Outlook: Wall Street marriage that smacks of `me too'
On US Banking Mergers, Privatising The Tube And The Energis Flotation
Thursday 25 September 1997
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.
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