In my Money Week column this week, I've been looking at how the City is constantly attacking Vodafone. Here is a taster...
What’s the most successful British company of the last twenty years? Tesco would be a contender, but it is still a marginal force outside of Britain, and lags Wal-Mart and Carrefour in the global retail market. Royal Bank of Scotland would have been a possibility until Sir Fred Goodwin blew the whole bank up. GlaxoSmithKline has been treading water since its 1980s to early 1990s heyday.
In fact the answer is easy. Vodafone.
The telecoms conglomerate has 347 million subscribers, and runs the largest mobile network in the world, measured by revenues, even if it is slightly behind China Mobile in terms of its total customer base. It operates networks in 31 countries, and has partners in another 44. Not bad for a company which three decades ago was just a small unit of the long-since forgotten Racal.
And yet you would hardly guess that from the way the City treats the business. The share price is beaten up. The chief executive Vittorio Colao is under constant pressure to dispose of assets. There is an endless stream of stories about how he should be selling his businesses in the US, or France, or somewhere else. Demands are tabled for special dividends and share buy-backs.
It is crazy – and an illustration of the City’s short-termism at its most destructive. There are plenty of criticisms that can justifiably be made of Vodafone. And yet the mobile industry is still in its infancy. Its play for global dominance may yet pay off. It may be able to take full control of units it holds minority stakes in. The City should be supporting once of the UK’s few industrial leaders, not trying to tear it apart.
The last week has seen yet another round of pressure on Colao to dismantle the empire that his predecessor Sir Chris Gent so expensively put together at the turn of the last decade. The company’s $6.5 billion stake in China Mobile was sold off, amid pressure for divestments. The 45% that it owns in Verizon Wireless, the largest mobile network in the US, is constantly under review. So to is the 44% stake it owns in the French operator SFR, of which Vivendi owns the other half. The 25% stake in Poland’s biggest mobile operator Polkomtel could be on the block. One shareholder group to lobby for the break-up of the business has been active since 2007. The demand for deals to boost shareholder returns builds all the time.
Some of the criticism is fair. Amid the telecoms bubble of the late 1990s, the company spent almost £200 billion on acquisitions. The $175 billion it paid for Germany’s Mannesmann remains one of the largest hostile takeovers ever attempted in Western Europe. Of the largest fifty deals of all time, Vodafone was a party to three of them. Shareholders didn’t see much of a return for all that frantic, and expensive, activity. Spending £200 billion only produced a company worth £85 billion today: not a great return, even if much of the money was in shares rather than cash. The share price has perked up this year – its dividend is one of the most generous and safest on the London market – but at just over 160p is still a long way short of the 444p it reached in March 2000.
But so what? All that is ancient history. The fact remains that whilst it may have over-paid for its acquisitions, Vodafone is today an industrial giant. No other mobile company comes close to its reach and scale in the mobile market: China Mobile may have more customers, but it doesn’t have anything like the same global reach.
There is still a good chance that its ambitions may pay off one day. No one knows precisely how the mobile industry will develop. It is, in truth, still in its infancy. It may end up destroying fixed line networks. It may merge with the computing and social networking industries. It may develop into something completely different. Whether having a global presence, in the way that Vodafone does, will pay off remains to be seen. It’s a gamble. But it is hardly a foolish one. Being the biggest gives you muscle in a market. It doesn’t guarantee success – there are plenty of big companies that completely mess up – but it’s a good place to be starting from.
Many of its minority stakes are frustrating. It hasn’t received any dividend on its Verizon shares since 2005: the two companies appear locked in a stand-off that makes the War of the Roses seem amicable and straightforward by comparison. Vivendi shows no interest in selling Vodafone majority control of the French operation they share. In some countries, it has already abandoned its ambitions. In Japan, for example, it sold out in 2006 after years of making little headway in one of the world’s most competitive, and technologically advanced, telecoms business.
But is still crazy to pressurize the company to sell out of successful businesses in France, Poland, and most crucially the US. It may be a long struggle to get control of Verizon. But the prize is surely worth having. Likewise, it doesn’t make much sense to sell out of the Polish market, which must surely have some of the best growth prospects in Europe. It may not have complete control of that business. But who is to say it won’t be able to win it one day.
Mobile telecoms is one of the world’s most lucrative and innovative consumer industries. For the UK to have the global leader is a remarkable achievement. It is an indictment of the City that it only wants to rip that apart – and can’t seem to see any virtue in supporting the company. The German stock market doesn’t try and break-up its most successful business, and neither does the Swiss or the Japanese. The London market should be more worried about supporting the country’s few world-class companies – and should spend a lot less time thinking about where the next deal is coming from.
Showing posts with label city. Show all posts
Showing posts with label city. Show all posts
Monday, 27 September 2010
Wednesday, 18 August 2010
The City's Fresh Challengers....
In my Money Week column this week, I've been lookig at the fresh challenges the cuty faces from financia;l centres in the emerging markets. Here's a taster....
Three years on from the start of the credit crunch, plenty has been written about how not much has changed. The banks are all paying big bonuses again. Trading levels are close to where they were before the crisis began, and equity markets have recovered the bulk of the losses they suffered when the markets crashed. At this rate, even Sir Fred Goodwin will be able to show his face in public again soon.
But one thing has changed, and decisively so.
In the wake of the credit crunch, all the traditional financial centres have lost ground. The City of London, along with New York and Tokyo, is being challenged by rising group of new capital markets in places such as Seoul, Mumbai, Shenzhen and Dubai.
That trend is not going to reverse anytime soon. In response, the City has to work out how to remain competitive in the decade ahead. It should focus on three tasks. Concentrate on its Northern European heartland. Encourage more inward investment. And focus on selling expertise and advice more than financial products themselves.
There is little mistaking the way the hierarchy of financial centres has been shaken up in the wake of the credit crunch. We were used to a financial universe in which New York, London and Tokyo were the dominant forces (and pretty much in that order). Hong Kong, Singapore, Frankfurt and Geneva played supporting roles, taking the stage to perform character parts, but never threatening to hog the main action, rather like John Cleese playing Q in a James Bond movie.
Now, however, there are signs that is starting to change. The traditional centres are gradually losing their share of the market. For example, the US and the European Union between them accounted for 75% of global stock market capitalisation in 2001, but are down to 50% this year. The number of listed companies from the BRIC nations (Brazil, Russia, India and China) was just 2% of the global total in 2001. It is 22% now. Last year, more than half of the world’s IPOs were in China alone. Likewise, Asia’s share of the total investment banking revenue pool rose from 13% in 2000 to more than 20% in 2009.
Not surprisingly, new financial centres are emerging to capitalise on that boom. In the annual ranking of the competitiveness of financial centres published by the City of London, London and New York have remained at the top for years. But look at the smaller cities racing up the table. Cities such as Beijing, Seoul, Shenzhen, Shanghai, and Dubai have improved their global ranking hugely since 2007: Beijing is up 20 places, Seoul up 17, Shenzhen up 14, Shanghai up 13, and Dubai up seven spots. Seoul has increased its competitiveness by 42% in just two years. They are clearly the rising powers of global finance.
“In the long-run, emerging financial centres, especially in Asia, are likely to succeed in establishing the scale and scope in their market environment that will help them advance into the top group of global locations,” concluded a recent report on the subject from Deutsche Bank. It predicts a ‘multi-polar’ financial market, with many different centres sharing the available revenues. The big three will remain strong, but they will never be able to recapture their traditional dominance.
It is no great surprise that Seoul and Shenzhen are ring fast up the rankings. That is where the growth is. Other centres may join them. The Russian President Dmitry Medvedev spoke recently of turning Moscow into a major financial hub, and the rouble into one of the world’s reserves currencies. For a country that was defaulting on its debts only slightly over a decade ago, it might not sound very likely. But with Russia’s rapid growth, it would be foolish to bet against it.
So how should the City respond?
There are three ways it can remain competitive.
First, it needs to focus on its Northern European hinterland. All financial centres have strong ties to their local markets. The City has spent too much time focussing on being a global hub. But having decisively bested Frankfurt and Paris to become the main European financial centre, and with the euro not looking like much of a threat to anyone anymore (except possibly to itself), it should be serving the French, German, Dutch and Scandinavian markets. It should be the place entrepreneurs from Eindhoven, Hanover or Lyon come to raise funds, and stage their IPOs. The City needs to widen its definition of its backyard – then make sure it dominates it.
Next, encourage more inward investment. It has done brilliantly as a base for the giant American and European investment banks. Big JP Morgan and UBS offices have made it hugely powerful. But those banks are not the rising forces. What the City needs is to attract a new wave of incomers. It should be the place that Indian, South Korean, Chinese, Brazilian and Russian banks and brokers set up their European offices. It needs to figure out what they need, and how to offer it to them. Ideally, London should be the place a Shenzhen bank plugs itself into the global money markets quickly and cheaply.
Thirdly, get into the picks and shovels business. In a gold rush, it’s the guys selling the digging equipment who make the most money. The new financial centres still have weak infrastructure. They need IT systems, back offices, and the expertise to run banks and bond markets. London should concentrate on selling it to them. Just as the German economy benefits from the rise of the BRIC economies by selling them the machine tools they need to build all those factories, so London should be selling them the machine tools they need to get into the financial services industry.
If London can do all of that, it should be able to remain competitive. But it needs to guard against complacency – because it isn’t going to be easy.
Three years on from the start of the credit crunch, plenty has been written about how not much has changed. The banks are all paying big bonuses again. Trading levels are close to where they were before the crisis began, and equity markets have recovered the bulk of the losses they suffered when the markets crashed. At this rate, even Sir Fred Goodwin will be able to show his face in public again soon.
But one thing has changed, and decisively so.
In the wake of the credit crunch, all the traditional financial centres have lost ground. The City of London, along with New York and Tokyo, is being challenged by rising group of new capital markets in places such as Seoul, Mumbai, Shenzhen and Dubai.
That trend is not going to reverse anytime soon. In response, the City has to work out how to remain competitive in the decade ahead. It should focus on three tasks. Concentrate on its Northern European heartland. Encourage more inward investment. And focus on selling expertise and advice more than financial products themselves.
There is little mistaking the way the hierarchy of financial centres has been shaken up in the wake of the credit crunch. We were used to a financial universe in which New York, London and Tokyo were the dominant forces (and pretty much in that order). Hong Kong, Singapore, Frankfurt and Geneva played supporting roles, taking the stage to perform character parts, but never threatening to hog the main action, rather like John Cleese playing Q in a James Bond movie.
Now, however, there are signs that is starting to change. The traditional centres are gradually losing their share of the market. For example, the US and the European Union between them accounted for 75% of global stock market capitalisation in 2001, but are down to 50% this year. The number of listed companies from the BRIC nations (Brazil, Russia, India and China) was just 2% of the global total in 2001. It is 22% now. Last year, more than half of the world’s IPOs were in China alone. Likewise, Asia’s share of the total investment banking revenue pool rose from 13% in 2000 to more than 20% in 2009.
Not surprisingly, new financial centres are emerging to capitalise on that boom. In the annual ranking of the competitiveness of financial centres published by the City of London, London and New York have remained at the top for years. But look at the smaller cities racing up the table. Cities such as Beijing, Seoul, Shenzhen, Shanghai, and Dubai have improved their global ranking hugely since 2007: Beijing is up 20 places, Seoul up 17, Shenzhen up 14, Shanghai up 13, and Dubai up seven spots. Seoul has increased its competitiveness by 42% in just two years. They are clearly the rising powers of global finance.
“In the long-run, emerging financial centres, especially in Asia, are likely to succeed in establishing the scale and scope in their market environment that will help them advance into the top group of global locations,” concluded a recent report on the subject from Deutsche Bank. It predicts a ‘multi-polar’ financial market, with many different centres sharing the available revenues. The big three will remain strong, but they will never be able to recapture their traditional dominance.
It is no great surprise that Seoul and Shenzhen are ring fast up the rankings. That is where the growth is. Other centres may join them. The Russian President Dmitry Medvedev spoke recently of turning Moscow into a major financial hub, and the rouble into one of the world’s reserves currencies. For a country that was defaulting on its debts only slightly over a decade ago, it might not sound very likely. But with Russia’s rapid growth, it would be foolish to bet against it.
So how should the City respond?
There are three ways it can remain competitive.
First, it needs to focus on its Northern European hinterland. All financial centres have strong ties to their local markets. The City has spent too much time focussing on being a global hub. But having decisively bested Frankfurt and Paris to become the main European financial centre, and with the euro not looking like much of a threat to anyone anymore (except possibly to itself), it should be serving the French, German, Dutch and Scandinavian markets. It should be the place entrepreneurs from Eindhoven, Hanover or Lyon come to raise funds, and stage their IPOs. The City needs to widen its definition of its backyard – then make sure it dominates it.
Next, encourage more inward investment. It has done brilliantly as a base for the giant American and European investment banks. Big JP Morgan and UBS offices have made it hugely powerful. But those banks are not the rising forces. What the City needs is to attract a new wave of incomers. It should be the place that Indian, South Korean, Chinese, Brazilian and Russian banks and brokers set up their European offices. It needs to figure out what they need, and how to offer it to them. Ideally, London should be the place a Shenzhen bank plugs itself into the global money markets quickly and cheaply.
Thirdly, get into the picks and shovels business. In a gold rush, it’s the guys selling the digging equipment who make the most money. The new financial centres still have weak infrastructure. They need IT systems, back offices, and the expertise to run banks and bond markets. London should concentrate on selling it to them. Just as the German economy benefits from the rise of the BRIC economies by selling them the machine tools they need to build all those factories, so London should be selling them the machine tools they need to get into the financial services industry.
If London can do all of that, it should be able to remain competitive. But it needs to guard against complacency – because it isn’t going to be easy.
Monday, 12 April 2010
Why Britain Needs More Banks....
In my Money Week column this week I've been discussing why Britain needs more banks. Here's a taster....
We may be used to Virgin planes, trains, health clubs, and the dozens of other ventures that the serial entrepreneur Richard Branson has launched over the years. But a Virgin Bank? Thanks to a £100 million investment by the American billionaire Wilbur Ross, we may end up as familiar with Virgin banks on the high street as we are with Barclays, Lloyds and HSBC.
It would be easy to portray that as a brave incursion into a toughly competitive market. No doubt that is the way Virgin formidable PR team will be spinning it if the new bank does get off the ground.
And yet, in truth, it is more interesting to look at it the other way around. What is striking is not that someone is finally attempting to launch a new bank, but that so few people have done so. Eighteen months after the credit crunch caused the near collapse of the British banking system, the old players are still firmly in control of the industry. And yet, these companies are widely disliked, distrusted, and they sell poorly designed products at rip-off prices. In any normal industry, they’d have been blown out of the water by dozens of entrepreneurs.
The fact they haven’t been suggests banking is still an over-protected oligopoly, with too many barriers too entry. Until that changes, we aren’t going to get a safer, better value financial system.
True, there is plenty of interest in launching new banks in the UK.
Virgin has already made tentative moves, buying one small bank to acquire a license. The money million from Wilbur Ross is earmarked for a bid for 318 Royal Bank of Scotland branches which are due to sold off: if successful, that will give it an immediate presence in the market.
Sandy Chen, a former Panmure Gordon analyst, had put together plans for a new bank called Walton & Co. Vernon Hill, another US entrepreneur, is launching a new venture called Metro Bank: it plans to open branches in South Kensington and London later this year, with plans for a network concentrated in the South-East of England. And, somewhat inevitably, Tesco is sniffing around the market, with plans to turn its existing financial services arm into a full-scale bank offering current accounts alongside the dog food and bananas.
They are, however, are fairly small-scale. Their impact on the mass market is likely to be limited. And yet, there can be few industries as wide open to new players as British banking. It isn’t hard to think of reasons why this should be a great time to launch a new bank.
For starters, the banks are widely disliked. They took crazy risks, went broke, got us all to bail them out, then went straight back to paying themselves vast bonuses. Even estate agents are more popular than bankers right now. Parking wardens could probably out-poll them. If people could punish the banks by switching their business elsewhere, then they surely would.
Next, their recklessness in the run up to the credit crunch has left many people wondering if their bank is really that safe. Two years ago, most people hardly gave a second thought to whether their money was safe with one of the High Street names. Now they are nervous of leaving big sums on deposit. They have blown most of the trust they once had. An airline that did that would expect to be in trouble: there is no reason why a bank should be any different.
Finally, the products were never that great anyway, but in the last two years they have got even worse. The banks have been busy repairing their battered balance sheets, and they have been doing so at the expense of the customer. Interest rates are at a record low of 0.5. But can you get a mortgage at that rate? Or a loan for your company. Forget it. In reality, they banks have been widening the spread between what they pay their depositors and what they charge for loans. It is a bad deal for both savers and borrowers.
In short, these are unpopular companies, that nobody trusts, offering a poor value stuff that often doesn’t do what it’s meant to – but it is still an essential product that everyone needs. If that isn’t an open goal for an entrepreneur, it is hard to know what is.
In a normal, properly functioning free market, you’d expect to see lots of new players getting into the business. In airlines, Ryanair blew up the old, established carrier. In autos, first the Japanese and now the Koreans took huge chunks of the market from the old European and American giants. Apple has just taken Nokia and Motorola apart in the mobile phone business. In most industries, old established players are constantly getting challenged by new entrants. Rubbish companies get replaced by better ones. That’s how capitalism works. So why not in banking?
Of course, there are some barriers to entry. It’s a lot of bother to change your bank account. There is a certain amount of inertia on the part of the consumer. It’s hard work to get people to feel safe putting money into a bank they have never heard of.
Even so, it is hard to escape the conclusion that this is still too difficult an industry to get into. The obstacle of acquiring a banking license, the burden of regulation, and the way that payment systems between the banks are organised, all mean it is hard for new players to get a toe-hold in the market. And it’s getting harder. Regulators are so nervous of a bank going under, they are making it tougher and tougher to break into the market.
In the wake of the credit crunch we heard a lot about how the system of financial regulation should be reformed. And yet, in reality, there are very few economic problems that can’t be fixed with a healthy blast of competition.
What the government and the regulators should be doing is making it as easy as possible for new players to get into the industry. Not just Virgin and Metro and Tesco: there should be dozen of new banks, all finding their own space in the marketplace. Only diversity and competition will make the system work better. And if there is one thing the regulators should be focussing on for the next ten years, it should be that.
We may be used to Virgin planes, trains, health clubs, and the dozens of other ventures that the serial entrepreneur Richard Branson has launched over the years. But a Virgin Bank? Thanks to a £100 million investment by the American billionaire Wilbur Ross, we may end up as familiar with Virgin banks on the high street as we are with Barclays, Lloyds and HSBC.
It would be easy to portray that as a brave incursion into a toughly competitive market. No doubt that is the way Virgin formidable PR team will be spinning it if the new bank does get off the ground.
And yet, in truth, it is more interesting to look at it the other way around. What is striking is not that someone is finally attempting to launch a new bank, but that so few people have done so. Eighteen months after the credit crunch caused the near collapse of the British banking system, the old players are still firmly in control of the industry. And yet, these companies are widely disliked, distrusted, and they sell poorly designed products at rip-off prices. In any normal industry, they’d have been blown out of the water by dozens of entrepreneurs.
The fact they haven’t been suggests banking is still an over-protected oligopoly, with too many barriers too entry. Until that changes, we aren’t going to get a safer, better value financial system.
True, there is plenty of interest in launching new banks in the UK.
Virgin has already made tentative moves, buying one small bank to acquire a license. The money million from Wilbur Ross is earmarked for a bid for 318 Royal Bank of Scotland branches which are due to sold off: if successful, that will give it an immediate presence in the market.
Sandy Chen, a former Panmure Gordon analyst, had put together plans for a new bank called Walton & Co. Vernon Hill, another US entrepreneur, is launching a new venture called Metro Bank: it plans to open branches in South Kensington and London later this year, with plans for a network concentrated in the South-East of England. And, somewhat inevitably, Tesco is sniffing around the market, with plans to turn its existing financial services arm into a full-scale bank offering current accounts alongside the dog food and bananas.
They are, however, are fairly small-scale. Their impact on the mass market is likely to be limited. And yet, there can be few industries as wide open to new players as British banking. It isn’t hard to think of reasons why this should be a great time to launch a new bank.
For starters, the banks are widely disliked. They took crazy risks, went broke, got us all to bail them out, then went straight back to paying themselves vast bonuses. Even estate agents are more popular than bankers right now. Parking wardens could probably out-poll them. If people could punish the banks by switching their business elsewhere, then they surely would.
Next, their recklessness in the run up to the credit crunch has left many people wondering if their bank is really that safe. Two years ago, most people hardly gave a second thought to whether their money was safe with one of the High Street names. Now they are nervous of leaving big sums on deposit. They have blown most of the trust they once had. An airline that did that would expect to be in trouble: there is no reason why a bank should be any different.
Finally, the products were never that great anyway, but in the last two years they have got even worse. The banks have been busy repairing their battered balance sheets, and they have been doing so at the expense of the customer. Interest rates are at a record low of 0.5. But can you get a mortgage at that rate? Or a loan for your company. Forget it. In reality, they banks have been widening the spread between what they pay their depositors and what they charge for loans. It is a bad deal for both savers and borrowers.
In short, these are unpopular companies, that nobody trusts, offering a poor value stuff that often doesn’t do what it’s meant to – but it is still an essential product that everyone needs. If that isn’t an open goal for an entrepreneur, it is hard to know what is.
In a normal, properly functioning free market, you’d expect to see lots of new players getting into the business. In airlines, Ryanair blew up the old, established carrier. In autos, first the Japanese and now the Koreans took huge chunks of the market from the old European and American giants. Apple has just taken Nokia and Motorola apart in the mobile phone business. In most industries, old established players are constantly getting challenged by new entrants. Rubbish companies get replaced by better ones. That’s how capitalism works. So why not in banking?
Of course, there are some barriers to entry. It’s a lot of bother to change your bank account. There is a certain amount of inertia on the part of the consumer. It’s hard work to get people to feel safe putting money into a bank they have never heard of.
Even so, it is hard to escape the conclusion that this is still too difficult an industry to get into. The obstacle of acquiring a banking license, the burden of regulation, and the way that payment systems between the banks are organised, all mean it is hard for new players to get a toe-hold in the market. And it’s getting harder. Regulators are so nervous of a bank going under, they are making it tougher and tougher to break into the market.
In the wake of the credit crunch we heard a lot about how the system of financial regulation should be reformed. And yet, in reality, there are very few economic problems that can’t be fixed with a healthy blast of competition.
What the government and the regulators should be doing is making it as easy as possible for new players to get into the industry. Not just Virgin and Metro and Tesco: there should be dozen of new banks, all finding their own space in the marketplace. Only diversity and competition will make the system work better. And if there is one thing the regulators should be focussing on for the next ten years, it should be that.
Tuesday, 23 March 2010
Blame The City For EMI's Decline....
The decline of the record label EMI is usually put down to the problems in the music industry. But really it is the City that is to blame, as I explained in my Money Week column last week. Here's a taster....
It is hard to know how much longer the record label EMI can stagger on under its current management. Every week seems to bring more bad news: selling the legendary Abbey Road studios to raise cash: replacing the chief executive: and losing a legal battle with Pink Floyd over whether it can sell single tracks as downloads.
Ever since the private equity mogul Guy Hands bough the business for £2.4 billion in 2007, the business has staggered from one disaster to another. The stars are already jumping from the ship: The Rolling Stones and Radiohead, have already left, Pink Floyd and Queen are rumoured to be on the way out. The private equity investors look like being wiped out, and there are doubts about whether the company itself can survive. It may well end up being auctioned off by its bankers. Even against some stiff competition, it must unquestionably rank as one of the worst takeover deals of all time.
The slow, tragic demise of one of this country’s finest companies is regularly portrayed as an inevitable result of technological change. Faced with a generation that swaps music for free on the internet, the old record labels are doomed, runs the argument. In fact, that isn’t true. Sure, the music industry faces challenges, some of them severe. But it is the money men that are killing EMI, not the web pirates. And that is a terrible indictment of the City, and the way it operates. After all, EMI is precisely the kind of company that we should be nurturing, not destroying it. And if the City isn’t able to do that, people are rightly going to wonder what exactly is the point of our over-mighty financial sector?
Historically, EMI is one of the few British companies that has always been brilliant at riding technological change. It’s been around since the start of recorded sound (it was formed as The Gramophone Company in 1897). It virtually invented the modern pop business. Long before any of its rivals, it recognised it was a global industry, built around artists of stature. It pioneered album-orientated music, from The Beatles onwards, and was the first label to sell more albums than singles. For the best part of a century, there was very little it didn’t know about getting ahead of the curve. When something new came along, it grabbed it, and figured out how to make money from it.
Much the same was true of the internet. EMI was experimenting with digital music when most of us were still wondering how to plug in our modem. It was the first label to make a whole album available for digital download. It turned Lily Allen into one of the first MySpace stars.
Fast-forward to today, and EMI’s core business is still in pretty good shape. It knows as much as it ever did about finding artists and selling songs. Coldplay’s Viva La Vida was the biggest selling album in the world of the last two years. It has just taken the country act Lady Antebellum to the top of the American charts. When it comes to its core business, EMI is still pretty good at doing what it’s always done.
Nor is the record business in the crisis that is sometimes portrayed. Last year single sales – that is, paid for downloads – soared 33%, to an all-time high of 152 million units in the UK. Ringtones are a whole new vast business. Album sales are down a bit, but only from 133 million in 2008, to 129 million in 2009, hardly a catastrophic fall. The overall value of the music industry actually rose by 4.7% in the latest annual figures from the Performing Rights Society. It’s an industry facing change, true. But it’s hardly terminal.
Its rivals prove that. Warner Music, like EMI, has seen a hit. But it is still a profitable company. Its shares have tripled in the past year. Universal Music Group, the world’s largest label, owned by France’s Vivendi, made 580 million euros last year, and pushed up profits by 11% in the latest quarter. If they can do it, why can’t EMI.
Because, instead of focussing on its main business, the company has been wheeler-dealing. As early as 2000 it planned a merger with Warner. It had another go with Warner in 2002, and when that failed again, tried to merge with Bertelsmann in 2004, before finally giving up the attempt to stay independent and selling itself to Hands’s Terra Firma in 2007.
The City kept pressing it for deals. It wanted a merger to boost the share price, and to allow it to strip out costs, and keep the profits steadily ticking upwards. But mergers are an irrelevance when your whole industry is being re-invented. It doesn’t make any difference how big you are, and cutting costs it’s rarely the way to keep the artists happy. All it does is keep you from concentrating on what the company should be doing to survive and prosper.
Private equity ownership has been even worse. In theory, it could have taken EMI out of the spotlight of the quoted market, and carefully nurtured it through a period of change. Instead, it loaded it up with a ton of debt, and put a group of people who nothing about the industry in charge.
In reality, the money men of the City have taken one of the UK’s most successful companies, a key player in one of our most promising industries, and turned it into a complete dog’s breakfast.
A financial market is meant to provide the capital to allow companies to grow, and to share ownership among a wide group of people. It should be a mechanism that helps encourage a healthy, balanced, creative economy. The lesson of EMI is that the City, for the last decade, has been completely failing to do that. Not only does the City consume vast public subsidies, and pay itself vast bonuses, it can’t even keep alive British companies. If that carries on, it is going to be very hard for people to see the point of it.
It is hard to know how much longer the record label EMI can stagger on under its current management. Every week seems to bring more bad news: selling the legendary Abbey Road studios to raise cash: replacing the chief executive: and losing a legal battle with Pink Floyd over whether it can sell single tracks as downloads.
Ever since the private equity mogul Guy Hands bough the business for £2.4 billion in 2007, the business has staggered from one disaster to another. The stars are already jumping from the ship: The Rolling Stones and Radiohead, have already left, Pink Floyd and Queen are rumoured to be on the way out. The private equity investors look like being wiped out, and there are doubts about whether the company itself can survive. It may well end up being auctioned off by its bankers. Even against some stiff competition, it must unquestionably rank as one of the worst takeover deals of all time.
The slow, tragic demise of one of this country’s finest companies is regularly portrayed as an inevitable result of technological change. Faced with a generation that swaps music for free on the internet, the old record labels are doomed, runs the argument. In fact, that isn’t true. Sure, the music industry faces challenges, some of them severe. But it is the money men that are killing EMI, not the web pirates. And that is a terrible indictment of the City, and the way it operates. After all, EMI is precisely the kind of company that we should be nurturing, not destroying it. And if the City isn’t able to do that, people are rightly going to wonder what exactly is the point of our over-mighty financial sector?
Historically, EMI is one of the few British companies that has always been brilliant at riding technological change. It’s been around since the start of recorded sound (it was formed as The Gramophone Company in 1897). It virtually invented the modern pop business. Long before any of its rivals, it recognised it was a global industry, built around artists of stature. It pioneered album-orientated music, from The Beatles onwards, and was the first label to sell more albums than singles. For the best part of a century, there was very little it didn’t know about getting ahead of the curve. When something new came along, it grabbed it, and figured out how to make money from it.
Much the same was true of the internet. EMI was experimenting with digital music when most of us were still wondering how to plug in our modem. It was the first label to make a whole album available for digital download. It turned Lily Allen into one of the first MySpace stars.
Fast-forward to today, and EMI’s core business is still in pretty good shape. It knows as much as it ever did about finding artists and selling songs. Coldplay’s Viva La Vida was the biggest selling album in the world of the last two years. It has just taken the country act Lady Antebellum to the top of the American charts. When it comes to its core business, EMI is still pretty good at doing what it’s always done.
Nor is the record business in the crisis that is sometimes portrayed. Last year single sales – that is, paid for downloads – soared 33%, to an all-time high of 152 million units in the UK. Ringtones are a whole new vast business. Album sales are down a bit, but only from 133 million in 2008, to 129 million in 2009, hardly a catastrophic fall. The overall value of the music industry actually rose by 4.7% in the latest annual figures from the Performing Rights Society. It’s an industry facing change, true. But it’s hardly terminal.
Its rivals prove that. Warner Music, like EMI, has seen a hit. But it is still a profitable company. Its shares have tripled in the past year. Universal Music Group, the world’s largest label, owned by France’s Vivendi, made 580 million euros last year, and pushed up profits by 11% in the latest quarter. If they can do it, why can’t EMI.
Because, instead of focussing on its main business, the company has been wheeler-dealing. As early as 2000 it planned a merger with Warner. It had another go with Warner in 2002, and when that failed again, tried to merge with Bertelsmann in 2004, before finally giving up the attempt to stay independent and selling itself to Hands’s Terra Firma in 2007.
The City kept pressing it for deals. It wanted a merger to boost the share price, and to allow it to strip out costs, and keep the profits steadily ticking upwards. But mergers are an irrelevance when your whole industry is being re-invented. It doesn’t make any difference how big you are, and cutting costs it’s rarely the way to keep the artists happy. All it does is keep you from concentrating on what the company should be doing to survive and prosper.
Private equity ownership has been even worse. In theory, it could have taken EMI out of the spotlight of the quoted market, and carefully nurtured it through a period of change. Instead, it loaded it up with a ton of debt, and put a group of people who nothing about the industry in charge.
In reality, the money men of the City have taken one of the UK’s most successful companies, a key player in one of our most promising industries, and turned it into a complete dog’s breakfast.
A financial market is meant to provide the capital to allow companies to grow, and to share ownership among a wide group of people. It should be a mechanism that helps encourage a healthy, balanced, creative economy. The lesson of EMI is that the City, for the last decade, has been completely failing to do that. Not only does the City consume vast public subsidies, and pay itself vast bonuses, it can’t even keep alive British companies. If that carries on, it is going to be very hard for people to see the point of it.
Monday, 14 December 2009
Why Cadbury Should Stay British.
In Money Week this week, I've been discussing why Cadbury should remain British. Here's a taster.
The British have discovered economic patriotism pretty late in the day. Land Rover and Jaguar were sold off to the Indians. Heathrow to the Spanish, and Rowntree to the Swiss. Our power companies are French, and the investment banks American.
But Cadbury? The Birmingham-based chocolate manufacturer, under assault from the American food giant Kraft, appears to have stirred a final, last defiant stand against the foreign takeover of Britain’s traditional businesses. The Deputy Prime Minister Peter Mandelson has suddenly discovered a passion for British manufacturing, columnists debate the need for an industrial strategy, and the blogosphere and twitterati are in a sweat about the possible disappearance of Diary Milk.
In truth, Cadbury should remain British, but not for the reasons that people usually argue. Protecting British companies is a dumb way to try and re-build the UK economy. It won’t mean more factories in this country, nor will it stop jobs being transferred abroad. There’s no point in trying to emulate French economic jingo-ism: it hasn’t worked that well on their side of the Channel, and it will work even less well here.
But shareholders should reject the hostile bid for Cadbury for far narrower, more self-interested reasons. There are too few decent, long-term places to put your money left in the world for to justify sacrificing one more of them. Indeed, the Cadbury’s bid will be a key test of whether fund managers and shareholders have woken up to how much the capital market have changed in the last eighteen months – and how hard it is going to be to make money going forward. If they are willing to lose Cadbury, they are deluding themselves if they think they can make better use of the money elsewhere.
Cadbury has a heritage to be proud of. It is one of the few giants of Victorian capitalism to survive and prosper into the twenty-first century. It has brands that are recognised around the world. And, over many years, it has delivered consistently respectable results for its shareholders. In 1989 Cadbury’s shares were around 175p. They were above 600p before the Kraft bid was launched. That is a pretty good record for a well-established company in a mature market.
Kraft acknowledges all of that, of course. At £11billion, it is putting more than a fair price on the business. The 800p a share offer is a hefty premium to the price before the bid was launched.
Despite that, opposition is stirring. “If you think that you can come here and make a fast buck, you will find huge opposition from the local population and from the British Government,” said Mandelson last week. Even by his standards of spin, it was a bizarre comment. After all, the last decade of Labour Government has been all about encouraging people to make a fast buck in Britain. It has steadfastly refused to protect a single British company from foreign takeover. And as for this opposition from the British government, what exactly does it consist of? Absolutely nothing so far.
Yet Mandelson has a feel for the political weather, and was smartly tapping into the unease about selling Cadbury. People sense that the UK needs a new economic path. The idea that we can make a living by hosting half the world’s investments bank, and hedge funds, and encouraging every Russian oligarch and Middle Easter oil sheik, to base themselves in London, has, to put it mildly, taken a bit of a knock in the past year.
No one would deny that the UK economy needs to be re-structured. It has been too dependent on financial services, government spending, and the reckless accumulation of debt. But that isn’t going to be achieved through industrial policy. Nor will it be achieved by protecting national champions. It is far too late for the UK to embark on French-style planning and protectionism. We don’t have the kind of political, industrial and financial elite that could make that work even if we wanted to.
The reason shareholders should reject the Kraft bid – and any rival offer that emerges from Nestle or elsewhere – is their own self-interest.
In a post-credit crunch global economy, there are precious few places you’d feel happy investing your money. Interest rates are so low you don’t want to be in cash – and anyway, you can’t really trust the bank you’ve left it in. Government bonds hardly look safe anymore: sovereign debt is already building up as the next leg of the credit crunch. Commodities look over-stretched. Gold has its supporters but that’s already looking like a bubble: it’s hard to make money when you buy an asset at the top of the market. Emerging markets will do well. But just because the Chinese economy grows, it doesn’t follow that shareholders will make any money – and certainly not foreign ones.
In reality, one of the few assets you can really feel comfortable owning are big reliable blue-chip companies, with powerful brands, and a long-term record of delivering respectable returns to their shareholders. In a world of slow growth, and moderate, persistent and rising inflation, they should keep pace with rising prices, and pay regular dividends as well.
So what exactly are shareholders going to do with the £11 billion they get for Cadbury? They will struggle to re-invest the money into some other asset class – for the simple reason that none of them look very appealing. They can leave it in Kraft, or they can invest it in another safe, reliable blue-chip company. But there are a diminishing number of them. And the fewer there are, the more the prices get pushed up.
If Cadbury get taken over, the shareholders will just be wondering what on earth they can do with the money. They will have taken it out of a safe and reliable home, and thrown it into a dangerous, uncertain one. In their own interests, they’d be better off leaving it where it is. Cadbury shares should triple again by 2030, and pay consistent dividends as well. And there aren’t too many assets you could confidently forecast that for.
The British have discovered economic patriotism pretty late in the day. Land Rover and Jaguar were sold off to the Indians. Heathrow to the Spanish, and Rowntree to the Swiss. Our power companies are French, and the investment banks American.
But Cadbury? The Birmingham-based chocolate manufacturer, under assault from the American food giant Kraft, appears to have stirred a final, last defiant stand against the foreign takeover of Britain’s traditional businesses. The Deputy Prime Minister Peter Mandelson has suddenly discovered a passion for British manufacturing, columnists debate the need for an industrial strategy, and the blogosphere and twitterati are in a sweat about the possible disappearance of Diary Milk.
In truth, Cadbury should remain British, but not for the reasons that people usually argue. Protecting British companies is a dumb way to try and re-build the UK economy. It won’t mean more factories in this country, nor will it stop jobs being transferred abroad. There’s no point in trying to emulate French economic jingo-ism: it hasn’t worked that well on their side of the Channel, and it will work even less well here.
But shareholders should reject the hostile bid for Cadbury for far narrower, more self-interested reasons. There are too few decent, long-term places to put your money left in the world for to justify sacrificing one more of them. Indeed, the Cadbury’s bid will be a key test of whether fund managers and shareholders have woken up to how much the capital market have changed in the last eighteen months – and how hard it is going to be to make money going forward. If they are willing to lose Cadbury, they are deluding themselves if they think they can make better use of the money elsewhere.
Cadbury has a heritage to be proud of. It is one of the few giants of Victorian capitalism to survive and prosper into the twenty-first century. It has brands that are recognised around the world. And, over many years, it has delivered consistently respectable results for its shareholders. In 1989 Cadbury’s shares were around 175p. They were above 600p before the Kraft bid was launched. That is a pretty good record for a well-established company in a mature market.
Kraft acknowledges all of that, of course. At £11billion, it is putting more than a fair price on the business. The 800p a share offer is a hefty premium to the price before the bid was launched.
Despite that, opposition is stirring. “If you think that you can come here and make a fast buck, you will find huge opposition from the local population and from the British Government,” said Mandelson last week. Even by his standards of spin, it was a bizarre comment. After all, the last decade of Labour Government has been all about encouraging people to make a fast buck in Britain. It has steadfastly refused to protect a single British company from foreign takeover. And as for this opposition from the British government, what exactly does it consist of? Absolutely nothing so far.
Yet Mandelson has a feel for the political weather, and was smartly tapping into the unease about selling Cadbury. People sense that the UK needs a new economic path. The idea that we can make a living by hosting half the world’s investments bank, and hedge funds, and encouraging every Russian oligarch and Middle Easter oil sheik, to base themselves in London, has, to put it mildly, taken a bit of a knock in the past year.
No one would deny that the UK economy needs to be re-structured. It has been too dependent on financial services, government spending, and the reckless accumulation of debt. But that isn’t going to be achieved through industrial policy. Nor will it be achieved by protecting national champions. It is far too late for the UK to embark on French-style planning and protectionism. We don’t have the kind of political, industrial and financial elite that could make that work even if we wanted to.
The reason shareholders should reject the Kraft bid – and any rival offer that emerges from Nestle or elsewhere – is their own self-interest.
In a post-credit crunch global economy, there are precious few places you’d feel happy investing your money. Interest rates are so low you don’t want to be in cash – and anyway, you can’t really trust the bank you’ve left it in. Government bonds hardly look safe anymore: sovereign debt is already building up as the next leg of the credit crunch. Commodities look over-stretched. Gold has its supporters but that’s already looking like a bubble: it’s hard to make money when you buy an asset at the top of the market. Emerging markets will do well. But just because the Chinese economy grows, it doesn’t follow that shareholders will make any money – and certainly not foreign ones.
In reality, one of the few assets you can really feel comfortable owning are big reliable blue-chip companies, with powerful brands, and a long-term record of delivering respectable returns to their shareholders. In a world of slow growth, and moderate, persistent and rising inflation, they should keep pace with rising prices, and pay regular dividends as well.
So what exactly are shareholders going to do with the £11 billion they get for Cadbury? They will struggle to re-invest the money into some other asset class – for the simple reason that none of them look very appealing. They can leave it in Kraft, or they can invest it in another safe, reliable blue-chip company. But there are a diminishing number of them. And the fewer there are, the more the prices get pushed up.
If Cadbury get taken over, the shareholders will just be wondering what on earth they can do with the money. They will have taken it out of a safe and reliable home, and thrown it into a dangerous, uncertain one. In their own interests, they’d be better off leaving it where it is. Cadbury shares should triple again by 2030, and pay consistent dividends as well. And there aren’t too many assets you could confidently forecast that for.
Monday, 14 September 2009
Oh no, a merger boom....
The last thing the City needs right now is another takeover boom, as I explain in my Money Week column this week. Here's a taster.
The bulls are rampant again. Bonuses are back. Million-plus houses in London are being snapped up. And, if we needed any more evidence that the City has regained much of its swagger and confidence, it now looks like a merger boom is cranking up into action.
The American food giant Kraft started the week with a £10.2 billion bid for the chocolate manufacturer Cadbury. The weekend papers were full of stories of a bidding war for Deutsche Telecom’s British mobile unit., T-Mobile, before a joint-venture with Orange was sewn up. It is not long since the mining giant Xstrata lodged a £41 billion merger proposal for its rival Anglo American.
A this rate, we’ll soon be in the middle of a full-scale merger boom, much like the telecoms and media takeover craze that powered the bull market of the late 1990s.
But this time around, the City should resist. The fund managers should tell the predators to get lost, and the bankers should tell their clients they are not interested. If there is one thing the capital markets need to do right now, it is to demonstrate that they have put self-serving, fee-driven short-termism behind them. And there would be no better way of doing that than by killing this merger wave off before it picks up any more momentum.
It isn’t hard to understand why some big deals are being put on the agenda again. After the savaging equity markets took in the past year, assets are cheap by any historical standards. Regardless of whether you think the global economy has recovered, or whether the downturn has another dip in it, there is probably not going to be a better moment to expand an industrial empire. If you aren’t going to make a bid for that great rival you’ve been coveting for the past decade this year, then you probably never will. British assets are particularly cheap. The FTSE hasn’t recovered as fast as other markets, and the pound has devalued significantly against the dollar and the euro.
Nor is it just a matter of opportunistic timing. The chances are that the next decade will be a lot tougher economically that the one we have just been through. Global demand will be sluggish as debt mountains, both public and private, get paid down. Making money is going to be a hard slog. Taking over a rival, cutting costs, and hopefully edging up prices as competition is reduced, is one of the few guaranteed ways of improving profits when times are hard.
The City, if the past is any guide, will pile in enthusiastically, doing everything it can to stoke another merger boom.
Bankers will be licking the lips at all the fat fees that can be earned from M&A deals. Fund will be looking forward to locking in the profits of the last six months, and pocketing healthy takeover premium as well. Take Cadbury’s for example: the shares went down to 445p at the depth of the credit crunch, but soared past 800p the morning the Kraft bid was launched. It will be hard to resist profits like that.
Hard, but not impossible.
In truth, the last thing the City bankers and fund managers should be doing is slipping straight back to their bad old ways. One of the main problems the City needs to tackle is the way it rewards short-term porifts at the expense of long-term prosperity. That’s true of bonuses, most obviously. But it is true of the M&A market as well.
The overwhelming evidence is that mega-mergers don’t work. They destroy value on an epic scale. Vodafone chewed up billions making itself the biggest mobile company in the world whilst losing market share at home. Glaxo devoured Wellcome and then SmithKline Beecham, and didn’t end up any bigger than it had been when it started. Conglomerates put together through wheeler-dealing, such as Hanson, fell apart even faster than they were created.
True, the bankers make some fat fees. But only at the cost of destroying long-term relationships with companies that could have provided work for decades to come. And the fund managers get a short-term boost to their profits. But only at the cost hollowing out the base of companies they can invest in.
Again, think about Cadbury. The UK has precious few globally successful consumer goods companies. A hundred years of work has gone into creating some of the most recognisable confectionary brands in the world. Almost certainly, if they are subsumed into a giant Kraft conglomerate, they will slowly be forgotten about and eventually die off. Sure, the fund managers will make a quick extra 30% profit on the shares, and that will flatter the next quarterly report to their investors. But there will be one less high-quality British company to invest in. Cadbury could have provided them with steady profits and dividends for years – precisely the kind of blue-chip stock that pension funds need to hold in their portfolio.
Likewise Anglo American. True, plenty of fund managers have questions about the way the mining conglomerate is being managed. It may well not be extracting all the value that can be squeezed out of its assets. Over the long-term, however, a huge merger is unlikely to fix that. If the shareholders aren’t happy, they can always sack the management. But if they sell the company, they won’t get to share in its long-term growth. And the FTSE will lose another big, quality company – after all if platinum, gold, diamond mining isn’t a good long-term business, then it is hard to know what is.
The City, including the fund managers, the hedge funds, and the bankers, could send a simple message. Over Cadbury or Anglo American, they could say, this is a quality business, and if there are any problems, we’ll ask the management to fix them. If they aren’t up to it, we’ll appoint new ones. But we don’t see any point in a mega-merger: it will just distract management, and destroy value in the long-term.
True, there is probably about as much chance of happening as there is of a packet of chocolate buttons surviving break-time in a school playground. If it did, however, it would send a powerful message that the City had changed. And before the fund managers pocket the profits, and before the bankers start trying to rustle up a rival bid, they should at least pause to ponder whether another merger boom is really what they want right now.
The bulls are rampant again. Bonuses are back. Million-plus houses in London are being snapped up. And, if we needed any more evidence that the City has regained much of its swagger and confidence, it now looks like a merger boom is cranking up into action.
The American food giant Kraft started the week with a £10.2 billion bid for the chocolate manufacturer Cadbury. The weekend papers were full of stories of a bidding war for Deutsche Telecom’s British mobile unit., T-Mobile, before a joint-venture with Orange was sewn up. It is not long since the mining giant Xstrata lodged a £41 billion merger proposal for its rival Anglo American.
A this rate, we’ll soon be in the middle of a full-scale merger boom, much like the telecoms and media takeover craze that powered the bull market of the late 1990s.
But this time around, the City should resist. The fund managers should tell the predators to get lost, and the bankers should tell their clients they are not interested. If there is one thing the capital markets need to do right now, it is to demonstrate that they have put self-serving, fee-driven short-termism behind them. And there would be no better way of doing that than by killing this merger wave off before it picks up any more momentum.
It isn’t hard to understand why some big deals are being put on the agenda again. After the savaging equity markets took in the past year, assets are cheap by any historical standards. Regardless of whether you think the global economy has recovered, or whether the downturn has another dip in it, there is probably not going to be a better moment to expand an industrial empire. If you aren’t going to make a bid for that great rival you’ve been coveting for the past decade this year, then you probably never will. British assets are particularly cheap. The FTSE hasn’t recovered as fast as other markets, and the pound has devalued significantly against the dollar and the euro.
Nor is it just a matter of opportunistic timing. The chances are that the next decade will be a lot tougher economically that the one we have just been through. Global demand will be sluggish as debt mountains, both public and private, get paid down. Making money is going to be a hard slog. Taking over a rival, cutting costs, and hopefully edging up prices as competition is reduced, is one of the few guaranteed ways of improving profits when times are hard.
The City, if the past is any guide, will pile in enthusiastically, doing everything it can to stoke another merger boom.
Bankers will be licking the lips at all the fat fees that can be earned from M&A deals. Fund will be looking forward to locking in the profits of the last six months, and pocketing healthy takeover premium as well. Take Cadbury’s for example: the shares went down to 445p at the depth of the credit crunch, but soared past 800p the morning the Kraft bid was launched. It will be hard to resist profits like that.
Hard, but not impossible.
In truth, the last thing the City bankers and fund managers should be doing is slipping straight back to their bad old ways. One of the main problems the City needs to tackle is the way it rewards short-term porifts at the expense of long-term prosperity. That’s true of bonuses, most obviously. But it is true of the M&A market as well.
The overwhelming evidence is that mega-mergers don’t work. They destroy value on an epic scale. Vodafone chewed up billions making itself the biggest mobile company in the world whilst losing market share at home. Glaxo devoured Wellcome and then SmithKline Beecham, and didn’t end up any bigger than it had been when it started. Conglomerates put together through wheeler-dealing, such as Hanson, fell apart even faster than they were created.
True, the bankers make some fat fees. But only at the cost of destroying long-term relationships with companies that could have provided work for decades to come. And the fund managers get a short-term boost to their profits. But only at the cost hollowing out the base of companies they can invest in.
Again, think about Cadbury. The UK has precious few globally successful consumer goods companies. A hundred years of work has gone into creating some of the most recognisable confectionary brands in the world. Almost certainly, if they are subsumed into a giant Kraft conglomerate, they will slowly be forgotten about and eventually die off. Sure, the fund managers will make a quick extra 30% profit on the shares, and that will flatter the next quarterly report to their investors. But there will be one less high-quality British company to invest in. Cadbury could have provided them with steady profits and dividends for years – precisely the kind of blue-chip stock that pension funds need to hold in their portfolio.
Likewise Anglo American. True, plenty of fund managers have questions about the way the mining conglomerate is being managed. It may well not be extracting all the value that can be squeezed out of its assets. Over the long-term, however, a huge merger is unlikely to fix that. If the shareholders aren’t happy, they can always sack the management. But if they sell the company, they won’t get to share in its long-term growth. And the FTSE will lose another big, quality company – after all if platinum, gold, diamond mining isn’t a good long-term business, then it is hard to know what is.
The City, including the fund managers, the hedge funds, and the bankers, could send a simple message. Over Cadbury or Anglo American, they could say, this is a quality business, and if there are any problems, we’ll ask the management to fix them. If they aren’t up to it, we’ll appoint new ones. But we don’t see any point in a mega-merger: it will just distract management, and destroy value in the long-term.
True, there is probably about as much chance of happening as there is of a packet of chocolate buttons surviving break-time in a school playground. If it did, however, it would send a powerful message that the City had changed. And before the fund managers pocket the profits, and before the bankers start trying to rustle up a rival bid, they should at least pause to ponder whether another merger boom is really what they want right now.
Monday, 4 May 2009
How To Re-Invent The City
In Money Week this week, I've been writing about how the City will need to re-invent itself. Here's a taster....
It has been a terrible year for the City of London. Half the British banking system has been nationalised, and the other half doesn’t look safe yet. The non-domicile tax rules that made it the magnet for the brightest young financiers from around Europe have been curbed. There are tough new rules on the way bankers are paid being proposed by the Financial Services Authority.
And now – presumably on the principle that you might as well finish a job once you have started it – the Government has just lifted the top rate of tax to 50%. It would have been hard to think of a more deadly final nail to hammer into an already wounded financial centre.
In response the City is going to have to re-invent itself all over again. For the last twenty years, it has flourished as a lightly-regulated, lightly-taxed global financial centre – Monaco without the yachts. That has now been shot to pieces. The City has re-invented itself several times in the past, and can no doubt do so again. It can find niches in stockbroking and financial re-structuring, as well as building on the UK’s historic ties with rising economic powers such as India. But the challenges are going to be immense – and there can be no certainty that the City will be able to rise to them.
There is no point in underestimating the gravity of the threat the City now faces. Its standing in the world has taken a terrible series of blows.
Whatever the Government may pretend, there UK has suffered more damage from the credit crunch than any other major economy. No other nation has seen runs on banks such as were witnessed at Northern Rock, nor has there been any calamity on the scale of the Royal Bank of Scotland.
The FSA Chairman Adair Turner has promised a tough new regime of regulation, stating bluntly “there’ll be fewer people earning less money”. No doubt that is true, but it suggests a regime that will be heavy-handed and intrusive.
Meanwhile, the non-doms who made London a magnet for ambitious young financiers will now have to pay a £30,000 annual charge, and, more worryingly, answer a lot of detailed questions. And now, a 50% top rate of tax, which will apply to any earnings from working at London-based bank or hedge fund regardless of whether you are British or not.
That will be the fourth highest top rate of tax in the developed world (Sweden, Denmark and the Netherlands are higher, in case you are wondering where you really don’t want to move to). It is simply inconceivable that ten of thousands of clever, ambitious young bankers, motivated principally by money, are going to up sticks and move to one of the highest-tax regimes in the world.
For the UK, that matters. In the 2007-09 financial year, the City provided 11% of total income tax payments, and 15% of corporation tax payments, making a total of £42 billion. Already that is reckoned to have at least halved, responsible by itself for much of the red ink splattered across the Government’s books. The British economy needs a thriving financial centre. It is one of the few things we are really good at.
But the City is going to have to re-invent itself. True, it is good at that: the Square Mile has scripted more triumphs over adversity than a Hollywood screenwriter. In the 1960s and 1970s, it created the offshore Eurodollar market, recycling dollars from the oil rich states to the rest of the world. In the wake of Big Bang, in 1986, it re-created itself as a global hub for largely foreign-owned banks. A combination of the non-dom rule, what in retrospect was excessively light regulation, and the traditional entrepreneurial spirits of its workforce, allowed it to see off challenges from Paris and Frankfurt to become the key European finance centre. Indeed, in the last three years, it was starting to pull ahead of New York as the global centre for the money markets.
All that is in the past. The foreigners will head back home. The American and European banks will be slimming down their operations. And the British banks will be shadows of their former selves.
There are opportunities out there.
Stockbroking, which was once one of the City’s core professions, is about to make a comeback. The credit crunch has left thousands of companies with shattered balance sheets. They will need to swap a lot of debt for equity, and that is going to mean patiently talking to shareholders and persuading them the business is worth backing. That is precisely the job stockbrokers used to do – and there will be a demand for them again.
Next, the government debt markets will be swilling with paper. The British government will soon be selling £200 billion of debt a year, and other governments will be placing similar amounts. The competition for capital will be intense. Any expertise in placing that – and the City has plenty – is going to be in demand.
Thirdly, the City is already the world’s major currency trading centre. The euro has survived the credit crunch so far, but whether countries such as Spain, Italy and Ireland can stand the pain of the recession without devaluing their currency remains to be seen. Splitting up the single currency could be a bonanza.
Lastly, the BRIC economies of Brazil, Russia, India and China are going to keep growing in importance. The City has always been the most international financial centre. It has already established itself as a bridge between Russia and the rest of the world. And it can do the same for India as well.
Even so, the City will be a far more English financial centre for a decade or more to come. It will be smaller, and less profitable. And it will be a long time before it claws back the prominence of the middle half of this decade.
It has been a terrible year for the City of London. Half the British banking system has been nationalised, and the other half doesn’t look safe yet. The non-domicile tax rules that made it the magnet for the brightest young financiers from around Europe have been curbed. There are tough new rules on the way bankers are paid being proposed by the Financial Services Authority.
And now – presumably on the principle that you might as well finish a job once you have started it – the Government has just lifted the top rate of tax to 50%. It would have been hard to think of a more deadly final nail to hammer into an already wounded financial centre.
In response the City is going to have to re-invent itself all over again. For the last twenty years, it has flourished as a lightly-regulated, lightly-taxed global financial centre – Monaco without the yachts. That has now been shot to pieces. The City has re-invented itself several times in the past, and can no doubt do so again. It can find niches in stockbroking and financial re-structuring, as well as building on the UK’s historic ties with rising economic powers such as India. But the challenges are going to be immense – and there can be no certainty that the City will be able to rise to them.
There is no point in underestimating the gravity of the threat the City now faces. Its standing in the world has taken a terrible series of blows.
Whatever the Government may pretend, there UK has suffered more damage from the credit crunch than any other major economy. No other nation has seen runs on banks such as were witnessed at Northern Rock, nor has there been any calamity on the scale of the Royal Bank of Scotland.
The FSA Chairman Adair Turner has promised a tough new regime of regulation, stating bluntly “there’ll be fewer people earning less money”. No doubt that is true, but it suggests a regime that will be heavy-handed and intrusive.
Meanwhile, the non-doms who made London a magnet for ambitious young financiers will now have to pay a £30,000 annual charge, and, more worryingly, answer a lot of detailed questions. And now, a 50% top rate of tax, which will apply to any earnings from working at London-based bank or hedge fund regardless of whether you are British or not.
That will be the fourth highest top rate of tax in the developed world (Sweden, Denmark and the Netherlands are higher, in case you are wondering where you really don’t want to move to). It is simply inconceivable that ten of thousands of clever, ambitious young bankers, motivated principally by money, are going to up sticks and move to one of the highest-tax regimes in the world.
For the UK, that matters. In the 2007-09 financial year, the City provided 11% of total income tax payments, and 15% of corporation tax payments, making a total of £42 billion. Already that is reckoned to have at least halved, responsible by itself for much of the red ink splattered across the Government’s books. The British economy needs a thriving financial centre. It is one of the few things we are really good at.
But the City is going to have to re-invent itself. True, it is good at that: the Square Mile has scripted more triumphs over adversity than a Hollywood screenwriter. In the 1960s and 1970s, it created the offshore Eurodollar market, recycling dollars from the oil rich states to the rest of the world. In the wake of Big Bang, in 1986, it re-created itself as a global hub for largely foreign-owned banks. A combination of the non-dom rule, what in retrospect was excessively light regulation, and the traditional entrepreneurial spirits of its workforce, allowed it to see off challenges from Paris and Frankfurt to become the key European finance centre. Indeed, in the last three years, it was starting to pull ahead of New York as the global centre for the money markets.
All that is in the past. The foreigners will head back home. The American and European banks will be slimming down their operations. And the British banks will be shadows of their former selves.
There are opportunities out there.
Stockbroking, which was once one of the City’s core professions, is about to make a comeback. The credit crunch has left thousands of companies with shattered balance sheets. They will need to swap a lot of debt for equity, and that is going to mean patiently talking to shareholders and persuading them the business is worth backing. That is precisely the job stockbrokers used to do – and there will be a demand for them again.
Next, the government debt markets will be swilling with paper. The British government will soon be selling £200 billion of debt a year, and other governments will be placing similar amounts. The competition for capital will be intense. Any expertise in placing that – and the City has plenty – is going to be in demand.
Thirdly, the City is already the world’s major currency trading centre. The euro has survived the credit crunch so far, but whether countries such as Spain, Italy and Ireland can stand the pain of the recession without devaluing their currency remains to be seen. Splitting up the single currency could be a bonanza.
Lastly, the BRIC economies of Brazil, Russia, India and China are going to keep growing in importance. The City has always been the most international financial centre. It has already established itself as a bridge between Russia and the rest of the world. And it can do the same for India as well.
Even so, the City will be a far more English financial centre for a decade or more to come. It will be smaller, and less profitable. And it will be a long time before it claws back the prominence of the middle half of this decade.
Thursday, 12 February 2009
Banking Bonuses
I don't think the scale of the contraction in the banking industry has started to sink in yet. In my Bloomberg column this week, I was speculating that pay in financial services is likely to fall around 50% to get back to long-term sustainable levels. It could be further, however. A whole generation as grown up assuming that banking is the place to make money and that isn't going to be true for a long time.
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