‘Core’ economy outgrows age and size restrictions

There has to be an element of triumphalism on the part of what is commonly called the “old economy” this week, now that four out of the nine upstart start-ups that elbowed their way into the FTSE 100 index of leading stocks in April have been asked to leave.

To be a “leading stock” from April to June is a bit like being a leading actress because you’ve had a one-month run in the West End. The FTSE shows of Psion, Baltimore, Kingston Communications and Thus are likely to end their run when FTSE International, the impresario which puts on the show, estimates companies will have to be worth at least &£2.6bn to qualify.

These young hams will be replaced by old troupers – expected to be Scottish & Newcastle, AB Foods and Hanson. The Ocean Group, which recently pulled out of a logistics conglomeration with NFC, is expected to qualify in its own right. These companies should not really be called “old economy”. The inflation and deflation of techie enterprises’ stock market valuations suggests there is no such thing as the “new economy”.

The economy is the economy – simple as that. The likes of Scottish & Newcastle and AB Foods are still there not because they are relics of some past economic paradigm but because they are part of the core economy. It is far better, therefore, to speak of the core and non-core economies.

The trouble with “old” and “new” is that it seems to distinguish qualitatively between types of company simply on the basis of age. This is patently absurd, since commercial longevity must play a part in qualitative valuations, just as we might take a commensurately pejorative view of a company that lasts in an index of leading stocks for less than two months.

The same criticism can be levelled at my suggested replacements of “core” and “non-core” – that they distinguish qualitatively between companies simply on the basis of size. As value investment fund managers will confirm, the greatest skill and financial return comes in identifying under-valued – and therefore currently “non-core” – opportunities.

But I make no apology. The difference between “old” and “new” stocks is inflexible. An old company cannot become a new one – certainly not by turning itself into a dot-com – anymore than I can become a young man again. But companies can move between the core and non-core economies, either through their own effort (or lack of it) or the changing nature of the economies themselves.

In this regard, it is worth noting that telecoms equipment company Bookham Technology should be joining the FTSE 100 this week – capitalised at about &£4.5bn – having floated in April and seen its share value rise by more than 300 per cent. The core economy will always consist of well-run companies, whether they are old or new. So I hereby coin the terms “core” and “non-core” economies – you read it here first. The former is still likely to be represented by the FTSE 100, by virtue of the fact that well-run businesses grow into the biggest, but also because their collective size makes them central to the economic health of the nation.

Similarly, the non-core economy represents those companies that our national economy could exist without. In other words, those companies that a conglomerate would sell if it chose to concentrate on core activities.

These demarcations stand up to all scrutinies, except for one I have already touched upon. What about those companies that are currently non-core but are bound for the FTSE 100 and, consequently, the core economy? After all, all FTSE companies started as non-core enterprises – most of them comparatively recently.

To a significant degree, you can say it doesn’t matter. Well-run companies will move from the non-core to the core economy and entry into the FTSE 100 will formally record their achievement. If value investment managers spot them early enough, their funds out-perform rivals and everyone’s happy.

But another disturbing thought occurs to me. Perhaps size doesn’t matter any more; perhaps the FTSE 100 is not so much out of date in terms of its terminology and content as in its representation of size and conglomeration as indicators of economic health.

Globalisation, the digital revolution and an ageing, increasingly part-time and mobile workforce all conspire to make the old, big company that burgeons on economies of scale increasingly inappropriate. Sure, there are still industries that need consolidation to compete effectively – talk of Cadbury Schweppes teaming up with French foods group Danone to bid for Nabisco is symptomatic of that. Equally telling, however, is the fact that German media conglomerate Bertelsmann is planning to bundle all its dot-commery into a separate holding called the Bertelsmann E-Commerce Group (BECG). Separately floated, this company might not meet the FTSE 100’s entry criteria in terms of size, but it would surely be one of the most significant new enterprises around.

Tellingly, the company’s new chief executive, Andreas Schmidt, says BECG will be “less a traditional enterprise than a network of companies and brands”. In the future, networks of companies and brands won’t be valued as conglomerates like those in the FTSE 100. But they won’t be non-core either. They will be both part of a new and a core economy. And our terminology will have to be revised again.