CITY SPECIAL

How to win friends and influence share prices

DOMINIC LAWSON

If the great 12-year bull market in British equities has indeed ended, then the time has come for some detailed self- examination on the part of all financial intermediaries. That group, whether they like the tag or not, includes the financial press, and in particular the Sunday news- paper financial reporters, whose scale and influence has grown commensurately with the share prices they so love to write about, and — it has to be said — to influence.

The role of the financial pages on the daily newspapers is likely to be less affected by the sudden change in circum- stances. There will still be the inexorable plod of hard news — in particular company results — that forms the meat and drink of the daily financial columns.

But for the Sundays, whose two main pursuits have been the anticipation of future takeover bids, and the identification of share prices which may rise for other reasons, the future is less predictable.

Perhaps the tenor of the Sunday finan- cial columns over the first two weeks of the slump in share values is some guide to the future. The speculative guesses at future bid and deal activity has been eclipsed by detailed blow-by-blow accounts of the pre- vious week's developments, and by lengthy analyses of what it all means. It has, in fact, marked a brief return to a much older style of Sunday financial journalism, in which the City editor gave weighty interpreta- tions of recent events, rather than hazard guesses about future price movements. If the Sundays' obsession with bid scoops is thus curtailed it will not be a bad thing. For that trend of the past few years has raised unanswered questions about the use and abuse of inside information, the sha- dowy role of public relations companies, and the purity of editorial judgment.

It is easy to understand the journalistic pleasures of the speculative style. It is boring to cover — albeit more reflectively — the ground covered by the dailies over the previous week. And it does give the journalist a flattering way of measuring his own personal impact on the world of high finance, when one of his stories or tips causes a share price to jump like a marionette.

Yet a number of such stories contain rather less flattering implications for the journalists concerned. Many are spoon fed by the growing army of financial PR companies, who see such 'stories' as an invaluable way of getting public attention for an otherwise obscure client, and thus getting the client's share price up to levels where it is a more potent weapon for future bid activity.

In the bull market, paper, not cash, was the key to success. The manipulation of the Guinness share price for which a number of former Sunday paper favourites — such as Ernest Saunders, Gerald Ronson and Roger Seelig — now stand accused is the logical, if illegal, conclusion of the City- wide drive to inflate the value of company stock in order to reduce the financing costs of otherwise inconceivable acquisitions.

The process begins, for the smallest companies, in the share-tipping columns of the Sundays. The most influential are `Market Miscellany' in the Sunday Tele- graph, `What's Up' in the Sunday Times and `Throg St' in the Observer. One such column recently led with a story which went, 'Look out for sparkling results from

. Expectations of a profits advance from £573,000 to £850,000 will be easily exceeded . . . a private company acquisi- tion could also be on the way.'

Now a company this tiny is most unlikely to be closely followed by any analyst. So how was the newspaper so sure that this little company would beat all expectations? Most probably it was a leak, possibly sanctioned by an officer of the company, via a PR firm. Such prominent attention for so small a company, in which the market in the shares is likely to be very thin, would normally cause a sharp upward movement in the share price. Which would make the exclusively predicted 'company acquisition' that much easier to finance. The loser? That soon-to-be-acquired com- pany which would get fewer shares for its assets than would otherwise be the case.

The defence mounted by newspapermen against criticism of such practices is usually twofold. First, they argue, they are making money for their readers by spotting such 'undervalued' situations. Second, they point out that the market is an efficient judge of their wisdom, and if they are wrong, they will be ruthlessly exposed by future share price movements.

That second argument seems less comm- pelling after the spectacle of the recent stock market crash, which suggests that the markets had hopelessly over-valued equities for a whole year. How much easier, then, to perpetuate or inspire an anomalous rating for a single company.

As to the first argument — it is wilfully naive. Market makers, and in earlier times stockjobbers, are assiduous readers of the Sunday share-tipping columns. They mark up the price of the tipped shares before the small investor has a chance to get through to them and buy at the old 'undervalued' price. The real beneficiaries are the tipped companies, which is why some PR firms are willing to give such columns company results in advance of the stock market, and in clear breach of the rules of that market.

In fact the Insider Dealing Unit of the Stock Exchange is quite interested in this phenomenon. 'There will come a time when we interview journalists,' says Mr Nicholas Mann of the unit. He points out that the publishing of concrete inside in- formation in order to encourage readers to deal on that information is potentially an offence under Section 1(8) of the Company Securities (Insider Dealing) Act 1985 and punishable by a two-year sentence or unlimited fine. But the journalist must say that he knows the information to be true, for the Insider Trading boys at the Stock Exchange to get interested, and most journalists are wise to this.

This, presumably, is why the Observer tends to introduce its bid scoops with the ponderous formula, 'It is reliably under- stood that Company X is considering the possibility of mounting a bid for Company Y.' This periphrasis also has the advantage of being sufficiently vague to avoid the need for any embarrassing public retrac- tion should the information turn out to be a bum steer.

Industrialists are particularly incensed by this latter category of 'story' in which, typically, a smooth financial operator goes long of a stock, then persuades a journalist that it is a bid target, and then sells after the spurious rumour gets into print and pushes the price up. The CBI Task Force report on the City three weeks ago com- plained that 'speculation about possible takeovers in financial columns, often with- out any foundation other than City rumours, can actually distort share prices. The Task Force believes that the extent to which share prices can be manipulated by such press comment, and the scope for profit by those initiating the rumours, requires more detailed attention and inves- tigation both by the regulatory authorities and by the Press Council.'

It does not look as though the CBI will have much luck. The Press Council seems uninterested, while on the other hand the financial press has not been brought within the powers of the Financial Services Act and the sanctions of the Securities and Investments Board. The Labour Party unsuccessfully attempted, during the pas- sage of the Financial Services Bill, to include City editors under Schedule 1 of the Bill, but the Government said that this would be an unwelcome infringement of the freedom of the press. An historic moment. Paradoxically, tip sheets are in- cluded under Schedule 1 of the Act. 'The idea is that tip sheets should be more reliable than columns in newspapers,' is the SIB's rather unconvincing rationalisa- tion of this legislative anomaly.

The CBI's other objection is even more central to the concerns about codes of conduct in the Sunday financial pages. The Task Force complained that 'the practice of providing information to one journalist on an exclusive basis in order to obtain favourable publicity is questionable'. While it is true that Sunday financial journalists spend much more time than their daily counterparts ferreting around for exclusives, and spending their evenings tirelessly wining and dining loose-tongued businessmen, it is also true that a fair number of what appear to be scoops earned by such methodi are in fact handed on a plate by PR firms in the hope that this favour will result in the editorial copy being favourable to their client.

The extent of this trade in inside in- formation in return for favourable com- ment is the subject of disagreement be- tween the PR firms and the journalists they attempt to suborn. The -PR executives, almost to a man, believe that it exists. The journalists, for obvious reasons, say that it does not. One PR man told me that a Sunday City journalist warned him that unless he gave more inside information on his clients, then he could not expect the newspaper to help him out 'when it counts', in other words during a contested bid in which one of his clients was in- volved. Another PR man explained that `inside information is a tradable commodi- ty in British financial journalism, but at least that is better than the situation in some other countries, where journalists are paid in cash to write favourable stories, rather than just seduced with the promises of more information.'

There is little doubt that the Sunday paper breaking the story of a bid, will tend to present the business concept behind the bid in glowing terms, if only to emphasise the importance of the scoop.

However, Ian Watson, Deputy Editor of the Sunday Telegraph, and previously an outstanding City editor of the same paper argues that it is true that the PR firms assume that there is a trade-off, but if they really believe that, then they are asking for trouble'.

Yet not only PR men, but also the principals they represent seem to have a low opinion of the ability of most financial journalists to resist the hype. And Sunday paper journalists, who are under infinitely greater pressure than their daily rivals to find stories, are simply more vulnerable to these pressures.

A rare glimpse inside this world was provided by Christopher Parkes of the Financial Times, who was allowed by Allied-Lyons to be a fly on the wall during its meetings with its financial and PR advisors as it attempted to find ways of fighting off last year's takeover bid from Elders IXL.

Parkes records a glorious moment in which the man from Saatchi and Saatchi told Sir Derrick Holden-Brown, Allied's chairman, that it would be useful to get publicity favourable to Allied into editorial copy, so that it could later be used as 'cut-outs' in advertisements, without appearing to be mere hype: "'When do you want us to organise it?" asked Sir Derrick artlessly. "It's not very difficult."' There is a danger of being too superior in criticisms of the Sunday press. Their job is more difficult and uncertain than that of the daily newspaper reporters. They are probably right not to ask moral questions about the motives of their informants. There is a lot of inside information sluicing around the City, and there is no reason why their readers should not get a glimpse of the rumours which are rife amongst the real insiders in the City of London.

Yet the Sunday financial reporters should occasionally admit, if only to them- selves, that they have proved dangerously susceptible to flattery and persuasion from smooth-talking salesmen who have in the past provided them with some good copy. None more so than the now disgraced Ernest Saunders, as consummate a man- ipulator of the Sunday press as he allegedly was of the Guinness share price. It cannot be just coincidence that, last year when Saunders outrageously reneged on prom- ises to appoint Sir Thomas Risk chairman of the merged Guinness/Distillers group, the City editors of the daily press were divided; but the City opinion columns of the Sunday Times, Sunday Telegraph and Observer were united in the view that Saunders should be supported.