Outlook: Wall Street marriage that smacks of `me too'

On US Banking Mergers, Privatising The Tube And The Energis Flotation

Another day, another mega-corporate merger, this time between two of Wall Street's "bulge bracket" investment banks. Were there special factors driving Smith Barney and Salomon Brothers together or is this our old friend globalisation at work again?

Mercifully, the statement announcing the marriage mentions the dreaded word only once (a remarkable achievement when set against the extraordinary outpouring of global gobbledegook visited upon us by Coopers & Lybrand and Price Waterhouse last week) but there is no mistaking the general tone of what Sandy Weill, the charismatic chairman of Travelers Group, is saying here.

Yes, it is all about the perceived need to get bigger and bigger to meet the challenges of a progressively integrating world economy.

This is a very similar merger to that announced earlier this year between Morgan Stanley and Dean Witter, and there is undoubtedly an element of me-too-ism in what Travelers is doing here. Again a wholesale investment bank with a substantial presence in international capital markets is being brought together with one of the US's largest retail stock brokers. Smith Barney has an outlet in every town of substance the length and breadth of the land. As with the Morgan Stanley deal, it is not immediately apparent why a merger of two such different strands of the investment banking world should either work or yield much in the way of benefit to anyone.

While it is true that there is some potential for cost- cutting, again the lack of fundamental overlap between the two businesses may make this quite limited. There will be extensive layoffs among bond traders and analysts, but that is where the process largely stops. Size in itself will also yield some benefit in the way of cheaper capital. Furthermore, Salomon gets a ready made and captive distribution network for its capital- raising escapades. There is also something to be said for the argument that size for the sake of it gives competitive edge by allowing executives to take risks that would be unthinkable for smaller organisations. Big companies can gobble up business opportunities in a way that smaller ones cannot.

If for no other reason than this, others in the industry, including our own dwindling band of independent integrated investment banks here in Britain, will feel themselves duty bound to respond.

But where does it all end? There's one person that always fails to get a mention in all this global corporate empire building - the poor old customer. As often as not, these mergers are more about crunching and exploiting the customer than serving him.

Deryck Maughan, chief executive of Salomon, is a sensible chap on the whole, as you would expect from a former Treasury man. He's also achieved astonishing success in restoring the Salomon name after the "rotten to the core", Bonfire of the Vanities frolics of the 1980s.

But is not this race for the "truly global corporation" its own form of vanity? Whether it will all end in a bonfire is anyone's guess but there is at least a reasonable possibility of it.

Is Blair going down the Tube?

Is Tony Blair about to ditch another old Labour shibboleth and privatise the Tube? Before the election he was, of course opposed to the sale of London Underground. Things have a remarkable habit of looking different in office, however, particularly when the Chancellor is busy buttoning the hairshirt even tighter and the funding applications begin to roll in.

As things stand it is all but impossible to see how public ownership of the Tube can ever deliver a decent, reliable, modern transport system for the capital. The investment backlog is currently running at something like pounds 1.5bn and is in danger of being made even worse by the Jubilee Line extension which is sucking in cash like a speeding tube train sucks in air.

Stuck in the straitjacket of public sector financing there is no way that this shortfall will ever be made good. The alternative of allowing the Underground to raise its own capital through revenue-backed bonds would simply amount to expensive government borrowing by another name.

Nor is the sticking plaster solution of the Private Finance Initiative sufficient to heal the gaping wounds in the Underground's finances. The PFI may be able to handle new rolling stock for the Northern Line but it is not equipped to fund the pounds 400m needed every year to modernise the overall network.

A full-blooded private sector solution could prove both simple and elegant, however. Use the proceeds of flotation to fund the investment backlog and then allow commercial acumen to do the rest. Last year the Underground made an operating profit of pounds 155m on sales of pounds 807m and received grants of a little under pounds 400m to invest in the core business.

In return for effectively giving the private sector the assets taxpayers could expect to reduce their ongoing funding liability. But this would be offset by the greater efficiency that private operation ought to bring to the operation of the Underground system and the cost of funding its upkeep. Whether that private sector involvement is achieved by selling off the infrastructure separately from the franchises, as with British Rail, or creating a series of vertically integrated operators owning both track, stations and passenger lines remains open.

One easy way to make the system profitable would be to close down stations which are in areas of the capital already well served - say Covent Garden - and redevelop the sites. That would be a stop too far. The challenge for Mr Blair and his ministers will therefore be to devise a system of ownership and control which balances public accountability with sufficient incentives to attract private capital. Privatisation of the Tube may remain unpalatable to many within Mr Blair's ranks but the more important realisation is that it looks like being a bankable proposition.

Living in hope at Energis

Here we go again. A flotation of a telephone operator with little in the way of track record and income much less profits but with a lot of hope invested. National Grid's confirmation that it is to float a minority stake in Energis made up in hyperbole what it lacked in financial detail. One suggestion is that in 10 years Energis will be worth more than the parent company itself, so great are the growth prospects in the business communications market.

Yet if other recent telecoms floats are anything to go by, the prospects are not encouraging as the experiences of Orange, Cable & Wireless Communications and the latest quoted telecoms stock Ionica, testify all too painfully. . Energis may parade its flashy high tech network, but critics would no doubt point out that it lacks many of the lucrative final connections to customers.

The reality may be brighter, because Energis has wisely steered clear of the consumer market and has carved an impressive niche in providing private networks in the media and retail industries. Whether that justifies a valuation of pounds 1bn is another matter altogether.

Start your day with The Independent, sign up for daily news emails
Life and Style
Steve Shaw shows Kate how to get wet behind the ears and how to align her neck
healthSteven Shaw - the 'Buddha of Breaststroke' - applies Alexander Technique to the watery sport
Arts and Entertainment
The sight of a bucking bronco in the shape of a pink penis was too much for Hollywood actor and gay rights supporter Martin Sheen, prompting him to boycott a scene in the TV series Grace and Frankie
tv
Sport
footballShirt then goes on sale on Gumtree
Voices
Terry Sue-Patt as Benny in the BBC children’s soap ‘Grange Hill’
voicesGrace Dent on Grange Hill and Terry Sue-Patt
Arts and Entertainment
Performers drink tea at the Glastonbury festival in 2010
music
Arts and Entertainment
Twin Peaks stars Joan Chen, Michael Ontkean, Kyle Maclachlan and Piper Laurie
tvName confirmed for third series
Sport
Cameron Jerome
footballCanaries beat Boro to gain promotion to the Premier League
Arts and Entertainment
art
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine