Abbey boss weighs bid risks

A PROLONGED battle for control of Abbey would not be a cost-free exercise for chief executive Luqman Arnold. Having steered the mortgage bank towards a takeover, he faces some really tricky decisions in the coming weeks.

With the Abbey share price still below the Santander offer, he will be hoping for an early bid from HBOS - which shows signs of wobbling - as a means of extracting a better price from the Spanish predators.

Then the Abbey board will have the complex task of weighing up the value of a bid in the hand from Madrid, against the regulatory risks associated with an offer from HBOS or other British banks.

It is possible that the competition issue could be resolved relatively quickly by the Office of Fair Trading. But if a UK deal were to be referred to the Competition Commission - where there could be a year-long delay as evidence is taken - then the risks associated with waiting would be considerably more. It already has been noted that the Safeway business was damaged by the wait for the CC to rule on the bids from other supermarket chains.

A bank is an even more sensitive creature than a supermarket. At least one top executive - Stephen Hester, a key figure in clearing out the wholesale banking mess - is on his way out to British Land. Many more might follow were there to be a prolonged interregnum.

Even more worrying would be a failure to hold mortgage market share and deposits in the face of strong competition.

This may well be among the reasons why so many UK banks are considering throwing their hats in the ring as a kind of spoiling exercise. The corporate governance charges made against Santander are almost certainly something of a sideshow. Much more important for investors and customers are the huge claims made for Santander's IT and banking model, which look overcooked.

Abbey's army of private investors should sit tight and see what - if any - cash HBOS places on the table before proceeding. But if a long competition inquiry is triggered, selling in the market may yet prove the best exit route.

Rate pause
HAS the Bank of England done enough to cool down the overheating British economy? The results of its toils are starting to look a great deal more encouraging for governor Mervyn King.

Indeed, some analysts are now forecasting that at 4.75% British base rates could soon be approaching their peak. Certainly, concerns that the combined pressure of strong consumer spending, government borrowing and the needs of industry would be too hot for the economy to handle, are looking exaggerated.

The long-awaited upturn in manufacturing output, after six years in the doldrums, is fading. Production has now fallen two months consecutively. As a result, the year-on-year increase has now fallen from 1.9% to 0.8%.

The August figures showing a 0.2% decline in manufacturing, against the 0.5% rise expected, clearly caught the markets on the hop.

The main factor behind the decline was the 2.9% drop in chemical production, which could be partly seasonal. In fact, some of the growth sectors of the economy, including motor manufacturing and computers, are doing very nicely with the latter shooting ahead 10%.

Overall, the latest data suggest that the 'soft spot' in the economy felt in the housing market and retail has spread to manufacturing. The Bank's hope had been that weakness in housing would make more room for industry to expand.

That now looks far less likely. But perhaps we were all pinning hopes on a chimera given that even in good years manufacturing has struggled to reach a 1% expansion.

One certain outcome is that the Monetary Policy Committee, having hoisted rates by a quarter point in August, will take a break when it assembles today for a twoday gathering. More important for all those still hovering around the housing market is what happens next.

The betting on the financial markets had been that interest rates would top out at close to 5.25% early next year. Capital Economics now suggests rates are close to their peak and may even fall in 2005.

That would be great news for the Prime Minister as he starts to think about an election date.

Myners' task
MARKS & Spencer chairman Paul Myners is a busy chap. His latest commission comes from the Department of Trade and Industry.

It wants to know whether the requirement that companies give existing shareholders first refusal on buying new shares militates against investment in growing firms.

The big growth business for Myners is government make-work.