View from City Road: Inchcape puts its money on synergy

Financial services are one of the few remaining sectors where the synergies are large enough to justify paying fancy takeover prices. Back-office staff are a sizeable item in an insurance broking operation and the scope for reducing costs by putting two overlapping businesses together is well worthwhile.

Nevertheless the stock market was spooked by the pounds 176.6m cash price tag that Inchcape has put on Hogg Group after a stiff bidding competition led by rivals Hongkong and Shanghai Bank.

Even the most charitable forecasts for Hogg are that after a sharp setback last year it will make pre-tax profits of pounds 11m in 1995, implying a price/earnings ratio of 23.

While Hogg shareholders celebrated their good fortune, Inchcape shares fell 9p to 552p in a rising market.

This may be a short-sighted reaction. The overlap between Hogg and Inchcape's insurance broking offshoot, Bain Clarkson, in UK small corporate business will over time mean big back-office savings.

In the future, the proposed listing of a good chunk of the combined entity on the stock market will create the third-largest UK- listed insurance broker - and also a springboard for further cost-cutting expansion into a rapidly consolidating industry.