Now is the time for inspiration and innovation

COMMENT: 'If this bid has achieved nothing else, it has sent out a clear warning to underperforming, uncommunicative managements: reacting in the desperate, panic-stricken way that Forte did won't turn the tide'
Click to follow
As every conquering hero invariably discovers, winning the battle is the easy part. The real difficulty begins when you try to establish the empire. Having won control of Forte, Gerry Robinson and his team at Granada face as tough a management task as they come. Over the next six months he needs to deliver a steady stream of asset disposals at prices that might be difficult to achieve even in a sellers' market. As it is, the sheer weight of top-notch hotels going up for sale would normally be expected to drive prices down.

On top of the planned pounds 2bn worth of disposals, he needs to bring about a sea-change of culture and service in what remains of the dismembered Forte group. There is no doubting the potential for improvement that lies within Forte. Anyone with the unfortunate experience of staying at a Posthouse hotel in recent times would be able to tell you about it. Nonetheless, achieving such change at a time when the arithmetic of the bid requires savage cost-cutting calls for swift and delicate footwork as well as an inspired and innovative management approach.

Judging by yesterday's landslide victory, the City seems to believe he can do it. It is important to realise, however, that it was as much the City's desire for revenge as any inherent belief in Mr Robinson's management abilities that swung this bid. Ms Galley's early acceptance yesterday morning may have helped to create a snowball effect, but on the final figures it appears that Granada didn't need her; it would have won, anyway. It is hard to overestimate the disillusionment among Forte's shareholders. Sir Rocco Forte has paid the price.

If this bid has achieved nothing else, it has sent out a clear warning to underperforming, uncommunicative managements; reacting in the desperate panic-stricken way that Forte did when hostilities began won't turn the tide. It also shows the City has little patience with dynastically-run companies that pursue personally motivated campaigns. While it is true Sir Rocco eventually took steps to disentangle Forte from its disastrous 13-year siege of the Savoy, it looked too much like a death-bed repentance to be taken seriously. His use of capital markets 18 months ago to issue stock at a deep discount to underlying assets was for many big shareholders the final straw. But although revenge may be sweet, the aftermath can be a messy one. Over to you Mr Robinson.

Extra pennies make Farnell a cash machine

As with many of the best stock market investments, few have even heard of Farnell, a company that for many years has been quietly coining it from one of the least glamorous businesses known to man, electronic components distribution. Its lack of profile hasn't stopped Farnell's market value rising sixfold over the past five years to the best part of pounds 1bn. Nor will it stop the company cruising into the FT-SE 100 in the spring when its latest deal, the pounds 1.85bn acquisition of US rival Premier, triples its size again.

By any measure this is a hugely ambitious deal and the market's scepticism about Farnell's ability to cope was writ large in a 62p fall in the share price to 617p. Howard Poulson, chairman, described the acquisition as "a once-in-a-lifetime opportunity", and for a business worth less than pounds 200m five years ago it is plainly a massive leap.

The price at which NatWest and BZW felt comfortable underwriting the rights issue element, 540p against a share price of 679p, hardly suggests enormous appetite for the deal. With earnings dilution of nearly a tenth expected in the enlarged group's first year's trading, the worries of managing a big US business by remote control and the 25 per cent vendor's stake overhanging the market, that caution is justifiable.

But anyone who knows anything about Farnell is likely to give management the benefit of the doubt. Dull it may be, but with a return on sales any other wholesaler would kill for, a fast-growing market and state of the art IT systems, who needs glamour?

Farnell makes a 20 per cent profit on sales for the simple reason that it is neither here nor there to the men in white coats in small electrical labs whether they pay 10p for that small but crucial little connector or 11p. When you are only buying half a dozen, the difference is immaterial, but when you're selling a hundred thousand the benefit to the bottom line is not to be sneezed at.

That extra penny a sale has made Farnell a cash machine. It may have overpaid in the short run, but a few more years of the 21 per cent growth Farnell promised yesterday and nobody will notice. You never know, one or two people may even claim to have heard of the company.

Jaw jaw could serve BT shareholders well

Over the next two to three weeks, British Telecom must respond to two key regulatory initiatives; its approach could mark a watershed in the company's history. If BT digs its heals in and kicks against the regulator, it will certainly end up with the Monopolies and Mergers Commission. As British Gas has already discovered, that can prove a fate worse than agreeing the regulator's original demands. Equally, BT may have reached the point of no return; for shareholders, it might argue, a stand needs to be taken against the ever-encroaching powers of the regulator. Which way to go?

On one of the initiatives, the new price cap to govern BT into the next century, we don't yet know precisely what Don Cruickshank, director general of Oftel, has in mind. But we do know he wants BT to live with a much smaller rate of return on capital than allowed. That means a correspondingly tough price cap regime. The quid pro quo is more flexibility for BT to decide what to do with its various tariffs but the overall effect would be deeply negative.

BT must decide whether increased competition is in any case going to drive rates of return down to the levels envisaged by Mr Cruickshank. By the turn of the century, 80 per cent-plus of telephone subscribers will have some kind of a choice of carrier. Harsh though Oftel's proposals might be, the market place might prove harsher still.

The second initiative is equally hard to call. Here the regulator is asking for a general prohibition on anti-competitive behaviour, a catch- all clause that would allow the regulator to deal swiftly with any abuse of dominant market position. This is a reverse of the present position where a new licence amendment has to be sought every time the regulator discovers a new case of abuse, a situation that plainly suits BT. Again, however, the detail of this reform provides plenty of scope for negotiation. Already Mr Cruickshank has shown himself ready to retreat from the extremes of his position; the requirement that BT give competitors notice of all new services, a key objection to the regulator's proposals, is being dropped.

Jaw jaw is usually much better than war war. It may well be the case that BT is able to achieve more for its shareholders by adopting this approach than challenging the regulator before the MMC.

Comments