Financial Market

With the news this week that Virgin are the front runners in the bid to take over troubled bank Northern Rock, Financial Market looks at how the group will have to alter its tabled bid in order to cement any proposed deal.

The government has told the Virgin Group, spear headed by Richard Branson, that if it is to take over the Northern Rock the terms of its existing deal will have to be improved. The current terms are said to be more geared towards new investors than the long term standing of the mortgage specialist..

With the news that the Virgin consortiums terms are not to the liking of the government, the management-led bid to salvage the bank could still fall through. Nationalisation of the bank is still very much on the table without a better deal for taxpayers according to the treasury.

The government has stated that in return for its risk in helping the troubled bank out it wants increased exposure to any upside.

Northern Rock still owes the Bank of England £24 billion. If a successful take over offer is not made, an alternative course of action that has also been proposed involves the splitting of Northern Rocks debt into government guaranteed bonds and selling them off to investors.

Investors were further concerned when shares in Northern Rock fell as much as 8% upon news that the rescue packages tabled were not meeting government expectations, but this is a far cry from the disappointment of the zero return investors are expected to get should the bank be taken into public ownership.

Northern Rocks biggest single share holder SRM Global has also increased their stake in the company to 11.5%. As an opponent to the take over bid by Virgin, SRM would see Virgin take a majority shareholding in Northern Rock should the take over proposal be successful.

A sixteen year high, that’s the level of inflation the UK is currently experiencing for goods leaving UK factories according to January’s report released by the Office for National Statistics.

Annual output inflation reached 5.7% in January up from 5% in December, with the price of goods leaving factories up 1% and prices paid by factories for raw materials also continuing to rise, now up 18.7% over the past 12 months.

According to ONS data the surge recorded in January is due to the further increasing prices of crude oil which is up 70.3% on the year, and the spiralling costs of home grown food up 36% - a record high.

Core output inflation which strips out the effects of both rising fuel and food prices, has also risen faster than expected, up 0.8% this month and 3.2% on the year.

The report will certainly be of concern to the monetary policy committee at the Bank of England, and could prevent any further planned rate cuts being made in a bid to stave off UK recession.

“We had been expecting a further increase in output price inflation, but these figures are unequivocally awful,” said Philip Shaw, economist at Investec. “The scale of worsening of factory gate inflation highlights the MPC’s dilemma with monetary policy over the remainder of the year. It is having to grapple simultaneously with a slowing economy and a worsening inflation background.”

This news comes at a time when comparable housing market data also show continued slowdown throughout January, a sign that the once lucrative property market is beginning to loose momentum. House prices rose 9.1% in January down from 9.7% in December.

Amid growing recession concern the ONS also released figures showing Britain’s trade deficit gap in December was £7.574bn, higher than the predicted figure of £7.35bn.

On Friday news broke that Microsoft have tabled a bid to buy rival search company Yahoo for a figure of $44.6bn in cash and shares, 62% above Yahoo’s closing market share price on Thursday.

The offer was presented in a letter to the Yahoo board and came only days after revenue forecasts had been cut, and the company had subsequently committed $300m to try and revive the business in 2008.

The two competitors have found it increasingly difficult in the field of internet search and online advertising in recent years with the increasing dominance of third rival and market leader Google. Microsoft’s take over would merge the two rivals and create an entity that then could better compete with the market leader.

A statement from yahoo upon confirmation of the bid from Microsoft read that yahoo would evaluate the proposal “Carefully and promptly in the context of Yahoo’s strategic plans and pursue the best course of action to maximize long-term value for shareholders.”

With the increasing belief by many that Microsoft’s existing business model becoming more unfeasible in the internet age, this offer indicates a radical shift in how Microsoft perceives the internet and its own future within it.
Over the last twelve months major search rival Google has began to offer free online software alternatives for much of Microsoft’s offerings, challenging the enterprise business model the software giant in built upon.

Currently Microsoft makes the majority of its money by selling license fees to its impressive software packages installed on PCs and servers. Google’s services available freely over the internet severely threaten this.

Coupled with the increasing threat to its core industry, the change in thinking demonstrated by Microsoft is undoubtedly due to the gems in Yahoo’s online advertising empire, a sector that Microsoft has thus far struggled to move into with any great success. Yahoo also offers a range of online applications that could bolster Microsoft’s existing Windows Live online services for both businesses and consumers.

There is the chance of a rival bid for Yahoo still being lodged, possibly from a media organisation, but there are few could offer a similar price to that of which Microsoft is offering. Rupert Murdoch’s News Corp. is one media conglomerate that could potentially do so, and a rival bid from Google is not off the table quite yet.

If Google do not launch a counter bid to Microsoft’s offer the search market leader will certainly delay proceedings by filing anti-competitive legal action against Microsoft in the hope of derailing any deal taking place, much in the same way Microsoft did to Google over DoubleClick last year.

It is already understood that Google executives have asked for a political strategy to challenge the acquisition of Yahoo which could threaten Google’s own dominance of online advertising. How far Google will go with any challenge is as yet unknown.

If the deal was to go through despite a challenge from Google, it would certainly consolidate the market and make two clear rivals, setting up a credible competitor to market leader Google. We would then be left with a true Microsoft versus Google scenario.

In the first business post written for Financial Market, we highlight the recommendation made today by the United Kingdoms Competition Commission ordering British Sky Broadcasting to sell a significant proportion of it shares in competitor ITV PLC. Under the recommendations BSkyB must reduce its share stake from the 17.9% it currently owns to below 7.5%.

The recommendation by the Competition Commission will now go to the Secretary of State for Business, Enterprise and Regulatory Reform who has until the 29th of January to reach a conclusion.

As well as the share reduction the Competition Commission also pushed for pledges that BSkyB would not push for a seat on ITV’s board, but didn’t go as far to recommend that BSkyB sell its entire stake in its competitor.

As ITV’s single biggest stakeholder, claims have been made that by having such a large stake in the company it restricts competition and isn’t in the public interest. It was thought that BSkyB could also influence ITV strategy after it acquired the £940 million stake in November last year, and was seen as an attempt to thwart a potential take over by NTL. NTL latter pulled out of takeover talks and BSkyB’s moves were heavily criticised by rivals BBC and Channel 4.

BSkyB had suggested it transfer its voting rights into a trust but the Competition Commission deemed this would be too difficult to enforce.

Analysts have said that although BSkyB will loose a significant sum if forced to sell of its shares, the company has still succeeded in preventing a takeover of the free to air broadcaster.

At current share prices the sell off could cost BSkyB around £200 million as the value of ITV’s shares have dropped since it bought its stake in the company. BSkyB paid a 17% premium when it first invested with what it called a ‘long term investment plan’, and shares at 0900 GMT were trading at 84 pence, far off the 135p a share it paid.

Graph showing ITV shares over the last 2 years -Source www.lse.co.ukBSkyB is itself owned 39% owned by a subsidiary of Rupert Murdoch’s News Corp.