Power over the serfs - and all under one roof

We have been here before. Some years ago Welsh Water bought a big shareholding in Swalec with the eventual intention of merging the two companies. Outside John Elsed Jones, then chairman of Welsh Water, nobody believed it feasible and the position was unwound. Now North West Water wants to acquire Norweb, whose area of operation largely mirrors that of North West. The parallels go beyond the obvious one of water and electricity companies with congruent geographical monopolies coming together.

Like Mr Jones before him, Sir Desmond Pitcher, chairman of North West and the self-proclaimed Mr Big of the region, dreams of creating a gigantic, regionally- based corporate power base from which to conquer the world. Think of it. A monopoly not just of water, but of electricity, too, and all under one roof. Here is power over the serfs - you and me, by the way - comparable with that of a medieval fiefdom.

Norweb is presently being courted by so many different suitors, most of them foreign, that it is said executives have difficulty in remembering who they are meeting when they walk in the room. So here is the other part of Sir Desmond's pitch (sorry). North West can save Norweb from the nasty foreigner and keep the company British. By all accounts, Ken Harvey, who as chairman and chief executive of Norweb runs Sir Desmond a close second in terms of ego, has bought the argument. He is desperate to do a deal with North West and, you never know, those clever lads at Kleinwort Benson might actually be able to concoct one for him. The word is that it will be on the Stock Exchange screens by this morning.

Sir Desmond's ambition is admittedly a formidable thing. This alone will not carry an offer document, however, and it is hard to see what else drives what is, in truth, a ridiculously conceived merger proposal. Electricity and water do not mix. This simple truth about the products should act as a powerful warning to those beguiled by the superficial logic of putting one utility together with another. Heaven forbid, the next thing is that British Gas will bid for an REC, a nightmarish idea that Cedric Brown, BG's beleaguered chief executive, pointedly refused to rule out yesterday.

North West can certainly afford this takeover. Even an all-cash bid would be within its means and, if financed with short-term debt, it might even be earnings-enhancing, to begin with at least. This is more especially the case since there would plainly be tax benefits in combining the businesses, with North West able to offset its capital spending allowances against Norweb's substantial tax charge. This is always a dangerous raison d'etre for a merger but there doesn't appear to be much else to justify it.

Though there would clearly be cost savings, they may not be as substantial as North West imagines. Merging two alien billing systems is in itself a costly and difficult process. It may well be that in practice the cost savings are not enough to justify the premium North West will have to pay to secure Norweb's agreement. Once the consumer has had his share, they certainly won't be.

Though they are both utilities, these are in truth two very different businesses. North West seems hard put enough to run its own operations effectively. Judging by its record on diversification and expansion overseas - which is lamentable - there is no reason to believe it will be any better with electricity. Furthermore, the regulatory hurdles are formidable - two regulators, two sets of legislation, a virtually certain Monopolies and Mergers Commission reference and an army of angry politicians and consumerists in full cry. North West's shareholders would be well-advised to form a delegation and stop Sir Desmond going any further.

Glaxo Wellcome swings the axe

Sir Richard Sykes, Glaxo Wellcome's chief executive, won few prizes as a visionary when he unveiled his pounds 9bn bid for Wellcome in January. There was no talk of new wonder drugs; no cure for cancer or the common cold was promised. Rather, a chill industrial logic dominated; survivors in the increasingly competitive world of pharmaceuticals would be those prepared to consolidate, merge and cut costs. Gone are the days of random discovery and monopoly profits. Drug companies must adjust accord- ingly. To howls of anguish from Parliament, the scientific community and the unions, the newly-formed Glaxo Wellcome has wasted little time in putting its game plan into action. Admittedly, of the 7,500 job losses announced yesterday, only around 1,700 will fall in the UK, but the axe is swinging disproportionately on R&D, previously seen as sacrosanct in the drugs industry.

It is early days yet, but at this stage Sir Richard seems set to deliver on his promises. Management believes cost savings will be as much as pounds 700m a year by 1998, giving a payback of less than three years on the forecast integration costs. In the meantime, Wellcome is already enhancing earnings per share, suggesting that Glaxo has not overpaid for its prize. Even in the new atmosphere, getting the cost base right is only half the story. In the final analysis, new drugs remain the key to Glaxo Wellcome's future. But there is no reason to believe a more efficiently-run R&D operation will be any less effective in this department.

EC dials the right number for telecoms

It is reassuring to see that the European Commission is holding steady in its commitment to deregulation of Europe's tele-communications industry.

Those who see the union as a Franco-Germany conspiracy may have some difficulty with the robust way the EC's Competition Directorate is dealing with the proposed joint venture between France Telecom and Deutsche Telekom dubbed Atlas.

What the two state-owned telecoms companies want to do is work together to provide key services, particularly data transmission, to European businesses. The Commission is saying no, unless key conditions are met. Nor is it willing to okay a second alliance, involving Atlas and Sprint, the US long-distance operator, aimed at providing a transatlantic component to the combined businesses. There are three key concessions the Commission is holding out for as a quid pro quo.

First, binding guarantees from France and Germany that they will, as promised, open their markets to "alternative telecoms infrastructure" by early 1996. Second, guarantees from the two telecoms companies of open access to national networks at competitive prices - inter-connectivity to use the jargon. Finally, they must agree to some technical changes, notably leaving France Telecom's Germany subsidiary, Info AG, out of any joint venture for business services. A similar alliance between AT&T and three smaller European telecoms operators (Dutch, Swedish and Swiss) is very likely to breeze through. The EC is surely right to demand as much and more from such entrenched monopolists.