CITY AND SUBURBAN
Cave mentem, in the last days of the Stock Exchange
CHRI STOPHE R FILDES
The Stock Exchange makes me feel that I am watching a film of the last days of Pompeii. You know the one: everything in off-register Technicolour is brighter and busier than ever, as the citizens bustle about, being ware of the dog, or unkind to the Christians, or doing whatever pays the mortgage. Only the music warns us, swell- ing as the camera pans to a puff of chemical smoke from the papier-mache mountain. So too in Throgmorton Street. The Ex- change's trading floor, now being wired up for new technology, is crammed, as the newcomers to the market signal their presence by trying to undercut the old guard. Never has so much money crossed that floor. Stock market incomes are a multiple of stock prices, commission rates, and the volume of dealing. Costs are largely fixed, almost all extra revenue is profit: up Pompeii! Why should its citizens worry? Because the bull market will come to an end? All good bull markets come to an end, and bear markets too, and anyone who does not know that has no business in the Exchange, either as dealer or as inves- tor. Two puffs of smoke signal a danger more imminent, and less remarked.The first is the urge to force companies to pay over the odds for using the market. Com- panies often finance takeovers by issuing new shares to the owner of the business they are buying. The companies' brokers, if they are expert, can arrange for these shares to be sold at once, for cash, to ready takers: this is called a vendor placing. That cuts out many of the companies' sharehol- ders, large and small, who are accustomed to having first refusal of any new shares, in a conventional capital-raising exercise, a rights issue. John Howarth speaks up for these shareholders in his Forsyte column (p. 22). Companies, though, are customers of the Exchange just as much as investors, and for them a vendor placing beats a rights issue hands down. The new shares are issued at a far narrower discount, and the deal can be done in minutes, without the expense of paying institutions to under- write the shares, in case the shareholders to whom they are dutifully offered turn out not to want them. When the supermarket group Dee Corporation agreed to buy Fine Fare and to finance £350 million of the cost through a vendor placing, the biggest yet, a ferocious row broke out and Dee was forced to back down. The Stock Exchange can enforce its wishes on companies like Dee for just as long as it has monopoly of its markets. One part of its monopoly, in the markets for debt, has long gone. As a source of new capital from debentures and loan stocks, the Stock Exchange is not in the same league as the international capital markets (substantially run from London, but not from Throgmorton Street). What about the market for share capital? There, observe the second puff of smoke. I have been fascinated to watch my friends at Euromoney Publications bring the com- pany which I helped to found (perhaps I should add that I no longer have a personal interest) to the market. Which market? This is a British company, London-based, its capital denominated in sterling, the subsidiary of a major company listed on the Stock Exchange. Euromoney Publica- tions is now listed — on the Luxembourg Stock Exchange. That, effectively, is capit- al raising in the international markets, using those markets' system, which derives from New York. The banks in charge (for Euromoney, Merrill Lynch) put together a selling group of banks: they sound out the market: from that, they can assess demand and, from that, the price. The issue is announced, together with a minimum price. Potential investors are contacted, and in the light of their response, a definitive price is struck and the shares allocated. As a mechanism, it is rapid and accurate. Euromoney's minimum price was 450p, its definitive price 460p, and dealings began at 460 to 463p. It makes the London market's conventional offer for sale look a hit or miss affair. There, demand is much more a matter of guesswork. The issuing house tries to pitch the price so as to bring in the punters and make the issue go — i.e. to make it cheap, or at least to make it look cheap. There is a time of doubt, and or risk, which is covered by the underwriters, whose commission is normally the largest single expense of the issue. The system produces issues which are wildly over- subscribed (like Laura Ashley) or glumly declined (like Mrs Fields, the chocolate chip cookie maker). A top-flight merchant bank made proposals for bringing Euro- money to the London market by an offer for sale. It could not match what Merrill could offer. It would not surprise me all that much if Merrill got a telephone call from Dee. The Stock Exchange's greatest fear is what its chairman, Sir Nicholas Goodison, calls the fragmentation of the central market. It was a sign of that fear when a senior colleague of Sir Nicholas sought to rebuke my Euromoney friends for not buying British. Less polite people would have replied that the most patriotic service they could perform for the Stock Exchange was to remind it that it nowadays had to compete, and that they had not found it competitive. As Big Bangs go, I suppose as big a bang as any came from Vesuvius. Look out, Pompeii.
Previous page
