Outlook: There must be ways to spend Niall's cash

NIALL FITZGERALD, chairman of Unilever, was in defensive mood yesterday as he admitted defeat in his search for an alternative, profitable use for the pounds 5bn he banked when he sold Unilever's speciality chemicals division to ICI. Rather than spending it on growth, whether organic or acquired, the money is instead to be returned to shareholders.

Intriguingly, the amount Unilever is paying out by way of special dividend roughly equates to the loss of value ICI shareholders have suffered since they acquired Unilever's unwanted bits and pieces. Since many of these shareholders are one and the same, it ought to be asked who really gained from this exercise in corporate restructuring - apart, that is, from fee- driven investment bankers and lawyers, which goes without saying. But that's another story.

More seriously, what's happened to make Mr FitzGerald, who wanted to spend the money on his business, change his mind? Acquisition prices are just too high, he says, even in the Far East, where private owners have yet to adjust their expectations to the new market conditions. So it is no to Heinz, no to Reckitt & Colman, and no to just about everything else Unilever has been linked with over the last two years.

Mr FitzGerald's decision raises two issues. The first is the level of asset prices and whether they are still too high to tempt all but the most foolhardy investor. Mr FitzGerald clearly thinks they are. He has been looking for businesses in emerging markets, or which have the capacity to expand in those areas. But the multiples attached to potential targets are prohibitive, even before a control premium is added.

In this respect, the market is right to applaud him for returning the cash pile to investors, rather than squandering it on some ill-conceived management frolic. There is, however, a more disturbing issue. If a company like Unilever cannot find a sensible way to invest the money after two years of scouring the globe, how are our investment institutions to manage it?

After so many years of share buybacks and special dividends, institutional investors are already awash with cash. The problem is compounded by the drying up of the new issues market, which is all but dead. It is a terrible indictment of the stock market that in the last year or so, one of the few ready homes for institutional money has been the re-weighting of tracker funds in expanded FTSE companies like BP-Amoco and Vodafone AirTouch.

There are several possible remedies. One is for fund managers to start looking at neglected small and medium-sized stocks where values have been hammered by the quest for size. Institutional investors are also going to have to start thinking much more seriously about the business start- up market. Much of what passes for venture capital in Britain - buyout activity - is little more than financial engineering.

But perhaps most important, in an age of low or negative inflation, both investors and companies are just going to have to get used to much lower rates of return than they have enjoyed in the past.