Vodafone risks US horror story

ONE OF our wiser fund managers said the reason British industry makes so many mistakes is that the City gives it too much capital too easily.

If big businesses were squeezed - as small businesses are squeezed - they would have to stick to what they understand and devote all their energies to making it better.

But of course that is hard work and it takes longer than the average life of a share option scheme to grow organically. Fund managers have not the time or the resources to follow small companies and grow with them. Executives know that the bigger the company, the more they get paid.

So there is an unholy alliance in which the executive taps the City to indulge his wildest fantasies to double and redouble the size of the business by acquisition, without ever saying much about profitability.

For both, it is so much more exciting than the day job. The result is that investment after overcapitalised investment and bid after overpriced bid, almost none of which live up to their promise, are paid for out of the public's pension funds and insurance policies. Study after study proves that 75% of bids destroy value but within months of the bottoming of the worst bear market for a generation companies, bankers and fund managers cannot wait to get back into the fray. The Bourbons should have been businessmen; they learned nothing either.

Vodafone's flirtation with a bid for AT&T Wireless has all the ingredients of a horror story. The giant AT&T, the epitome of the American telephone business, cannot make its mobiles division pay so it is selling. Vodafone, which cannot even dominate its home market against the likes of Orange, a revitalised O2 and Virgin Mobile, is assuming it can succeed where the Americans have failed. How many more billions will have to be sunk in pursuit of this dream is not discussed.

But if readers want a feel for how much it might involve, they should take note of the fact that the biggest investor into the UK these past two years, with almost £2bn spent, is Hutchison, the Hong Kong company behind third-generation network 3. For all that investment, it has made minimal impact so far.

Were it likely to get AT&T Wireless on the cheap, it might be worth a punt, but this is an auction. Sellers love auctions - because they maximise value for the seller. The corollary is that the buyer overpays.

One final thing. Vodafone's justification for asking shareholders to back this deal in America is that its management bought the wrong company last time it went shopping there. It currently has more than 40% of Verizon, the mobile-market leader in the States, but no prospect of control. This is clearly not ego-enhancing. If it buys AT&T, the regulator insists the Verizon shares will have to be sold - at who knows what lousy price to a buyer who knows Vodafone is a forced seller.

There must be a Harvard case study here. Its title could be 'Where is corporate governance when you need it?'

Psion success

PSION and its advisers Morgan Stanley got a rough ride this week when the technology company sold its stake in Symbian. The disappointment is understandable, particularly among investors who were hoping that Symbian would one day get its own share quote.

They should, however, think again because a flotation was never on for two reasons - first Symbian does not make a profit so a share offering would be a pretty cut-price affair, and second, Symbian's major customerand major shareholder Nokia was dead against it.

Far from Symbian being sold too cheaply, it fetched a remarkably good price for what is an asset of diminishing value. Its major customer was Nokia but Symbian technology has been around for a few years and such is the pace of innovation in this business that it was becoming conceivable that Nokia could replicate it without infringing the patent. That was becoming a credible threat.

The Symbian business model also had a flaw. Most of the projections for profit and value were based on a licence fee accruing to Symbian at the rate of $5 per handset. But only Psion has an economic interest in getting the royalty price up; the other shareholders who are customers wanted it lower. Estimate the royalty at $1 not $5 and the economic value of Psion's Symbian stake is dramatically reduced.

Nokia realistically was the only buyer, yet Psion still got a lot more for its shares that did Motorola, which sold out before Christmas. Not a bad result on a deal that probably had to be done now if it was going to be done at all.

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