In the City
Amersham Unitd
Tony Rudd
Sooner or later it had to happen. The mechanism of the London new issue market works on a feast or famine basis. Either an issue is a success, in which case it looks as though the seller has got less than he should have done, or it's a failure — as a result of which the company whose shares are being sold has its future blighted for Years to come. The Amersham premium of around 25 per cent over the issue price was hY no means the largest that has been seen in recent years; nor was the killing made by the stags. Because the degree of over- subscription was so enormous, the allotments were relatively small. The average turned out at around 11/2 per cent, which meant that the professionals who us- ed borrowed money to finance their very large applications only made a quarter of 31/z per cent. Allowing for the cost of the Money which they borrowed and the in- terest which they didn't receive on the money which they had to put up as col- lateral, there was probably less than 1 per cent net in the whole operation. Nothing like the killing that the pros made in Cable '' Wireless and much more like the rather thin return for Exco, the money-broking firm which attracted a huge scale of over- subscription of a few months ago.
Clearly none of the people who are com- plaining vociferously about the Amersham outcome have done their arithmetic all that accurately and all they are left with is the obvious point that a very substantial premium has been established on the'issue which, theoretically, should have been available to the seller, in this case the Government. In other words everybody is assuming, including the Government, who are behaving in the most extraordinary Manner in tacitly accepting all this criticism, that the difference between the price established in the market in dealings after the issue was theoretically available to the seller in the first place. This of course is poppycock. There is absolutely no way of knowing beforehand what the 'right price' of an issue is. It's not an matter of estimating intrinsic value. On the basis of what is really being offered in this case, Amersham was substantially over-priced by the merchant bankers, Rothschilds, when they arranged the flotation. A price which represents a multiple of earnings of nine- teen times the prospective profits of the current year and about double that for last year must strike any reasonable analyst as very top-heavy. On Wall Street a company of this kind would have been lucky to have commanded half the rating that Amersham did here. What got it away to such a fan- tastic start was its scarcity value. There are very few glamour companies in technology in the UK. And Amersham had all that it takes, medical diagnostic and yet nuclear, all in the one ball. The fact that it could all be a spoof in terms of the company's ability to maintain earnings growth is neither here nor there. So it was not surprising that every man and his dog was attracted. Peo- ple took the view that the big institutions, the pension funds and insurance companies and the like were bound to want to have some of these shares in their portfolios and would, despite the questionable current value, bid unrealistic prices to achieve this end. Everybody became the equivalent of a ticket tout, buying into a show they themselves didn't intend to stay to see. Following the herd instinct everbody got in on the act. The whole thing had the ingre- dients of a stampede. All that one can say is that the promoters, Rothschild, did an ab- solutely brilliant job and should be paid at least double their fee.
Instead of that, criticism is rife. Which goes to show that the old City adage that the bystanders are both greedy and windy is as true as ever. Especially when a whole lot of MPs are making observations on a mechanism which they little understand. The fact is that the only way of avoiding a premium of the Amersham kind in a suc- cessful issue in the London market is to go to a tender. But it is extremely difficult to achieve a full subscription of a tender and that is because, sheep being sheep, nobody wants to lead. Without a leader, you don't get .a price fixed. And without a price being fixed there can be no premium.
' Probably the right answer in London is to switch the whole method of distribution to the American system. On Wall Street a selling syndicate of underwriters and distributors outbids rival groups for the issue and then makes itself responsible for distribution. They don't have the British system of writing a prospectus which forms an offer for sale at a fixed price for all com- ers. There has never been an Amersham type scandal in Wall Street, and London might well take a look at how it is done over there.
A final aspect of the Amersham scene is that the over-subscription was achieved by the active assistance of the Bank of
England. The £1.7 billion put up for Amer- Sham inevitably put a substantial strain on the money and credit markets in London, which could have forced interest rates up, at least temporarily, and embarrassed the Government and the Bank, who (along with other European countries) are engaged in a political exercise of manipulating interest rates downwards. To avoid an interest rate hike the Bank of England gave substantial help to the discount houses by buying their bills so that in turn the discount houses had the funds to replace those which clearing banks took out of the money market when they withdrew very large sums of money 'at call'. They needed these in order to finance the stagging of the Amersham issue by their customers, most of whom didn't have the money to do the exercise and so borrowed the funds from their banks. At least half the issue was financed in this way, as though the Bank, of England printed extra 'monopoly' money which was used to over-subscribe the sale of the Government's own assets. All's fair in love and war. But what is not fair is for the Government subsequently to act in a hypocritical way and join in the witch hunt of why it all went wrong, since they fixed it from start to finish. We shall see in due course whether for buyers of the shares the issue price, let alone the price which the market has put on the shares subsequently, is justified. All we know is that a most remarkable bit of marketing has been achieved. There is though, obviously, the political question that it has been achieved at some cost. Pro- bably far too high.
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