Outlook: An implausible merger driven by executive ego

ON the Travelers-Citicorp deal and the problems facing the coal industry

JUST AS everyone thought the bull market on Wall Street might finally be drawing towards a close, along comes that nice Mr Sandy Wiell of Travelers Group to give it another adrenaline-boosting shot in the arm with news of his most ambitious deal to date - a pounds 93bn merger with Citicorp. The market just loved it and back the Dow soared through the 9,000 barrier.

It is hard, however, to see this injection of excitement as anything other than a temporary respite, or this merger as much more than the combined hubris of Mr Wiell and his opposite number at Citicorp, John Reed. Nor does it seem like coincidence that Mr Wiell announced this crowning glory of his career on the very same day that a bizarre partnership of Swiss and US business interests declared plans to rebuild the Titanic. Both plans seem equally implausible - classic top of a bull market stuff.

In fairness, it ought to be said that Mr Wiell's merger will probably take rather longer to fall apart than project Titanic, assuming Mr Wiell doesn't attempt a Richard Sykes and try to fire Mr Reed before the deal can be consummated. After all, Mr Reed likes an English fireplace in his executive suite as much as Mr Wiell, who is famous for it, so the two, as Mr Reed was keen to suggest when announcing the deal yesterday, obviously have much in common. Fireplaces aside, nobody believes that the partnership of Wiell and Reed is going to co-exist happily for much more than a year or two. Their protestations to the contrary are laughably unbelievable.

First there was the reference to the fireplaces. Then came Mr Wiell's insistence that since he had been married for 43 years, he was used to taking orders. From his wife maybe, but are we really to expect someone who in little more than 10 years has built Travelers from a series of tired or failing institutions into one of the world's largest financial services groups, is going to take them from anyone else? Nor is Mr Reed anyone's poodle either. Over the last few years he has brought about a renaissance in Citicorp's affairs and performance. He's not going to let Wiell walk all over him, or take the credit for his achievements.

OK, OK, so you just don't think it possible for these two to share the reigns of power. Well how about this to dull your scepticism? It was left to Mr Reed to play the 'Nam card. When you go into combat, he insisted, you want to be pretty damn sure it's with someone you trust and feel comfortable with. Such a person is Mr Wiell. So let's go kick ass. Still don't believe them? Well that's the problem with the modern world - too cynical. In the end, the duo were left protesting feebly that they would prove they could make it work. We'll see.

What about the concept itself? Here too the partnership gave a less than compelling account of themselves. Never mind the fact that over the last six months Mr Wiell seems to have knocked on more doors than Martin Taylor of Barclays in his attempt to "consolidate" - and that's saying something. By Mr Wiell's own admission, he was astonished to get a `yes' when he came calling at Citicorp just four and a half weeks ago.

What this indicates is merger on the hoof, neither planned nor particularly well thought out and probably not Travelers' preferred partner of choice. In other words, this seems to be a merger built more on an idea - the dream of a global financial supermarket - than a carefully worked out strategy. Our happy newlyweds boldly declared yesterday that this was a combination "whose time has come", but the concept of a financial supermarket has not worked convincingly to date, so why should it work now?

To be fair, there are some reasons for thinking it might do. The arguments for consolidation in financial services are well rehearsed. The breakdown of national boundaries across all industries is causing persistent downward pressure on margins, which in turn creates its own pressure for economies of scale to meet these new competitive challenges. Furthermore, advanced IT systems have allowed the distinction between previously separate financial products and channels of distribution to blur, creating a different sort of pressure for cross financial services industry consolidation.

In theory, then, this merger looks just the ticket. The problems emerge in the practice. For a start, it is not at all certain customers, big corporates and well off individuals alike, want to buy all their services from one shop. Take this example. Does Citicorp really expect to hang onto an individual's banking business when it has just refused his insurance claim? Nor is it at all likely that an ambitious chief executive is going to chose Salomons as his investment banker simply because his debt is with Citicorp. Moreover, the management task of bringing together two hugely different corporate structures and cultures may be too big and daunting to be worth the candle. Certainly, it is likely to swamp out any cost-cutting benefits.

This merger is a prime example of the puerile fashion for consolidation which has begun to stifle and absorb management and enterprise across the world. Driven by executive ego and fee-hungry investment bankers, it cannot do otherwise than end badly.

The snags in saving the pits

POSSIBLY it has more to do with saving his job at the Treasury than anything else, but Geoffrey Robinson is determined to pull off a deal to shore up the British coal industry and the jobs of several thousand miners. In some respects it is a laudable pursuit, even if the main beneficiary of this endeavour will be Richard Budge, about whom nobody in government is prepared to say a good word.

However, the Paymaster General's crusade to rescue the miners is threatening to create a whole host of problems for the Government on other fronts. It has been plain for some time to the civil servants conducting the review of energy policy that the long-term prospects for coal are bleak. The growth in gas-fired generating plant is eating away at its markets. The pollution reduction targets the Government has signed up to meanwhile make a powerful environmental case for reducing coal burn. Moreover, Mr Budge has made the position worse for himself by sticking out for high- priced deals with the generators in the expectation that the Government will at some point come along and bail him out.

Today's report from the Commons Select Committee on Trade and Industry will spell this out in big letters to those ministers who believe pit closures should be spared at all costs. Whether the message will sink in is another matter.

Constructing a deal to save the pits without trampling on Labour's new found belief in open markets will be an interesting exercise. Now that the generators are owned by shareholders, Mr Robinson will find it hard to instruct them to burn more coal. Building clean coal stations is too expensive and persuading the Germans and Spanish to end subsidies and open their own markets will take too long.

So the easiest solution looks like making it unattractive to build more gas-fired plant. In so doing, ministers will have to ignore the fact that this will stunt competition in generation and price a less environmentally- harmful fuel out of the market. No wonder the President of the Board of Trade, Margaret Beckett, is more than happy to see the Treasury take charge of this one.

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