IT IS dispiriting to see EMI pursuing a merger once again. A tie-up with Warner Music is the current flavour of the month — not for the first time, as it happens. A link between these two was mooted three years ago, when Warner Music split itself from the Time Warner mother ship with the help of private equity finance. But before that, EMI was at the merger dance with Sony and BMG and might have done a deal with either. As it turned out, EMI played the role of gooseberry and found itself looking at its shoes rather than into the eyes of a sweetheart.
There is some logic which suggests that EMI will benefit from a merger with Warner. Some operating overheads, currently duplicated, can be eradicated. Fused together, EMI and Warner could find themselves able to increase sales revenue faster than would be possible at either company if they continued to plough independent furrows.
Together, the companies may be better placed to steer technological innovation. They may be better placed to undertake original research and development. There may be an advantage in exploiting advances in technology that take place elsewhere.
But there is no guarantee that EMI will draw these merger benefits. The deal may not be done, for a start. EMI must have a sound chance of landing its prize because Warner Music’s private equity backers can be assumed to be looking for an exit, but deals in this sector have a habit of falling through. Music publishing assets are sound, but there is a trophy quality about them that means the usual rules of commercial engagement can be sidelined. And when sentiment enters the equation, volatility and surprise follow on.
Even if the merger is completed, the benefits may not be forthcoming. Respectable academic studies show that about four in five deals of this sort fail to create wealth. There must be a substantial risk that an EMI-Warner merger would fall on the wrong side of this uneven divide.
It is dispiriting, then, to see EMI pursue a merger because it may fail to merge or fail to secure the merger benefits. But it is depressing for other reasons, too. First and foremost, it is dispiriting because one is compelled to assume that merger planning has preoccupied EMI’s senior managers. They will say, and may earnestly believe, that the succession of on-off merger talk and speculation was not a distraction. But it surely diverted some of the company’s effort away from the creation and production of music.
EMI, in common with all music publishers, will only deliver genuine and sustainable wealth if it discovers, develops and promotes artistic talent. The company has done its fair share of this at the same time as flirting with merger ideas. But without the distractions it could surely have done more. It might have found more effective ways of meeting the piracy challenge and adapting its business model so as to be able to make attractive returns from a more diverse range of talent.
The re-emergence of merger talks is also dispiriting since it seems that EMI’s management feels obliged to pursue a deal because institutional shareholders want them to. Shareholders, as owners, need to be listened to. But we will all be poorer if fund managers, rather than company managers, call all the shots. EMI top brass should look again before leaping.
Developers in a better place
OF THE 10 million sq ft of new office space being built in London, 6.3 million is speculative — that is, the developers have yet to sign up any tenants to rent it. That’s a colossal acreage, equivalent to six Canary Wharf towers.
According to Drivers Jonas, the speculative splurge is especially acute in the City, where 3 million sq ft is rising behind the pavement hoardings with no one yet committed to fill it. Speculative development is not necessarily a bad idea. Most other industries routinely make capital spending plans without any guarantee of future customers. Why should property developers be any different?
But there can be pain. Youngsters in the industry will remember only the 2002 downturn, a relative blip, when the City downturn led to an excess of space, most notably at the Gherkin, which is now mercifully almost full. Peer back to the early 1990s, however, and the agony was more acute. Many small developers went to the wall and banks wrote off hundreds of millions of pounds in bad debts.
Could it happen again? Yes, of course. Financial services, especially wholesale financial services, is a volatile industry. A nasty market jolt or even just a couple of lean years could upset the developers’ plans. Most of the new space becomes available in 2007 and 2008.
The good news is that the industry is in better shape to withstand an upset. The speculative development is being done by bigger players such as British Land and Land Securities, which have the balance sheet muscle to cope and if necessary to sit and wait for better times.
Nasdaq intent
THE difference between 15 and 19 per cent may not sound much. So does it matter that Nasdaq yesterday raised its holding of shares in the London Stock Exchange from the former to the latter? The short answer is, yes it does.
The shift may fall short of giving Nasdaq notable extra leverage if the ownership of the LSE came down to a ballot. But Nasdaq is making a significant additional declaration of intent. Admittedly, this may be taking the Americans’ stance from very serious to deadly serious, but if anyone thought Nasdaq was doing no more than engaging in spoiling tactics, yesterday’s news suggests they should think again. It is not just that Nasdaq bought more shares, it also paid a higher price and this raises the bar for future purchases.
As Nasdaq digs in its heels, the task facing NYSE, which is also feting LSE and appears the preferred suitor, gets harder. It may soon become impossible.
Perk rage
Terri Dial, the American hired to run the retail operations of Lloyds TSB, has got off to a good start. However, Pirc, the corporate governance advisory body, is concerned because her £1.1 million options welcome package had no performance hurdles. Pirc is urging shareholders not only to vote down the remuneration report next week, but also to kick Ms Dial off the board. That looks like formulaic over-reaction. It is important to maintain high corporate governance standards, but these must be judged in qualitative, and as well as quantitative, terms.
