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Technology Stocks : PCW - Pacific Century CyberWorks Limited -- Ignore unavailable to you. Want to Upgrade?

To: ms.smartest.person who wrote (682)	3/26/2001 5:56:55 PM
From: ms.smartest.person	Respond to of 2248

Cable & Wireless Should Make Share Buyback Part of Its Pl March 26, 2001 Breaking Views Cable & Wireless Should Make Share Buyback Part of Its Plan Edited by Hugo Dixon It is second-time lucky for Singapore Telecommunications . The state-controlled telecommunications group lost out to Pacific Century CyberWorks in the battle to buy Hong Kong Telecom from Cable & Wireless last year. Now it has made up for that disappointment. Singtel reportedly has agreed to buy C&W's 52% owned Australian subsidiary, Cable & Wireless Optus , for about 17.5 billion Australian dollars ($8.69 billion or 9.77 billion euros) in shares and cash. Moreover, it has warded off Vodafone Group , its main bidding rival, in the process. 1 For the complete set of comments go to breakingviews.com2 It isn't hard to see why C&W elected to sell to SingTel rather than to the United Kingdom mobile group. Vodafone's offer was riddled with competition problems. It was seeking to merge the third-largest telecommunications operator in Australia -- its own -- with the second biggest, Optus. Vodafone's way around the regulatory problems was to sell about a quarter of the combined business to Hutchison Whampoa and help set it up as a credible competitor. Problem was, this wasn't a big enough pound of flesh. SingTel's offer, though, is likely to intensify C&W's cash headache. It has too much of the stuff. Assuming half the bid is financed by cash, C&W would end up holding about 6.2 billion pounds ($8.84 billion or 9.94 billion euros) in cash, as well as marketable securities valued at an additional 3.5 billion pounds. All this will simply intensify calls for C&W to hand some or all of that war chest back to its investors. There is sense in C&W's retaining cash for acquisitions. Prices for data carriers and Web hosting businesses are now depressed, and C&W's cash gives it flexibility to snap up bargains. But Chief Executive Graham Wallace needs to clarify how much money he needs to retain for this purpose. For the remainder, a buyback would probably be in order. * * * German Banks Bayerische HypoVereinsbank may well have its hands full. The Munich-based bank must close the books on its three-year real-estate nightmare, merge its mortgage-banking subsidiaries and integrate the Bank Austria purchase. But it would be a mistake to miss an even bigger opportunity close to home: Dresdner Bank . In a takeover, HypoVereinsbank should be able to cut 30% -- or 800 million euros -- of expenses in the smaller bank's retail business. Fold in another 75 million euros in savings from asset management and put the savings on a multiple of 10 and that gives 8.8 billion euros of value creation. HypoVereinsbank would have room to pay a premium of about 30% to Dresdner's owners at current prices and still make money. Moreover, because HypoVereinsbank has almost no investment-banking activities, there would be little overlap with Dresdner Kleinwort Wasserstein. Previous attempts by Dresdner to merge with Commerzbank and Deutsche Bank collapsed over this issue. In addition, the shifting tectonic plates at Allianz -- the big insurer that owns stakes in both banks -- may favor a deal. Allianz has made no secret of a desire to consolidate its shareholdings and gain greater retail distribution of its funds and insurance products. Owning a fifth of Germany's biggest bank would do the trick. The main barrier to a deal is HypoVereinsbank itself. Management still hasn't proven to investors that it could avoid mucking things up. The original merger that created HypoVereinsbank was a nightmare, and the Bank Austria purchase has only begun to trickle down to the bottom line. Even so, everything has a price. And Dresdner now looks so cheap that HypoVereinsbank's investors may just feel that a merger is worth a shot. * * * Deal Bonuses Vodafone was roundly criticized last summer for awarding its chief executive a 10 million pound bonus for masterminding the takeover of Mannesmann . One might have thought then that other companies would have gotten the message. Not so. Now Royal Bank of Scotland and Schroders have kicked up a row by announcing similar deals. Royal Bank has awarded a bonus of 2.5 million pounds to four senior executives for clinching the takeover of National Westminster Bank last year. Schroders has paid former chairman Sir Win Bischoff five million pounds for taking it into the Financial Times-Stock Exchange 100-Share Index and then breaking it up. Investors are right to fume at these proposals. Not because the executives in question are necessarily overpaid. The problem is the way the remuneration is structured. Executives shouldn't be rewarded for doing deals. They should be rewarded for making them work. There occasionally may be a case for rewarding executives who bring an outstanding opportunity to investors. But such exceptional awards should be paid in options over the company's stock, exercisable at prices prevailing before the announcement of the deal. This aligns the executive's interest with those of investors. Of the two present cases, there is not much investors can do about Sir Win. Schroders is still controlled by the founding family. If they wish to reward an old retainer, there is little the minority can do to stop them. But Royal Bank is in a more awkward position. It was wrong to make cash payments to the four directors and doubly wrong not to put the matter to shareholders. The Scottish group was able to take over NatWest because it enjoyed the enthusiastic support of its investors. By pressing ahead with the awards, it may squander this asset. * * * Baltimore Technologies How's this for a puzzle? Baltimore Technologies has warned that first-quarter revenue will be about 16% below analysts' forecasts, owing to the prevailing economic climate. It singles out the U.S. downturn. Yet the U.K.-listed Internet security company isn't highly exposed to the country. Only 22% of last year's revenue came from there. It is tempting to conclude that Baltimore's U.S. sales have fallen off a cliff. Tempting, and probably correct. Baltimore's sales channel leaves it highly exposed to a downturn. On Credit Suisse First Boston's estimates, its installed base of customers typically contributes less than 25% of its revenue. The rest comes from first-time purchasers. Until recently, these were plentiful. But in the current economic climate, persuading information-technology managers to start projects is extremely difficult. The fundamental problem for Baltimore is that its public-key infrastructure software is expensive. It competes with cheaper Internet security technology. For many companies the cheap stuff will do -- at least until economic conditions improve. Baltimore has diversified through acquisition, but not quickly enough to prop up sales. The shares have been punished already, but they still trade on seven times historic sales. For a business taken ex-growth by the business cycle, the rating is still way too high. --Jonathan Ford, Rob Cox and Mike Monnelly -------------------------------------------------------------------------------- URL for this Article: interactive.wsj.com Hyperlinks in this Article: (1) breakingviews.com (2) breakingviews.com -------------------------------------------------------------------------------- Copyright © 2001 Dow Jones & Company, Inc. All Rights Reserved. Printing, distribution, and use of this material is governed by your Subscription Agreement and copyright laws. For information about subscribing, go to wsj.com Used with permission of wsj.com