The new, topsy-turvy world of finance has turned the business world upside down – and the old, established rules no longer apply
FOR 37 years Val Padden worked at the brickworks in Accrington, Lancashire. He is proud of the plant’s history — the works has made bricks for 120 years, including the “Nori” high-strength blocks built into the foundations of the Empire State Building and Blackpool Tower. Local legend has it that the Nori brand originated when its intended name – Iron – was painted upside down on the factory chimney.
Last month the credit crunch broke Accrington’s brickmaking tradition. Hanson, the building-materials company that owns the plant, said the housing downturn meant it would be mothballed and 50 staff made redundant.
“Nobody thought it would shut,” said Padden. “We thought there would be some lay-offs and fewer hours, but we didn’t predict it would close down altogether. I still haven’t emptied my locker – it just doesn’t feel real.”
Several other brickworks, including those at Steerforth near Barnsley in Yorkshire and Caernarvon, North Wales, have shut in recent weeks. Just over a year ago such closures would have been unthinkable. The government had set a target of 3m new houses to be built by 2020, and the housing boom was in full swing. Now, due to the banking crisis and recession, housing is in retreat. Last year the UK made 2.4 billion bricks. This year it will be 1.9 billion, the lowest for 60 years.
The wave of brickwork closures is an example of how big business, like Alice when she followed the White Rabbit into Wonderland, finds itself in a topsy-turvy world. Recession has swept down like an avalanche. Its speed and depth, combined with the disruption of banking and other financial markets, has pushed firms and governments into actions that only a few months ago would have been thought impractical, or downright crazy.
Radical measures are now the norm. Take two examples from last week: the Bank of England cut interest rates to 2%, the lowest level since 1951, in a desperate attempt to stimulate the economy. The move made a mockery of the desire to drive out inflation that had obsessed the Bank’s rate-setters only six months ago. And the car-market slump forced Honda to quit Formula One motor racing, ending the Japanese car-maker’s 40-year association with the sport and a competition it recently vowed to spend any amount of money to win.
In some cases, such as the reshaping of the car-manufacturing and financial-services industries, the world is being turned upside down with the help – or at the behest – of governments. In other sectors, including commercial airlines and property, the scramble for survival has made businesses ditch long-held assumptions about their future.
“The unthinkable has become the inevitable,” said Tim Linacre, chief executive of stockbroker Panmure Gordon, which advises mid-sized public companies on their relations with investors. Robert Silver, senior partner at US law firm Boies, Schiller & Flexner and one of America’s top corporate lawyers, said there was no precedent for the shifts now taking place. “I’ve never seen anything like this. Every day is extraordinary,” he said.
The difficulty now is predicting what surreal twist the crisis has in store. Senior executives and City advisers fear the rupture in normal business activities – in particular companies’ refinancing of existing loans – will lead to a “bolt from the blue” – the collapse of a big UK group for no obvious reason.
“There is now a real risk that fundamentally viable and financially sound companies could fail because of a lack of liquidity,” said Peter Marshall, managing director at Houlihan Lokey, an investment bank that specialises in corporate restructuring.
This risk of large corporate defaults is prompting the government and officials to think about even more drastic actions. Gordon Brown and the Bank of England are contemplating whether interest-rate cuts go far enough, or should be augmented with direct economic intervention to reflate the economy.
Lord Mandelson, the business secretary, is drawing up a list of industries threatened by the crisis that could receive direct government support – a return to policies not seen since the 1970s. THE descent into Wonderland began with banks. The collapse in trust and drying-up of credit markets over the past year has threatened the survival of the international banking system. The result has been a spectacular shake-out of the big financial institutions, all done with the connivance of governments.
Five years ago Lloyds TSB was blocked from acquiring Abbey National on competition grounds. A merged Lloyds and Abbey would have had too large a market share, it was decreed.
Yet when Lloyds revealed plans to take over HBOS two months ago, the government had changed its tune. Together the banks will control almost one third of Britain’s mortgage market, but competition concerns were waived in the interests of securing HBOS’s future. On Wall Street, the crisis deepened so swiftly that the institutions seen as saviours had to be bailed out themselves. At the end of September Citigroup was asked to rescue struggling US retail banking giant Wachovia. A rival deal with Wells Fargo was stitched together soon after. Last month Citigroup itself received a $326 billion (£220 billion) government bail-out in a remarkable case of the hunter becoming the hunted.
Lehman Brothers had been thought to be one of those firms that was “too big to fail”.
It was a false assumption. While Washington had been willing to bail out the mortgage agencies Freddie Mac and Fannie Mae, had stood behind the rescue of Bear Stearns and took insurance giant AIG on to its books, Lehman was hung out to dry.
“Until the day they put me in the ground, I will wonder,” Lehman chief executive Dick Fuld told a congressional committee when asked why he thought the authorities had been unwilling to act. “I wake up every single night thinking what could I have done differently?”
Lehman’s collapse has in turn caused an unexpected crisis in the hedge-fund industry. The dozens of hedge funds that dealt with Lehman found their assets and trading books frozen, a gridlock that has still yet to be fully resolved. “The Lehman default has resulted in a state of chaos for fund managers – operationally, legally and from a risk perspective,” said Richard Saunders, chief executive of the Investment Management Association.
In other industries the scramble for survival is running ahead of government intervention. British Airways’ planned merger with Qantas, which stunned the City when it was first leaked, then officially confirmed last week, is a prime example.
Airlines have proved stubbornly resistant to the pan-national mergers that have swept through other global industries. They are largely protected from takeover by the 70-year-old system that governs international aviation and all but forbids foreign ownership and control of national flag carriers.
Reform has been glacial. Europe removed most of the constraints between its member states a decade ago, and last year agreed with America an “open skies” deal which dealt with some of the traffic-right restrictions but none of the ownership curbs.
The BA-Qantas deal could drag protectionist governments kicking and screaming into a liberalised brave new world. The pair plan to sidestep restrictions by creating a dual-listed company, a construct that allows the airlines to merge without losing their individual corporate identities. If a subsequent merger with Iberia and tie-up with American Airlines goes ahead, BA will have driven a coach and horses through what were until now regarded as inviolate rules that prevented such deals.
“This is the kind of transaction that does cause rules to change. It creates a positive need, and commercial imperative, to change rules rather than just a theoretical desire to change them,” Mike Whittaker, head of regulatory affairs at United Airlines, said.
It is the speed of the recession that has bowled over some industries, including Padden’s beloved brickworks. The UK housing market has gone from boom to bust in a little over a year, meaning that demand for bricks, cement blocks and other building materials has evaporated.
In April last year the shares of Taylor Wimpey, the UK’s biggest housing group, stood at 517p, giving it a stock-market value of about £4.5 billion. Last week the shares closed at 9.9p, valuing the group at £104.5m. The shares of its rivals have also taken a pummelling.
The number of new houses built during the next 12 months is forecast to fall as low as between 50,000 and 60,000. The lower number would represent a quarter of the 209,606 homes built last year and a fraction of the 404,356 houses built in 1967 – the peak year for housebuilding. Not since 1920, when only 2 9 , 7 0 0 homes were built, has output been so low.
IT TAKES about nine hours to drive the 520 miles between Dearborn, Michigan, and Washington DC. The road trip offered the bosses of the big three car firms plenty of time to work on their begging strategies.
The decision by the bosses of Chrysler, Ford and GM to drive to Washington this week in lean, green hybrid cars was an act of penance. Not so long ago hybrid was a dirty word in Detroit as the trio concentrated on selling gas-guzzling behemoths. High petrol prices and scared, credit-deprived consumers have brought their industry to the edge of destruction, threatening millions of jobs.
Two weeks previously, the car bosses had been sent packing by politicians after flying down to Washington in private jets. Now they were back, begging for $34 billion.
“We’re here today because we made mistakes,” said GM’s chief, Richard Wagoner.
Few doubt that the collapse of one of the three will have a profound impact on the US economy, but polls last week showed that the US public, as well as politicians, are reluctant to simply hand over more money to the car firms.
So, once unthinkable solutions are now being considered – such as a forced merger of GM with Chrysler. Silver, of Boies, Schiller & Flexner, said the government’s primary concern was to prevent more shocks to the system.
“It’s always a question of what risks do you want to take. Do you want to take a risk that you are going to have too much consolidation? Or do you want to take the risk that you are going to have a business failure that you could have prevented? Given everything that is happening now, and all the fragility, I think governments that would normally go in the first direction will now go in the second.”
FOR corporate Britain, the scrabble for funding will dictate the itinerary on the next stage of its trip through Wonderland. The banking crisis means that some groups will struggle to refinance loans that are falling due, and certainly not at the interest rates they enjoyed when the loans were first taken out.
Bankers say the funding crisis has been exacerbated by the recent collapse in equity markets. Deficits in defined-benefit pension schemes have soared as a result. “If pension trustees then force firms to take aggressive steps to reduce the pension deficit at the same time as the credit crisis, the results could be disastrous,” said Houlihan Lokey’s Marshall.
If loans are unavailable, companies will have to turn to their shareholders for cash injections. Corporate advisers expect a rash of rights issues – where companies give their existing shareholders the option to subscribe for new shares, usually at a substantial discount to the existing price – early next year.
“You could see a number of companies look to launch rights issues rather than get into tricky negotiations with their banks further down the line. The best companies will be looking to do this sooner rather than later to make sure they don’t end up at the back of the queue,” said Panmure Gordon’s Linacre.
Not all rights issues will succeed, however. There has been a polar swing in investor sentiment. Two years ago, when debt was cheap and the bull market was in full swing, no corporate story was too good to be true. Now, no tale of potential disaster, forced merger or corporate collapse is too outlandish to be believed. “[Two years ago] the world was so different as to be almost beyond remembering. It was ruled by greed, optimism and credulity. In short, it was the opposite of the last few weeks . . . [now] no scenario is too negative to be credible, and any scenario incorporating an element of optimism is dismissed as Pollyannaish,” Howard Marks, chairman of American investment firm Oak-tree Capital Management, told his clients in a recent letter.
For those rejected by their shareholders, there is another potential source of funds. Emboldened by government’s willingness to bail out banks, several large industrial groups have made a plea for state subsidy, the most high-profile of which has been Jaguar Land Rover, which is asking for around £1 billion.
Mandelson is now drawing up his list, but this weekend told The Sunday Times that he would take a tough line, with no open cheque book for British business.
For the moment, it’s hard to see an obvious way out of Wonderland.
