A merger made in heaven

MOST mergers destroy value. All the early signs were that Reckitt & Colman's marriage to Dutch group Benckiser in 1999 would do the same.

Within a year the shares had slumped from 780p to 440p. Reckitt had a string of problems before the merger and was accused of handing over too much (40%) of the combined group to its much smaller partner.

Those doubts have long since gone, banished by a sustained period of growth. The 9% profit gains in the three months to June is the 14th successive quarterly rise. Chief executive Bart Becht is beating his targeted annual sales growth of 4% to 6%. The first half rise was 7%.

With annual sales of £3.6bn, 7% makes quite a difference. Becht and finance director Colin Day deliver it by a relentless push for new products.

Vanish stain remover and Finish dishwasher tablets may not sound exciting but they do the trick for growth. Reckitt's research spending of about £55m - 1.5% of sales - is not large but it is effective. It has found a virtuous circle of cost control, higher margins, marketing spend on new products and higher sales. John Elston at broker WestLB says: 'It is not rocket science. They are just doing all the right things.'

This has been rewarded by a soaring share price, making an options fortune for the top team. Becht's paper gains could be £27m. This is a reward for success, not failure, but its sheer size is eye-watering - particularly when you remember that the shares topped £12 in 1998, and are only recovering to the old peaks.

They are no longer cheap at 18 times earnings. But Reckitt has huge room to grow in developing countries, which need good cleaning products.

Becht pleased analysts by dipping into his cash flow to buy back shares. Buybacks can tweak earnings upward, but do not exactly fire the imagination.

At the time Reckitt was merging, there was talk that Anglo-Dutch giant Unilever might step in to buy Benckiser. It opted to buy back its own shares instead. Given the subsequent track record, it may have missed an opportunity.

Euro woes

IT SAYS something for the optimistic mood of investors that they are pouring funds into the US while its budget deficit is heading for $500bn (£318bn) next year. The previous record was $290bn. The descent from three years ago, when it enjoyed a $236bn surplus, is dizzying.

Yet funds have been moving out of Europe into the US and the fast-growing Asian economies. Investors are ignoring the deficit to focus on US growth - which the Congressional Budget Office sees accelerating from 2.2% this year to a rapid 3.8% in 2004.

The outflow of funds from the eurozone has dragged the euro down since May from $1.19 to $1.09 and from 72.4p sterling to 69.25p. Neal Parker of RBS Markets thinks it will carry on down to $1.07 and 67.5p.

The latest economic figures throw some cold water on the optimists. US sales of new homes fell sharply in July. Consumer confidence and durable goods orders were more encouraging, but the overall impact was disappointing.

Europe, in contrast, drew some comfort from Germany's IFO confidence index, which rose for the fourth month in a row. That boosted hopes that the stagnant German economy is finally waking from the bad dream which has lasted for three miserable years.

The weakening euro does not do its recovery prospects any harm. It would be far better for Europe not to depend on a US recovery feeding through to its exports, but to generate strong domestic growth, with the European Central-Bank cutting through its red tape to take the lead. But that really would be dreaming.

Broker challenge

THE rise of stockbroker Collins Stewart has been breathtaking. Since it bought itself out of Singer & Friedlander, its value has rocketed to nearly £1bn, more than double Singer's, and rivalling the much admired Close Brothers.

Now chief executive Terry Smith faces a new challenge. Analyst James Middleweek, dismissed in July, has accused Collins of pumping up its own share price, floating poor quality companies, and failing to keep analysts and share traders at arm's length. He has sent his allegations to the Financial Services Authority.

Collins vigorously denies them and accuses Middleweek of seeking to use them to win a £2.4m payoff. Smith is a streetfighter and will defend the firm fiercely. This is not the Eliot Spitzer nightmare that cost Wall Street £900m. But the FSA needs to examine the issues thoroughly.