be for himself.

His outspoken criticisms seem much more likely to "jeopardise client relationships'' than anything Mr Herro is doing to the company. The picture that comes to mind is of a fractious child smashing a favourite toy when it is being taken away from him.

Of course the crux of this sad affair is that Saatchi & Saatchi is not Maurice's toy, and hasn't been since he chose to take it public nearly 20 years ago. It now belongs mainly to institutional investors, including Mr Herro's Harris Associates, which owns 10 per cent.

By contrast Maurice and his reclusive brother Charles owned less than 1 per cent, and are thought to have sold more of their shares in the last few days.

No one can deny the brothers' achievment in building up the world's biggest advertising agency. But they were over-ambitious, not least in their absurd attempt to buy Midland Bank. The shares collapsed from their £55 peak. And then there was the cost of running Maurice: one Bentley Turbo could be forgiven; a brace of them seems extravagant.

In the end Herro's was not a lone voice, however much Maurice might like to paint it as such. As I understand it, the company's advisers, Warburg and UBS, sounded out all institutional investors with more than 1 per cent of the company and found the vastmajority felt Maurice should go.

It will be fascinating to see what happens next. Several of Maurice's chums have rallied round, threatening to take their advertising business elsewhere. I doubt much will come of it. Unwinding such relationships is difficult. There's also the matter of finding an alternative agency on the scale of Saatchi not already serving a competitor business.

But the row may well frighten off prospective new business. Maurice's attack may be enough to sow the seed of doubt in a potential client's mind. If so, the lack of fresh business will be Maurice's fault, not Herro's.

A fee too far

I suspect the vast majority of people will be utterly amazed, astonished and appalled to learn that for every pound they pay into their pension or life assurance policy, the fund manager takes 25p straight back out again. That's just the average. The worst offending institutions snaffle as much as one-third of people's nest-eggs.

As we describe on page 1 and page 8, the new disclosure rules have let the cat out of the bag. Fat commissions to salesmen, flabby bureaucracies, heavy compliance costs add up to huge overall charges. From now on consumers will be crying out for a cut-price service.

Small wonder that Richard Branson has targeted financial services as his next big business opportunity.

Things will never be the same again in the savings industry. Institutions will have to drive down those charges to attract fresh customers. Savage cost-cutting and horrendous job losses look inevitable.