Outlook: Two retail weaklings don't make a heavyweight

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The Independent Online
We've had Glaxo-SmithKline, SBC and UBS, Guinness-Grand Met and now we have, er, wait for it - Somerfield and Kwik Save. In the wave of global mega-mergers sweeping industry and commerce this one hardly registers on the radar. As one analyst puts it delicately; "It is a pimple on the backside of some of the others."

This may be a little bit of an exaggeration, but it is also largely true. This is a merger akin to two lightweights getting together to form one bigger, but still dis-advantaged middle-weight. It may have a bit more muscle in the buying department but Tesco and Sainsbury's are still going to punch its lights out.

In a sector where might is right, Somersave or KwikField, or whatever it might be called, is still going to have only half the sales and market share of the top two. Moreover, it will also have the weakest brand and the poorest portfolio of stores. Its 1,400 outlets belie a long tail of no-hopers that will be haemorrhaging sales and probably losing money. Management won't be able to give them away.

Even so it is hard to see what else these two managements could do. Somerfield and Kwik Save have both been caught by the increasing dominance of the major supermarkets and the ruthless discounting of Continental groups like Aldi and Netto. This merger doesn't provide a solution in itself but it should strengthen their hand.

Certainly it will provide a cue for others to follow. UK supermarkets have been hot to trot for some time. One way or another the Big Four are determined to become the Big Three. And there will be more mergers and deals in the second division with Iceland, Budgens and so on. Separately there is likely to be a similar shake-out in the discount sector.

For Jardine Matheson, which controls 29 per cent of Kwik Save through Dairy Farm, this has been another spectacularly poor investment over the years, though not quite in the same league as Trafalgar House. Dairy Farm's stake has been on the market for as long as anyone can remember. Let's hope Somerfield, the strongest of the two, hasn't fallen for a pup in finally providing Jardine's with an exit.

Whingeing UBS bankers

It is hard to feel much sympathy for the whingeing stars of UBS as the curtain falls on this glorious City gravy train. These are investment bankers, and it ill becomes those who hand it out with such abandon to complain so vigorously about a redundancy programme which is par for the course among many of the clients they so lucratively advise. The brutality of the capital markets is legendary. In a sense, UBS is just getting a dose of its own medicine.

Even so, it is also plain that the merger of SBC Warburg with UBS's investment banking activities has been badly mishandled and that a very substantial amount of value may have been surrendered in the process. When a business takes over and closes down a competitor, as is happening with SBC and UBS, the hope always is that the encumbrant can somehow or other retain the market share of the company subsumed. Unfortunately it often doesn't work that way; the acquired market share has a tendency to slip through the fingers like sand.

In the case of UBS it may be much worse than that. So angered are many of UBS's key people about the way this supposed merger of equals has been handled, that even those offered jobs in the new organisation are turning them down in droves and moving to the competition. Meanwhile all constructive activity at UBS has ground to a halt. SBC may have succeeded in removing a competitor from the market, but it seems a mighty expensive way of doing it if all UBS's business has meanwhile shifted off to rivals.

FSA delivers the goods

Time magazine recently described Britain's Financial Services Authority as one of the big innovations for the next millennium in global capital markets. Dr Rolf Breuer, chairman of Deutsche Bank, said in a speech last week that he expected the FSA to provide a model for banking and securities regulation throughout Europe. Suddenly the FSA and its chairman, Howard Davies, are flavour of the month.

This is in marked contrast to the way news of the FSA was received in the City when it was first announced. Then the perception was that the Government by combining nine different financial regulators in one organisation was creating a massive and powerful new bureaucracy which because it would attempt to combine wholesale with retail regulation would inevitably fail.

Any lingering doubts the City may have had on this score should have been allayed by yesterday's first FSA plan and budget. By going for rapid and early integration of the various channels of regulation, Mr Davies has been able to deliver an immediate cut in cost, which the City pays for under a complex structure of fees. Rapid change always carries a certain risk, especially in the delicate field of financial supervision where distracting influences can be highly dangerous. All the same, if the FSA can demonstrate real benefits for the City in the new approach from the word go, it should help create goodwill and a following wind. The challenge for Mr Davies is to make the jump from flavour of the month, to solid, durable, reliable regulation of the future.

Clash of cultures in the Big Six

KPMG and Ernst & Young are blaming the collapse of their planned $18bn merger on a combination of regulatory issues and "client power". But is this really the whole story? The two firms have very different cultures and this must surely have been equally to blame. KPMG is still essentially a loose federation of firms, while E&Y is considered to be significantly closer to becoming a single organisation.

Moreover, the structures of the two firms are sharply different. KPMG is a pyramid where senior executives such as the international chairman Colin Sharman are paid much more than other partners. E&Y is a more open and flatter structure where the spread of partners' earnings is narrower.

Price Waterhouse and Coopers & Lybrand always believed the KPMG proposal to be a spoiler, designed primarily to undermine their own more carefully worked out deal. Nobody should assume that just because KPMG has failed, Price Waterhouse will too. It may be that the competition authorities in Europe and elsewhere will be less troubled by the Big Six becoming the Big Five than they would have been by the appearance of a Big Four. As important, Coopers and PW do not have same sort of potential audit dominance as KPMG and E&Y would have done in certain key sectors, such as financial services.

So PW may yet succeed where KPMG has failed. Whatever the outcome, these accountancy mergers have thrown up an amusing irony. The most vociferous critics have been the very company executives who are forever pointing to the need for mergers in their own industries so as to meet the challenge of globalisation. All of which goes to show that your view of competition depends crucially on whether you are in the position of supplier or customer.

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