It is worth taking a gamble on British Telecom

GlaxoSmithKline

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Cazenove to take action against BT short-sellers as rights deadline nears

For hundreds of thousands of shareholders in British Telecom, it's make your mind up time ­ sell your rights in the market, allow the company to sell them on your behalf, or take them up. A large number of BT's army of retail investors, many of them dating from the original privatisation in the mid-1980s, might reasonably think that to take up the rights is merely to throw good money after bad. BT has proved a poor investment since privatisation, having underperformed the rest of the market by nearly 40 per cent. The only time it significantly outperformed was during the technology bubble of 1999 and early 2000, which was an aberration.

Even so, that doesn't necessarily mean you should be rushing to sell your rights in the market, as some retail brokers are recommending. Most private investors will have quite small shareholdings, and after commission, the proceeds from selling in the market will be barely worth having. "Tail eating", or selling sufficient rights to pay for the rest, would not be an appropriate strategy unless you have a quite sizeable holding.

For most retail investors, then, the choice is between taking up the rights and allowing the company to sell them for you. Since the rump will be placed at a discount, you won't get the full amount from the latter option. That's one reason for taking up the rights, albeit not a particularly good one. A better reason is that BT shares are being heavily shorted in the market by hedge funds, arbs and other professional investors, this on the assumption that they can unwind their positions by buying the rights at a discount when the rump is sold.

Cazenove, BT's brokers, is warning that those caught shorting won't be allowed to participate in the placing, but in any case the shorting strategy may be misjudged, for it depends on there being sufficient rights to be sold to satisfy the short positions. This is quite a gamble. Most institutional investors will take up their rights and even if all retail investors, accounting for 17.5 per cent of the shares, were not to do so, there may not be sufficient stock to go round. In these circumstances there will be a bear squeeze, BT shares will rise, and those who have sold will be left looking stupid.

But the chief reason for taking up the rights is that there is good reason for believing the BT turnaround story. There are a number of excellent businesses within BT, but there have been some bad strategic errors, an out of control debt mountain, poor management, and, ironically for such a company, a real problem with communication. All four failings are now being addressed. The mobile business is being demerged, and once consolidated with one of the other big European players, there is no reason it shouldn't command a Vodafone or Orange-type valuation. The structural changes planned for the rest of the group also look promising.

BT is the first of the major European PTOs with its rights issue and asset disposals ­ a rare case of seizing the initiative ­ and this puts it at an advantage to others. BT will also benefit relative to the others from the fact that all its shares are publicly owned. This is not the case with other PTOs with their residual state holdings, and they will suffer consequentially from the forthcoming process of index reweighting from size of the whole company to size of the free float.

None of this is to say the shares are without risk. There is a real danger of the telecommunications sector as a whole returning to a utility rating, so badly has it over extended itself and so great is the capacity overhang. But if this happens, the armageddon wrought among BT investors will be nothing compared with what's in store at Vodafone and the even more highly rated alternative network providers.

GlaxoSmithKline

Most big corporations are being forced to learn the hard way about wider social responsibility, and no more so than in the pharmaceuticals industry, which has been profoundly shocked by the campaign against it from Oxfam and other non-government organisations.

The big pharma companies are not allowed in most countries to advertise their prescribed products directly, so historically they have been relatively anonymous organisations to all but the investment and medical communities. In any case, because they are involved in the business of developing life saving and enhancing drugs, they have traditionally been thought of as the good guys.

All that changed with the humanitarian crisis of aids, malaria and tuberculosis sweeping Africa and other parts of the Third World. With their widely misinterpreted legal attempt to prevent generic pirating of their patents in South Africa, the drug companies became for many pariah organisations ­ just as bad as the big oil companies if not worse. The experience has cut them to the quick and is leading to some radical rethinking of corporate objectives and responsibilities.

Next week GlaxoSmithKline publishes its own stab at the corporate responsibility thing, "Facing the Challenge". It would be easy cynically to dismiss the document as little more than public relations and lip service, but there's more to it than that. "Facing the Challenge" makes a genuine and well thought out attempt to address what, for all organisations rightly focused on the major imperative of generating shareholder value, is exceptionally difficult territory. As Shell has discovered, getting the balance right between maximising returns on the one hand, and social and environmental responsibility on the other is a virtually impossible task.

To stand any chance at all involves a quite substantial reworking of traditional business models and ways of working. Equally important is convincing the capital markets that there are tangible long-term commercial benefits to be had from being a good corporate citizen. This is better appreciated than it was, but it is still an uphill task persuading many investors that it is worth spending money and forgoing profit for the greater good of the world at large. Capitalism and socialism are not easy bed fellows.

With the big drug companies it is perhaps doubly hard. In "Facing the Challenge", GSK commits to selling drugs in poorer nations for infectious, life threatening diseases including aids and malaria at prices up to 90 per cent less than the average world price. For many, even that price is not enough. Generic companies can provide the products even cheaper, but only because they have no research and development costs. Public pressure may eventually force GSK and others to go even further, but they can only do so if those in affluent Western societies deliver on their side of the bargain.

Companies like GSK wouldn't exist without patent protection or indeed the ability to recoup their research and development costs from what they charge. The rewards of success are huge, but equally, the cost of failure can be devastating. To provide what people seem to want, that is near free treatment for infectious disease in the Third World, requires committed public and government support for the differential pricing and cross subsidisation it requires. Without it, pharmaceutical companies will give up on the search for life saving therapies, and instead concentrate on lifestyle drugs like Prozac and Viagra, for which they can charge what they like.

j.warner@independent.co.uk