Chairmen, especially those embarrassed by the share price on their watch, feel obliged to examine any old merger or acquisition idea. But there are limits to what counts as credible and Barclays’ John McFarlane was seriously off-piste if he thought shareholders would be remotely interested in a corporate combination with Standard Chartered.
The idea provoked inevitable derision in the City. First, Barclays’ entire strategy for the past three years has been to reinvent itself as a US-UK “transatlantic bank”, minus its former African business. Merging with Standard, which operates almost exclusively in Asia and Africa, would be a U-turn too far. Second, regulators would probably demand substantially bigger capital buffers, thereby negating the appeal of Standard’s Asian deposit base. Third, the potential to rip out costs, banks’ usual justification for big mergers, would barely exist.
Barclays’ “exploratory conversations”, according to the FT’s report, were prompted by the perceived need to have a plan B to hand when the unsmiling agitator Edward Bramson turns rough. Bramson’s Sherborne fund has bought a 5.4% interest in Barclays and a confrontation of some form is inevitable because that is how activists justify their fees.
McFarlane and colleagues should drop their “blue sky” bumbling. Barclays’ share price, stuck around the 210p mark, is unimpressive but a panicky mega-deal could make things worse. Their thinking should be simple. If the board trusts the chief executive, Jes Staley, to grind out higher returns over time, let the strategy run. If it doesn’t, it should not have approved his plans in the first place.
Bramson’s beef is assumed to be about Barclays’ investment bank. Should the bank even be in a capital-hungry business dominated by big American firms? Bramson will probably offer a few sharp criticisms and, actually, it’s right that Barclays should be made to explain why dismantling its unreliable investment bank is supposedly too expensive to contemplate. But give the detailed rebuttal, don’t play silly games of fantasy mergers.
Most of all, remember that Bramson is merely a 5% short-termist punter who may have overreached in trying to call the tune at a large regulated bank. He should not be a source of terror.
M&S has time to save itself
It was a “historic day” for Marks & Spencer, declared the chairman, Archie Norman, and he wasn’t talking about the record £514m “adjusting item” hit to profits, which beat even last year’s £437m whack. Rather, M&S was offering the first warts-and-all assessment of its troubles for ages, Norman said.
The list of woes was certainly long: too many stores; stores in the wrong places; a website that is too slow; a distribution centre that cannot cope with peak demand; dated IT systems; an inefficient supply chain in food; and, as the chief executive, Steve Rowe, put it, a corporate culture that was “top heavy” and “inward looking”. Given that none of those items can be considered minor, you can understand why the promised turnaround is pitched as a “three-to-five-year” job.
Does M&S have the luxury of time? Up to a point, it does. The size and scope of the “adjustments” is extraordinary but, in terms of hard cash, the cost of the rejig to the store portfolio remains unchanged at £200m. Meanwhile, M&S is still generating plenty of cash from operations and net debt was reduced from £1.9bn to £1.8bn last year. Under a microscope, it is even possible to see an improvement in womenswear sales, one of the key areas of focus.
The share price rose 5%, probably reflecting M&S’ confidence in a same-again dividend of 18.7p. The yield is 6% if you believe the annual distribution is permanently safe. That’s not the worst long-term gamble in a horrible retail sector, even if one suspects more than 100 stores will eventually have to close. M&S still has time to save itself.
