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Why it's time for business

Robert Peston | 13:15 UK time, Monday, 29 January 2007

Here and now is the best time to be broadcasting or writing about business. The private sector and the unleashing of market forces across the globe is changing all our lives, mostly for the better, but also (if, for example, you are in the wrong job in the wrong place, or if you've been saving in many conventional pension funds) for the worse.

It's an epic drama called "Globalisation", with Tolstoyan themes: the emergence of great new economic superpowers, China and India, and the strikingly fast dissemination of IT and broadband technologies that have combined to engender rapid (and surprisingly stable) economic growth almost everywhere. They're manifested in news stories on a daily basis, such as this report in The Times today about the angst of the giant mining companies over China's agreed takeover bid for more or less the whole of Africa.

Then there are the great anxieties or our age: that the explosion of cheap credit around the globe over the past decade - which fuelled a boom in corporate takeovers, the explosive growth of hedge funds and private equity, and putative housing-market bubbles in the US and UK - will end in tears; that the world's most important economy, the US, is excessively in hock (largely, though not exclusively, to China); that the spoils of growth are being unequally shared, within countries and between countries; and that the oil economy's excreta, CO2, is poisoning all our futures.

maria_ap_203.jpgIt's entertainment and soap opera too. Last week's ousting by the world's biggest bank, Citicorp, of a high-flying executive, Todd Thomson - after he shared a private jet with a glamorous US business journalist, Maria Bartiromo, whose sobriquet is the Money Honey - was a sizzler. But the recent turmoil at the UK's second largest company, BP - when its chief executive, Lord Browne, decided to quit 18 months early - was more Shakespearean tragedy, redolent of Julius Caesar.

So I hope that this blog will be a conversation about the important trends, the drama of breaking news, the big business personalities who are now in many ways more powerful than politicians, and - above all - the issues that touch all our lives and affects our futures. It would be surprising if in the coming weeks and months the agenda didn't include:

1) Is Tesco a great British success, the bringer of the good life to millions of consumers, or destroyer of high streets and local communities?

2) Are the high street banks the vital infrastructure of the economy, innovators helping us provide for our retirement, or oligopolists fleecing us?

3) Are small businesses being crushed by the burden of taxation and regulation or is complaining about mortal threats just part of the natural condition of being an entrepreneur?

4) Is the abandonment of final salary pension schemes by companies a dreadful betrayal of their employees or essential for their survival in a cruelly competitive world?

5) Does it matter that the wealth gap between the super-rich and the rest of us is widening?

6) Is it a good thing that unprecedented numbers of British companies are being bought by overseas outfits?

7) What are the implications of the growth of private equity, or the increasing number of companies that are going private backed by specialist funds?

This phenomenon of private equity is utterly compelling. Suffice to say for now that the British-based private equity funds - which are significantly smaller than their counterparts in the US - raised £27bn in new equity capital in 2005 (and considerably more in 2006). Now when they buy a company, they tend to deploy £4 of borrowed money for every £1 of the equity capital they invest. So that equity capital is sufficient to buy companies with a total value of almost £140bn.

To put that in context, Tesco has a market capitalisation of £32bn, Unilever's value is £18bn, and Cadbury Schweppes is worth £12bn. So these days only the very biggest businesses, such as HSBC (valued at £108bn) can be wholly confident they won't be taken over by private equity - for now.

The ToundhoseNow last week, the eminences of British private equity were out in all their pomp and finery at the most glittering of parties held in London's magnificently refurbished Roundhouse. Only rarely in the history of this nation can so many stupendously wealthy individuals have been gathered in one place. Many of those present were worth many tens of million pounds each, some worth comfortably more than £100m. According to a banker, the collective net worth of those at the do was more than £10bn.

They were there for "charidy", to launch the Private Equity Foundation, a new charitable trust endowed by private equity's leading firms and individuals. It's part of a slightly belated charm offensive, to show that some of the high returns generated by the buyout of companies will be ploughed back into good causes. So far it's raised £5.1m, which is a fraction of what a private equity partner can expect to earn in just one big deal that goes right. "Frankly the charity has got to do a lot better if it wants to impress," said one of the guests.

Now private equity makes its profits by buying companies and making them more efficient. Some of this improved efficiency is fairly simple financial engineering, the replacement of equity by debt in a company's balance sheet (a subject to which I will return in later postings). Some of it stems from cost reduction, often involving job cuts.

buffini.jpgInevitably, therefore, private equity hasn't endeared itself to the trade union movement. And outside the Roundhouse last Wednesday night were protestors from the GMB, who've been targeting one of the UK's leading private equity houses, Permira. The GMB has been trying to embarrass Permira over job cuts at Birds Eye and the AA, two companies it controls (Permira shares ownership of the AA with another private equity house, CVC).

And the trade unionists have focused much of their campaign on Damon Buffini, Permira's managing partner. They've put his face on posters, they've picketed his local church, they've littered Labour's last annual conference with leaflets attacking him. But arguably they've shown poor judgement in painting him as villain, because in many ways he symbolises the opportunities available in a meritocratic UK. He was brought up on a council estate in the Midlands by a single mum, he's black and he went to local state schools.

Today Buffini is probably one of the UK's top five business people. He embodies one of the great debates of our time: Britain as a place where excessive spoils accrue to a tiny minority versus Britain as a place where any of us can make it big. Sadly he won't be taking part in that debate, because he shuns publicity as though it were pure kryptonite.

Comments   Post your comment

  • 1.
  • At 02:20 PM on 29 Jan 2007,
  • Sam wrote:

Well done on re-starting this blog. I am looking forward to your postings.

With respect to the mining companies, its hard to be sympathetic towards them. They have had the run of Africa and lots of other parts of the world, they have taken the natural resources and it doesn't look like they gave anything back.
It was a smart move by the Chinese to entice African leaders with infrastructure projects.

Isn't this the point of globalisation? Competition for resources whether that be capital, human or mineral?

  • 2.
  • At 03:28 PM on 29 Jan 2007,
  • Stephen wrote:

Looking forward to reading the blog Robert. Hope the rest of the entries are a bit shorter though! I'm exhausted after the first day ;)

  • 3.
  • At 03:36 PM on 29 Jan 2007,
  • Sam wrote:

Good stuff - and good luck for your blog. It's always struck me that the stories about people in business are as good as the stories about people in football, films, or any other part of society. Good luck if you're going to be sharing some of that with us.

  • 4.
  • At 03:41 PM on 29 Jan 2007,
  • James wrote:

Hi Robert and welcome to the blogosphere.

Yours is a very important role - someone focused on business stories in the heart of the business-unfriendly BBC. Your predecessor Jeff Randall was under no misapprehension of the "visceral" antipathy of most of his BBC colleagues to the business world. If the BBC is avoid becoming a cosy echo chamber for metropolitan public sector views, then the business world needs to be explained, investigated (and yes, defended too) much more than the BBC has managed to date.

Your list of topics looks good. Can I suggest you also look at the concept of profit and how societal views on it have changed over the years? My own view is that a lot of people, particularly at the BBC, have become desperately confused about profit. It has become a totemic issue, a demonised concept and, for the lazy-thinking, shorthand for rampant greed. It is, in fact, vital for our economy, our taxation, our jobs, our government spending and just about everything in between. This paradox should be explored and would make good blog content or even better, good broadcast material.

Good luck with the blog anyway

James

  • 5.
  • At 03:43 PM on 29 Jan 2007,
  • DW wrote:

If Damon Buffini is in the UK's top five business people, who are the other four?

  • 6.
  • At 05:14 PM on 29 Jan 2007,
  • Vincenzo Rampulla wrote:

Robert,

Interesting start to the blog, look forward to reading it over the next couple of months.

I hope you take up the issue of the changing relationship between consumers and high-street banks, including building societies for that matter.

I absolutely think there is a backlash occuring that shows the average highstreet consumer beginning to flex their collective muscles, demanding more value from the services they recieve.

Take bank charges. Hot on the OFT's trail which saw them call for credit card charges to be capped at £12, consumer groups are supporting their investigation into the cash cow that are bank charges. Give the success of the OFT campaigns in recent years, Credit Card charges and Legal Service Reform to name but two, they are unlikely to roll over on this one.

The industry is desperately trying to firefight the issue and keep hold of the massive income/profit injection they get from these charges. But they don't look to be winning.

It is indicative of greater consumer action that a national Building Society such as Nationwide is receiving as many as 200 demands from customers for bank charge refunds A DAY.

This'll have an impact on free banking as the only thing likely to stay constant in this equation is banks/building society profits, but they're not going to have such a free ride anymore.

  • 7.
  • At 05:28 PM on 29 Jan 2007,
  • david hellier wrote:

good luck with this robert. i wishit every success

Decided to answer some questions on Robert Peston's BBC Blog http://www.bbc.co.uk/blogs/thereporters/robertpeston/

1) Is Tesco a great British success, the bringer of the good life to millions of consumers, or destroyer of high streets and local communities?

Depends if your thinking in terms of a rich person with a share portfolio, or a poor person who has to catch more buses and walk more to buy groceries at a price that ain't really all that anyway. Nothing has got that much cheaper, and if it is cheap in the supermarket it's only because it's crap, like 2p crisps, trans-fat packed 10p mini-rolls, or bread that makes you fart all night long for 32p a stick. Not forgetting 42p a can 2% lager...oh joy.

2) Are the high street banks the vital infrastructure of the economy, innovators helping us provide for our retirement, or oligopolists fleecing us?
I don't know, I pity the poor lambs having to take £30 off me everytime my overdraft goes 0.01p over the agreed rate, thats a hard way to make money (not to mention illegal --> www.penaltycharges.co.uk)

It used to be said when the last politician is hanged with the entrails of the last priest mankind will know freedom. But I'm thinking lately crap politicians are the symptom not the cause, so that when the last priest is hanged with the entrails of the last banker. The world will know peace and freedom. :)

3) Are small businesses being crushed by the burden of taxation and regulation or is complaining about mortal threats just part of the natural condition of being an entrepreneur?

Or do you compound questions that aren't really related? Rich people like to moan how they can't get richer and richer quick enough, just like the proles complain about not having enough pennies to plop onto the gas key. Oh and small businesses are being crushed by taxation and moreso regulation. And this is wholly intentional on the part of government and big business. When a company like Tesco can employ over 5% of uk workforce, then further consolidation in the market as the years progress will lead to 20-25 companies having say oevr 95% of the population, then we can congratulate ourselves on having a corpratist system of fascistic control that would have probably been evident only in Hitler's wettest dreams.

4) Is the abandonment of final salary pension schemes by companies a dreadful betrayal of their employees or essential for their survival in a cruelly competitive world?

Whatever the spin it's damn convenient, as a child of the 80's I'd rather stuff a matress for retirement then let greedy employers/government take more of my hard earned on the basis of some promise in a future that may not emerge. Is this not how business has come to suceed anyway? Long dead are the days of Henry Ford and working with the workers...Nowadays this is the emplyers code...

Step One: Betray those who work for you ruthlessly. Impress on them it's their own fault for sucking in a cruelly competative world.

Step Two: ??????

Step Three: Profit.

5) Does it matter that the wealth gap between the super-rich and the rest of us is widening?

Not at all, because we have always been slaves and will always remain so. For the few of us who realise our predicament and attempt to squirm our way out however, the above consistent phenomena is indicative of the fact that wealth in our terms is not what it is in their terms. This is not a fight for resources persay, more a fight over which resources.

The rich spend on war, on aggregating power in govt and business, on consolidation and rationalization and imposing ignorance. The rich really spend their life serving money, the fountain of greed ensuring their wasted existence.

The poor spend on food, shelter, personal enjoyment, entertainment, education. the poor mostly spend their life trying to make money serve them whilst chasing enough of it, obviously, to get by. Soemtime they sell themselves to rich men and die in their wars to provide for their families, or the barest glimpse of a future without such suffering.

The more things change, the more they stay the same is the short answer.

6) Is it a good thing that unprecedented numbers of British companies are being bought by overseas outfits?
Depends if your a nationalist, xenophobic or a simple dumb human like me. I've had British bosses, Iraqi ones, Iranian ones, Pakistani's, Frenchies, a German one, and a Nigerian. They all sucked on pretty much the same high celestial plane. Globalisation is not meant to make us all like the first world anyway, Britiain is being wasted away due to design, not due to neglect. What really matters is that the decisions affecting peoples lives are made as close to them as possible. Society is taking a different trend, on that will reap slaughter, but then, that's what our economy survives on.

7) What are the implications of the growth of private equity, or the increasing number of companies that are going private backed by specialist funds?

Tyranny, in ever fewer hands. Economics is a conspiracy to which honest politics is the only cure. Therefore, we are forked. Royally. Regardless, many blessings, and hope to see you on the other side of this madness.

This will be an interesting blog, but I have a question.

Why are you so interested in

"...the big business personalities who are now in many ways more powerful than politicians."?

The rise of the powerful business personality as an entity which seems to exist some how beyond democracy is not something I find healthy. It is also a source of concern that you can become a minor celeb by massing personal wealth and being seen to use it on a feast of greed and over-consumption.

As business personalities live and die by the media, I for one will hope that you don't build too many already inflated egos on this blog.

  • 10.
  • At 10:19 PM on 29 Jan 2007,
  • Simon wrote:

I read a lot of economics and business blogs, and I have to say, this is the first one that has (in so far as a first post can) captured a broad sweep of the issues that interest me, and in so far as its stated views have gone, I agree with them.

The feel of the thing is right, I look forward to seeing how it fleshes out.

The numerous taxes imposed on all companies is enough to put anyone of starting a business. If you do take the plunge, then god help you if you do ok and end up employing five people or more. Then you have to be great at business and become a heath and safety boffin as well. There should be one tax only and it should simply be called 'tax' and should be taken from the PAYE scheme. Dividends should be included in PAYE figures. Health & Safety - Employees must first prove that they dispalyed common sense when it comes to workplace safety and the test should be as in law 'reasonable man'. A 'reasonabe man' would wear steel toe capped boots in a lead smelting factory! He should not have to be instructed to do so and should not be allowed to claim for flattened toes while working in his training shoes! Lets campaign for the re-introduction of common sense.

I agree with Thomas Chant, would be interesting if a piece was done on this facet of celebrity businesspeople, and furthermore whether BBC business reporting could be a little more 'real-world' and holistically applicable to our everyday lives, rather then a kind of sports entertainment numbers only game for those on the inside track.

  • 13.
  • At 10:10 AM on 30 Jan 2007,
  • Bernard wrote:

Hi Robert,

I very much liked your list of 7 agenda items. Could we also add:

8) Is it a good thing to have run away House Price Inflation? Is the 40%+ of average take-home pay, currently being used to service mortgage repayments, money that could be better spent in the wider economy on other goods and services?

  • 14.
  • At 11:20 AM on 30 Jan 2007,
  • Trucker wrote:

the blog is good news but what i would like to see is bring some of the technical aspects of business in to the public domain, for example, just how is a deal constructed in terms of risk management and debt structure, what is the other side of the story for example NASDAQ could make a good profit even if the LSE bid fails, how are deals hedged. This might be boring to some but the it would be great to have an alternative to the daily mail style coverage that the BBC tends towards (super casinos are not a business story).

  • 15.
  • At 11:45 AM on 30 Jan 2007,
  • tim wrote:

Robert. For info, Unilever plc's market cap is indeed £18bn. However, Unilever NV's market cap is €35bn (£23bn), making the combined market cap of the business around £41bn.

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