Global village joins forces to stave off effects of recession

I was on a BBC Radio show a couple of years ago when the amiable old saw was trotted out that Coca-Cola and Pepsico were actually owned by the same shadowy holding company and that the supposed competition between the two mega-brands was a corporate conspiracy to make the world drink more cola.

The role of radio in serious debate is to add the silly bits, so I said that I had evidence not only that Coca-Cola and Pepsico were owned by the same entity, but that British Airways and Virgin were owned by it too and that, in turn, the whole holding company was owned by Edwards, which is a bicycle shop in Camberwell.

There will always be the assumption, on the part of chat show hosts and the overwhelming majority of the population who don’t run a business, that there is some sort of international capitalist conspiracy behind globalisation. The truth is both more prosaic and more worrying. There is no shadowy, exploitative conspiracy, but nor is globalisation some kind of benign, millenarian palliative that will deliver economic stability and prosperity. In fact, it could be a symptom of quite the opposite, more of which in a moment.

What is indisputable about globalisation is that there is an awful lot of it about. Mergers, attempted mergers and counter-mergers over the past year in businesses as diverse as accountancy, pharmaceuticals and telecommunications inure us to manifestations of corporate globality. Or we simply ascribe such developments to the international explosion in information technology capacity and capability. Technology delivers the global village, so it’s only natural that the village’s merchants get together.

This is only partly true and it misses some points. It seems to me that globalisation is moving ahead on two fronts – corporate and financial. On the corporate front, the international mergers that will deliver real value are those that offer vertical integrations within the industries in which they occur, rather than simply economies of scale. International drinks and pharmaceutical combines have lately been notorious for the latter.

As to the former category, it’s probably fair to say that there is less around in globalisation that offers true vertical integration. Coca-Cola, as it happens, has demonstrated that it is extremely good at it. One of the most powerful brands ever, Coke has never sought to diversify in the manner of lesser brands, such as Virgin. Rather, it seeks to extend the power of its industrial base. It calls this process “alignment”, but what it amounts to is globalised vertical integration.

Coke has consolidated its franchised bottling operations into acquired subsidiaries from Europe to North and South America and South-east Asia. These are known as anchor bottlers and there are now ten of them worldwide, making Coke worth more in global earnings terms than the sum of its parts. Cadbury Schweppes, with its recent investment in American Bottling, would appear to be moving in the same direction. There’s nothing new under the sun – and vertical integration, knocked by competition authorities around the world – continues to deliver.

PowerGen has learnt this lesson too. Not only has it fulfilled its ambition to return the British electricity industry to some form of vertical integration between electricity generation and distribution through the 1.9bn acquisition of distributor East Midlands Electricity, it is apparently negotiating a merger with Houston Industries in America, where the power industry has to be vertically integrated, for reasons of geographical size. The companies are to keep their local identities, not least for purposes of listing their shares appropriately on their respective stock markets. However, to all intents and purposes, PowerGen is taking its vertically-integrated vision worldwide.

Meanwhile, the financial services industries have to keep up. Among the big accountants, Price Waterhouse’s international merger with Coopers & Lybrand becomes effective this week and KPMG, spurned in a similar proposed deal by Ernst & Young, early this week announced a restructuring operation to place itself more firmly in the global arena. Somewhat eclipsing these manoeuvres, Swiss banks UBS and SBC formally came together on Monday and subsidiary Warburg Dillon Read relaunched itself as Europe’s only candidate to take on the American investment banks on their own territory.

The demand for global financial services on the back of international corporate developments is irresistibly rational. But I also promised a warning. That comes in the shape of the decision of the mega-bank, Goldman Sachs, to end its delightfully lucrative run as a private partnership and embark on flotation. You don’t have to be too much of a cynic to see this as top-of-the-market stuff.

In the US, a deteriorating trade balance is slowing up growth. Furthermore, consumer and capital spending, which have propped up the American economy, have started to weaken. In the UK, latest figures from Cambridge Econometrics show that the manufacturing side of our economy will slow by 0.5 per cent, moving it into recession for the first time this year. I hate to say it, but the end is nigh.

In this context, globalisation – even of the earnings-enhancing, vertically-integrated variety – looks less like a growth bonanza for the new millennium and rather more like prudent consolidation ahead of the worldwide crash we’ve been promised for so long.

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