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.

Life and Style
Justin Bieber performing in Paris earlier this year
Arts and Entertainment
Martin Freeman and Lauren O'Neil in Jamie Lloyd's Richard III
theatreReview: The monarch's malign magnetism and diabolic effrontery aren’t felt
Arts and Entertainment
'Molecular Man +1+1+1' by Jonathan Borofsky at Yorkshire Sculpture park
Glamour magazine hosts a yoga class with Yogalosophy author Mandy Ingber on June 10, 2013 in New York City.
newsFather Padraig O'Baoill said the exercise was 'unsavoury' in a weekly parish newsletter
people'She is unstoppable', says Jean Paul Gaultier at Paris show
ebookA unique anthology of reporting and analysis of a crucial period of history
Alexis Sanchez and apparently his barber Carlos Moles in Barcelona today
Arts and Entertainment
Miley Cyrus has her magic LSD brain stolen in this crazy video produced with The Flaming Lips
Arts and Entertainment
In his own words: Oscar Wilde in 1882
theatreNew play by the Oscar Wilde's grandson reveals what the Irish wit said at his trials - and what they reveal about the man
Arts and Entertainment
Unless films such as Guardians of the Galaxy, pictured, can buck the trend, this summer could be the first in 13 years that not a single Hollywood blockbuster takes $300m
filmWith US films earning record-breaking amounts at the Chinese box office, Hollywood is more than happy to take its lead from its new-found Asian audience
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

HR Advisor - 6 months FTC Wimbledon, SW London

£35000 - £40000 per annum + Benefits: Ashdown Group: HR Advisor - 6 Months Fix...

IT Manager - Tolworth, Surrey - £40,000

£37000 - £40000 per annum: Ashdown Group: IT Manager - Tolworth, Surrey - £40,...

Compliance Officer - Trading Firm - London

£55000 - £65000 per annum + excellent package & bonus expectations: Real Staff...

Senior Compliance Executive - Top Bank - London

£80000 - £90000 per annum + competitive: Real Staffing: A highly successful Co...

Day In a Page

The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice
Hollywood targets Asian audiences as US films enjoy record-breaking run at Chinese box office

Hollywood targets Asian audiences

The world's second biggest movie market is fast becoming the Hollywood studios' most crucial
Grindr founder Joel Simkhai: 'I've found love on my dating app - and my mum keeps trying to hook me up!'

Grindr founder Joel Simkhai: 'I've found love on my dating app'

Five years on from its launch and Grindr is the world's most popular dating app for gay men. Its founder Joel Simkhai answers his critics, describes his isolation as a child
Autocorrect has its uses but it can go rogue with embarrassing results - so is it time to ditch it?

Is it time to ditch autocorrect?

Matthew J X Malady persuaded friends to message manually instead, but failed to factor in fat fingers and drunk texting
10 best girls' summer dresses

Frock chick: 10 best girls' summer dresses

Get them ready for the holidays with these cool and pretty options 
Westminster’s dark secret: Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together

Westminster’s dark secret

Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together
A History of the First World War in 100 Moments: Dulce et decorum est - a life cut short for a poet whose work achieved immortality

A History of the First World War in 100 Moments

Dulce et decorum est: a life cut short for a poet whose work achieved immortality
Google tells popular music website to censor album cover art in 'sexually explicit content' ban

Naked censorship?

The strange case of Google, the music website and the nudity take-down requests
Howzat! 8 best cricket bats

Howzat! 8 best cricket bats

As England take on India at Trent Bridge, here is our pick of the high-performing bats to help you up your run-count this summer 
Brazil vs Germany World Cup 2014 comment: David Luiz falls from leader figure to symbol of national humiliation

David Luiz falls from leader figure to symbol of national humiliation

Captain appears to give up as shocking 7-1 World Cup semi-final defeat threatens ramifications in Brazil