Victors of naval battle may not win the war
City & Business
Sunday 28 May 1995
But the warship building industry is simple. A child of six could grasp it. There are only three companies making warships. There is just one customer, the Ministry of Defence. And the product range is tiny. With nuclear subs, for example, you have a choice of just two models, the Trident or the Trafalgar.
You couldn't come up with a more straightforward sector to analyse. Deciding whether a proposed merger of two of the three suppliers is against the public interest should be a black and white judgment. Yet the panel of experts on the Monopolies & Mergers Commission couldn't agree.
The majority said GEC's offer for VSEL would be against the public interest. But two of the six panellists disagreed. And Michael Heseltine heeded the minority view, last week clearing the GEC bid with a minimum of conditions, as well as giving the green light to the less contentious rival offer from British Aerospace.
The inability of the six to come to a common view speaks volumes about competition policy. The judgment about any proposed merger will often be dictated more by the attitudes of the judge and jury than the facts of the case.
Heseltine has repeatedly made plain his attitude. This is that Britain needs national champions able to compete on a global scale. If this means creating monopolists nationally, so be it. They have to have the size and clout to compete internationally.
You can see his point in industries where there is unfettered competition and free trade and where transport costs are negligible: pharmaceuticals are a classic case, hence the clearance of the Glaxo/Wellcome merger. But the armaments industry is anything but a free global market. National governments source locally whenever they can. Britain is no exception: we buy the occasional Chinook helicopter from America, but all our warships are British-made. And all the major industrialised economies do likewise. The export market is limited to the developing world. The national champion in warship building will be lucky to build more than a couple of frigates for the Malaysians. We're not about to sell destroyers to the French.
Mr Heseltine was wrong. He should have heeded the majority MMC view - that a GEC takeover of VSEL would be likely to increase warship prices for the MoD and stifle improvements in design and production.
All that is water under the propeller, however. The City is now braced for a lively takeover battle. Each side has 21 days to table fresh bids and this weekend is studying the fine detail of VSEL's latest results. The betting seems to be going BAe's way. It can exploit tax advantages unavailable to GEC, and its growing stature in the City has inflated the value of its likely paper offer. But no one should underestimate GEC's Lord Weinstock. He has a cash pile of pounds 2bn and can always out-gun BAe if he chooses to. He also has a track record in shipbuilding that BAe lacks.
At the pounds 20 a share level being mooted as the clinching price, it's not at all clear that whoever wins the auction will necessarily win the war. If there is any clear victor, it is the shareholders of VSEL.
In April 1992, with the prospect of a putative Labour government cutting defence spending, the shares were languishing at pounds 2.70; they closed on Friday at pounds 17.85, with every prospect of going higher still.
THE level of public outrage each time another director of a privatised utility takes delivery of a tankerful of gravy surprises even me. There is something about former public servants becoming suddenly rich that touches the rawest of nerves. With Virginia Bottomley on the panel of the BBC's Question Time last week, the first question was not about the Health Service, but about the National Grid directors' share packages.
Coachloads of British Gas shareholders are due to descend on the London Docklands Arena this week from as far away as Aberdeen. They are making the trip, not to complain about gas charges, but to excoriate the board for giving Cedric Brown, the chief executive, a 70 per cent pay rise.
For all the sound and fury, the critical resolutions will be defeated. Institutional investors are rallying round the management. It's all rather pathetic. The Pirc resolution at the heart of the debate could hardly be more innocuously worded: it simply calls on British Gas to revise its policy on directors' pay in line with best practice. Hardly controversial.
But institutional investors are not even prepared to support this. And their trade body, the National Association of Pension Funds, has scaled new heights of spinelessness by urging members to vote, but not saying which way.
If ordinary people really want to crack down on directors' pay, they have to demand change from the fund managers who look after their pensions, life assurance, unit trusts and other investments. Only when pension fund trustees stamp their feet will fund managers start to change their spots.
A publicly raised eyebrow from a senior figure from the Pru or Mercury Asset Management would achieve far more than the protests of a coachful of angry Aberdonians. But it isn't going to happen. Not this week, anyway.
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