No inconsistency in short-circuiting these bids
Friday 24 November 1995
It is hard to see how the market could have been so wrong-footed, for Mr Lang has not in fact been inconsistent. The two bids are different from anything that has gone before because of the extent of vertical integration they would bring between generators and suppliers of electricity. Vertical integration was the bidders' reason for moving in the first place. They wanted access to the billing and marketing expertise of local distribution companies. Mr Lang, in a general statement of principle on electricity mergers in August, made clear that vertical integration would be a factor in his decisions.
Nor were yesterday's references inconsistent with clearance of Scottish Power's bid for Manweb, which also involves vertical integration. There are transmission capacity limits on how much electricity Scottish Power can sell south of the border. It is also a lot easier to ring-fence the Scottish generating operations than in the case of the two bids just referred. There was even less reason for referring Hanson's bid for Eastern, Southern Group's bid for South Western and the withdrawn bid by Trafalgar House for Northern. None of these involved a competition problem. The regulatory issues could easily be dealt with by the regulator.
Nevertheless, Mr Lang was on the defensive yesterday, insisting that, in general, he does not believe vertical integration is inherently objectionable in the electricity industry or anywhere else. He can hardly say otherwise, after allowing Scottish Power to buy Manweb, and Scottish and Newcastle to buy Courage breweries. However, the Government's hope of completing deregulation of the electricity market in 1998 by opening domestic supply to competition, has given rise to real concern about the effect of these two takeovers. Combine that with the more obvious worries about the potential for manipulating the electricity trading pool, and for exploiting control of distribution companies, and there is a good case for referring these two bids.
The decision does have its drawbacks, however. It may well be that the MMC agrees with PowerGen and National Power that the prospects for genuine competition will be enhanced if the bids proceed. There is a real risk that one of the Recs - Southern, rather than Midlands, where PowerGen has a blocking 21 per cent stake - will be snapped up by a foreign bidder while the inquiry is on. It is equally likely that Southern and Midlands will look at a defensive merger. Mr Lang should therefore refer any further bids for these two companies to keep a level playing field. There is a precedent in the referral of British Aerospace's bid for VSEL on public interest grounds, when only GEC's bid for the same company raised any clear competition questions.
Amec - a good case for integration
Was it rape and pillage, or something more civilised that Kvaerner had in mind when it raided the stock market for 12 per cent of Amec yesterday? Kvaerner would prefer the latter, but it seems quite prepared to resort to the methods of its ancestors, the marauding Vikings, should circumstances call for it.
At this stage it is not entirely certain what Kvaerner is after. For choice, it would like to acquire the whole shebang, then selling off the unwanted housebuilding and road construction interests. The pounds 370m it is prepared to offer, however, is clearly not enough. Anything to do with construction carries pariah status in the stock market these days. Even so, institutions are hardly going to allow Kvaerner to walk away with the company at just 100p a share. The alternative, putting the two companies' North Sea fabrication interests together in a joint venture, clearly makes industrial sense but again the attractiveness of the proposition depends crucially on the terms. At a meeting between the two sides yesterday morning, the industrial logic of extensive co-operation was apparently recognised by both. Sir Alan Cockshaw, chairman of Amec, remains highly suspicious, however, and unless the Norwegians are prepared to come up with a cracker of a bid price, seems determined to resist all smooth talk. A hostile bid may be Kvaerner's only way forward.
Exchange paralysis left undisturbed
Things appear to be going from bad to worse at the London Stock Exchange. Michael Lawrence, chief executive, had set great store by an internal strategic review, conducted throughout most of this year, which he saw as a means of silencing the growing ranks of City sceptics who have been wondering aloud about the future of the Exchange. The completed review was handed to the members of the Stock Exchange board some six weeks ago. Since then there has been only a deafening silence.
Far from uniting the board on a bold course forward, the review has inflamed emotions and divisions even further. Two elements have exercised members in particular. The first concerns suggestions for alternative revenue streams to make up for the loss of the pounds 60m brought in annually by the Talisman settlement system, when it is replaced next year by Crest. The second is the plan for running from next autumn an order-driven trading system capability alongside the Stock Exchange's traditional quote-driven system.
One hare-brained suggestion was that as a way of plugging the gap, the Stock Exchange should itself enter the inter-dealer broker market in direct competition with its members. Apparently not content with reaction to this, Mr Lawrence compounded the problem in his recent Leonard Sainer memorial lecture by saying the Exchange might go into competition with its members on other services as well, a position not agreed with the board. This has prompted some stern behind-the-scenes rebukes; the Exchange should stick to being a service provider for its customers and stop confusing itself with a profit-making business, Mr Lawrence's critics insist.
The order-driven issue is also contentious. Some board members fear that the attempt to tack on the new trading system to the old will inevitably mean the death of the quote-driven tradition, whereby the powerful market- making firms determine buy and sell prices. Mr Lawrence's task of attempting to be all things to all men may be close to an impossible one As everyone knows, you cannot please all of the people all of the time. The way things are going, however, he is going to end up pleasing no one. The present paralysis is a sorry state of affairs for Europe's premier financial capital.
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