Friendly Abbey-Barclays deal could get the OK

THERE has been much talk this week about Abbey National bidding for Alliance & Leicester. A&L's restructuring programme has not gone smoothly and the bank is perceived as being too small to compete with the big boys yet too large to be niche. Also, its five-year protection against being taken over runs out this summer and there is a feeling that it may wish to do a friendly deal now rather than be subject to hostile approaches in a few months' time.

Abbey National is in a similar line of business to A&L so the cost-cutting potential is significant. But Abbey has had a rough year too. Its successful defence against the bid from Lloyds TSB did not enhance investors' view of the management. Belief in Abbey was further undermined by the revelation last summer of a £64m bad debt provision in the wholesale banking division and the admission last month of a £115m exposure to collapsed US energy group Enron. Argentina's woes have prompted fresh questions in shareholders' minds about the exact nature of Abbey's wholesale banking business, which spent years investing in riskier debt on the grounds that the rewards were higher.

Next month, the group takes on a new chairman, Lord Burns. He is already there as deputy but assumes his full title on 1 February. Those within Abbey expect Burns to make a difference. He is relatively young, relatively energetic and the City is hoping he will prove to be a deal-doer.

He was also Permanent Secretary to the Treasury from 1991 to 1998. His predecessor in that role was Sir Peter Middleton, currently chairman of Barclays Bank. Barclays has made no secret of its desire to expand and could reap enormous benefit from a merger with Abbey. Suggestions of this nature have been rebuffed in the past but two chairmen who know each other of old could change the mood music.

The Competition Commission's decision on Lloyds' bid for Abbey and the Government's endorsement of that decision rule out the possibility of hostile bids among the big banks. But a friendly deal might be received in a more conciliatory fashion. Middleton has been at the helm of Barclays for years and may even be prepared to agree to make Burns his successor. Barclays' chief executive Matt Barrett could retain that role and his opposite number at Abbey, Ian Harley, could be appeased with a group title of some description.

Abbey needs to do something to boost investor sentiment. The City would be much happier seeing the bank as victim than predator.

Pay-off line

EVER since this Government came to power, it has been trying to work out what to do about executive pay. Ministers have stressed they are not against generous remuneration but they want pay linked to performance and they do not approve of reward for failure.

They may be unsettled, therefore, by the latest data from the Labour Research Department which show that 14 senior directors of British companies received pay-offs of more than £1m. Institutional investors also rail against badly constructed pay packages.

But there is a growing belief that less time should be spent worrying about the details of boardroom pay and more about appointing the right directors and then monitoring their performance properly.

Under Lord Simpson's tenure at Marconi, the company's market value sank from £35bn to less than £500m. His salary and pay-off were dwarfed by the amount he lost for shareholders. Marconi's big mistake did not lie in the details of his remuneration but in allowing him consistently to overpay for glamorous acquisitions.

Strategy is more important than pay. The latter should not be allowed to overshadow the former.

Plastic fantastic

TODAY'S consumer credit figures confirm that the British public is in a shopping frenzy, ensuring booming profits for retailers as the rest of the economy struggles.

The fundamental dilemma is whether the surge in credit-card spending has come about because people are mindlessly taking advantage of cheap borrowing or because they are cannily taking advantage of cheap borrowing. If behaviour is mindless, that implies consumers will be shocked when statements are received or if rates rise. If behaviour is canny, that implies consumers are simply making hay while the sun shines but are aware that the weather may quickly change and their habits would need to follow suit.

The Bank of England appears to tend towards the former view, warning that interest rates may have to rise if spending persists at current levels. However, its very warning may sound alarm bells in some households, thereby preventing drastic action later in the year.

Money markets predict base rates of 4.5% by summer and

5.25% by the end of 2002. Many economists believe these figures are too high. In the meantime, competition should ensure that credit-card rates remain low.