Ken Morrison never really liked the City, but it was the bizarre decision of a Labour government at the other end of town that effectively ended his career and almost brought down the business he built.
In January 2003, a rampant Wm Morrison agreed a £3bn takeover of Safeway, a bigger business which was losing ground to Tesco, Sainsbury and Asda. Their response was to signal their interest in counter-offers to the Office of Fair Trading, and in March, the government sent all the proposals to the Competition Commission.
This was precisely the outcome the three big groups wanted. It had been plain from the outset that none of them would be allowed to buy Safeway, and that competition would be hotter if Morrisons gained a national footprint. The commission, a lumbering body with no understanding of the value of time, took six months to reach this glaringly obvious conclusion.
By the time new terms were agreed in December, Safeway was a shambles, made worse by the introduction of a new accounting system just weeks before the takeover completed. The impact on Morrisons was devastating, requiring five profit warnings in 12 months. The company’s executives had only the vaguest idea of how they were trading, and it took five years before recovery was complete. Sir Ken hung on, but his power had gone.
He once famously rejected the suggestion of appointing any non-executive directors, responding that he could employ two more checkout girls for the same price. The exchange rate is more like four to one today – and there are five non-execs on the Morrison board. Sir Ken would not have considered this as progress.
Very Careful Transactions needed
Venture Capital Trusts have long been the stock market’s Cinderella. Now it seems that Cinders is coming to the ball in a tax-driven coach, should you go too, or are you joining when the best of the party is over?
The combination of a 30 per cent credit on subscriptions and tax-free dividends has attracted £6bn into VCTs since their launch in 1995. As the tax relief on pension contributions has been cut, more money has poured into VCTs – the inflow in the first eight months of this financial year is up by a half to £170m, and the tax-driven fund-raising season is only just starting. Titan VCT, already the biggest with a £380m portfolio, expects to raise £120m by April.
Whatever the original expectations, most VCTs have morphed into high-risk, tax-free annuities, with elderly buyers attracted by 5 per cent-plus yields in an age of zero returns. Dividends have typically come ahead of capital growth.
The rules on which businesses VCTs can invest in have recently been tightened, causing managements to grumble and some to suspend further fund-raising, concerned at the lack of suitable qualifying investments. Those businesses that do qualify are likely to be smaller, higher risk and less cash-generative than in the past. Maintaining dividends to VCT shareholders will get harder.
The managements argue that unearthing their little gems is labour-intensive, which may explain why the pressure on fees felt elsewhere in the fund management business has yet to penetrate VCTs. Despite its size, Titan still operates on a two-and-twenty model, which yielded over £7m to managers at Octopus last year.
The combination of generous fees, fewer qualifying investments and a rush of new capital is not an obviously attractive one for continuing the decent returns many VCTs have returned in the past. The old adage that you should never invest purely for tax reasons looks relevant here.
Blowing their own trumpet
Congratulations to Aida Abou-Rahme and 139 others, newly-promoted at Morgan Stanley this week. From now on they are all managing directors. This happy band “exemplify what it means to be a leader” at the bank. Well, not all of them, surely. In How to Run a Bassoon Factory, Nigel Balchin explained that the managing director is the one who knows where the factory is, and even goes there sometimes. The bank thanks the newbies for their “dedication and integrity”. It is unlikely to present them with copies of the book.
This is my FT column from Saturday