Outlook: Velcro company comes of age

WE LIVE in the age of the Velcro company, a stick 'em together, pull 'em apart world which must be as confusing to the uninitiated as it is logical to the investment banker with his annual bonus to think about. As busily as some companies are merging and consolidating, others are demerging and divesting. Some companies, such as BAT Industries and BTR, seem to be doing both at the same time.

It was Inchcape's turn yesterday to announce a break-up. In an act of selfless sacrifice, this one actually involves the chief executive and the finance director doing themselves out of a job, something of a first. Don't feel too sorry for them though. They'll get a big fat bonus and pay-off for their trouble. So will the investment bankers that put these conglomerates together in the rolling 1980s.

That said, there's plainly industrial and investment logic in what's going on. The commercial pressure for consolidation and "focus" in industry comes primarily not from management and investment bankers, but from ever more demanding investors and customers. Investors want the greatest possible efficiency in use of their capital.

That in turn requires a degree of clarity and management purpose which is impossible in a group of many different businesses. In a conglomerate, the rate of return becomes fudged and obfuscated - it is possible for the poor performance of one business to hide behind the better performance of another.

The pressure for consolidation goes hand in hand with that of focus. The world becomes ever more competitive. The speed of innovation and enhancement is said to be greater than at any time this century. At the same time there is persistent downward pressure on prices. Consolidation allows corporations to counter these pressures with economies of scale.

It is indicative of how powerful these arguments are that even those of us who believe competition and diversity to be the best guarantee of the wider public interest, accept the inevitability of the process. All the same, we need to be a bit careful here. Most of us swallowed the now discredited arguments for diversification with equal enthusiasm. This time round it seems to be more than just fashion which drives the process. None the less, much of what is now being done in the name of focus and consolidation will turn out to have been equally misguided. Of that there can be no doubt.

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