27 January - 2 February 2000

investors' corner

The Market

Equities in London ended in negative territory on Friday as US blue chips continued their downwards path, with trade in both markets volatile as futures and options expirations weighed, dealers said. The FTSE 100 index finished 2.4 points easier at 6,346.3, well above an early low of 6,287.1, but no where near its peak of 6,374.7 recorded at mid-afternoon. All the broader FTSE indices also ended weaker on Friday. Volume was strong with 1.8091 billion shares changing hands in 133,623 transactions. Again, strong trading in Vodafone AirTouch accounted for a sizeable chunk of the total - 222.07 million. London shares ticked higher in early deals but soon took a turn for the worse, dropping back under the influence of Wall Street's overnight drop and amid mounting worries over interest rates following recent data. However, once futures and options expiries had ended, by 10.30 am, leading shares perked up somewhat, mainly thanks to a rally by the banking sector on under-valuation factors ahead of the reporting season.

Economic data had little impact on shares in London as December provisional M4 money supply figures showed an adjusted month-on-month rise of 0.7 per cent, ahead 3.6 per cent year-on-year. December M4 lending was bigger than expected, up at an adjusted £9.0 billion.

On the corporate front, ARM Holdings maintained its place at the top of the FTSE leader-board, up 305 pence to 3,363 pence after reversing earlier sharp falls when Merrill Lynch repeated its "buy" rating and £54 price target, advising investors to pick up the stock on any weakness. ARM shares weakened because of worries about competition from the new super chip, Crusoe, developed by Transmeta. Merrill said it thought the sell-off overdone.

Kingfisher

Kingfisher drifted back from earlier highs to be up nine pence at 527 pence, despite a firm denial from German retail chain Metro that the two are in talks to create a pan-European retailing giant. Metro did admit, however, that it had received approaches from third parties. Marks & Spencer rose 2-3/4 pence at 308-3/4 pence as players digested news of the appointment of Promodes head Luc Vandevelde as new chairman.

Hopes of an early deal with the US FTC on the ARCO acquisition lent support to BP Amoco, up 19-1/2 pence at 562-1/2 pence. News that Dresdner Kleinwort Benson has raised its average Brent crude price forecasts to $19 from $17 for 2000 and to $17 for $15.5 for 2001 also helped.

Gains in banking stocks provided the main underlying blue chip support, with watchers suggesting that the sector - which has seen valuations decline dramatically in recent months - is looking oversold, particularly ahead of the results season. Woolwich led the charge, up 19-1/4 pence at 276-1/2 pence, while Abbey National was ahead 35 pence at 766 pence, and Halifax up 20 pence at 563-1/2 pence. CGU firmed 26 pence at 796-1/2 pence as Deutsche Bank published a hefty "buy" note and SG Securities advised a switch into the stock out of Royal Sun Alliance. EMI Group remained one of the worst performers in the FTSE 100, down 46 pence at 648 pence, as ABN Amro cut its current year estimates by 18 per cent and reiterated its 'sell' recommendation.

FI Group

FI Group, the IT services group reported that for the six months to 31 October, margins at the operating profit level, before interest and the amortisation of goodwill, increased to 8.3 per cent, up from 6.5 per cent, primarily as a result of changes in the business mix, increased efficiencies and lower levels of employee bonus and profit share. Meanwhile, cash generation within the core FI businesses remains strong and cash balances are healthy at £17.6 million, despite having used £16.2 million of free cash to fund the acquisition of OSI. The rise in creditors due after more than one year, primarily reflects the bank facility put in place to part finance the OSI acquisition.

Business performance was in line with most other major consultancy organisations, OSI was affected by the Y2K slowdown resulting in lower than usual utilisation levels. Consequently, operating margins of 4.5 per cent were abnormally low. Customer demand for e-business consultancy and development is growing fast, as a result of which Internet related and customer relationship management (CRM) work has leapt to almost 10 per cent of turnover. To give greater emphasis to this important area, it is FI's intention to form a separate e-solutions practice within the outsourcing business. There are early signs that the market will pick up again in the spring and FI's assumption is that momentum will start to build from March/April 2000 onwards.

Longer term, the outlook for large outsourcing contracts remains buoyant and the sales prospects look healthier.

FI's £670 million bid for IT consultancy company Druid seemed a logical way forward, as FI needed to boost its consultancy and e-business capabilities to meet increasing demand from customers for a one-stop shop offering the full range of IT services.

The merger will be structured as a share-for-share offer by FI for Druid on the basis of 3.73 new FI Shares for each Druid Share. The offer values each Druid share at 2853p, the issued ordinary share capital of Druid at £670m and the enlarged group at £2.4bn. The offer will result in the issue of approximately 87.5m new FI shares, representing approximately 27.6 per cent of the enlarged issued share capital of FI. The directors of Druid who own Druid shares and a member of Druid's senior management have irrevocably undertaken to accept the offer in respect of approximately 10.5 per cent of Druid's existing issued ordinary share capital.

Henderson Investors, the largest institutional shareholder in both FI and Druid, has indicated its strong support for the merger. Following completion of the merger, the enlarged group's consultancy practice will principally comprise Druid and OSI. These companies will be managed as separate businesses under the leadership of Allan Wood. Druid's current chief executive officer, John Pocock, will be appointed to the FI Board to focus on the strategic development of the enlarged group and on defining and developing the integrated service offerings to the combined customer base and new customers.

Meanwhile, Druid's current chief operating officer, Allan Wood, will take on the role of leading the enlarged consulting practice and will be appointed to the FI Board. Druid's current chairman, David Tebbs, will also join the FI board on completion of the merger, as a non-executive director. Following completion of the merger, approximately 32 per cent of the enlarged group's issued share capital will be owned by its workforce and employee benefit trusts with approximately 83 per cent of employees owning shares or options in FI.

Without any doubt, FI is in a high growth sector and through this merger it would be able to pull its weight in new sectors such as aerospace, defence, engineering and technology.

Scoot.com

Scoot.com, the directory services group, announced disappointing results for the year to 30 September. Revenue declined as a result of the significant reduction in the number of sales executives combined with the lower fixed listing fees per contract (55 per cent) following the introduction of Scoot Connect. Conditional upon completion of the Vivendi transaction, the company has decided to change its financial year-end to December in the current financial year (which will therefore be 15 months and run until December 2000).

However, Scoot is expected to generate an increasing revenue stream from transactions and access fees and a significantly reduced amount from listing fees. The second step in Scoot's progressive move towards being a transaction facilitator will be accomplished with the introduction of Scoot Version 2, expected to take place in early April 2000. Additional features that are expected to be introduced in the next 18 months include scheduling, auctioning, diary services and request for a quote. The group's aim is to expand this innovative service globally where local, national and international services blend seamlessly under the Scoot brand umbrella.

Scoot has developed an innovative range of value added services which will in future generate most of its revenues when a buyer is actually connected with a seller whatever the access device. Scoot aims to maximise the economic value of its transaction network by optimising the liquidity of buyers and sellers. Following the introduction of Scoot Version 2 the company will offer the subscriber a much simplified product. The merchant publishes information once and benefits from it being distributed across all Scoot access channels (combining wireless, wireline, Internet, digital TV and other devices).

Consequently, Scoot can much more easily bundle its product with a range of other existing media, communication and financial products. The benefits of such relationships would be to increase operational entanglement with the partners core services, reduce both parties acquisition costs and churn rates and more importantly generate incremental transaction fees through a higher penetration rate of paying merchants in the Scoot network. The company is in advanced discussions with a number of potential partners in the UK and is confident that it will be able to introduce these additional indirect sales channels during the course of 2000. At the point that this materialises it will have a profound impact on subscriber growth and therefore penetration rates, acquisition cost and incremental transaction and access revenues. To support further these positive developments the company intends to significantly increase its marketing budget during 2000.

Scoot.com announced target subscriber numbers - by 2005 it is predicting 750,000 subscribers and 1.5 million daily transactions across Europe. In the UK, Scoot expects to have 60,000 subscribers by December 2000 and expects this to leap to 200,000 by 2002