The Giving Business
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BUSINESS WITH PERSONALITY THE GIVING BUSINESS LONDON2012 MARC SIDWELL: WHY PHILANTHROPISTS NEED SKILL See The Forum, Page 20 SIMON WALKER: LET’S EXPAND HEATHROW See Debate, Page 21 14 …days to go ISSUE 1,673 FRIDAY 13 JULY 2012 www.cityam.com FREE Osborne fails to defuse tax timebomb BY TIM WALLACE GOVERNMENT finances are still stuck on an unsustainable path despite chancellor George Osborne’s RISING SUN efforts to cut the budget deficit, the Japan’s Mad Men buy Aegis in £3.2bn deal to shake up ad industry Office for Budget Responsibility (OBR) warned yesterday. BY LAUREN DAVIDSON GLOBAL AD GIANTS The aging population means rising AND JAMES TITCOMB healthcare costs could cripple the JAPANESE advertising agency Dentsu BY 2011 REVENUE state over the next 50 years unless has, after a string of attempts, finally the next government is prepared to cracked the global market with a WPP implement an extra £17bn of spend- £3.16bn bid for Aegis. ing cuts or tax rises in 2017, the inde- Shares in Britain’s second biggest ad £10bn pendent analysts said. agency jumped 45 per cent to 234p And if governments delay this extra after Dentsu unveiled its 240p per OMNICOM squeeze further, finances will deteri- share offer, a 48 per cent premium to orate and debt interest payments rise Wednesday’s closing price. £9bn until a future government is forced The deal – the second biggest the ad to deal with the problem – meaning industry has ever seen – comes just PUBLICIS the shock will be sharper the longer days after Publicis acquired top British the government waits. agency Bartle Bogle Hegarty. £4.6bn The current deficit reduction plan It also falls in the wake of ad giant should mean the government will WPP’s £348m deal for AKQA – a com- IPG run a primary budget surplus for pany that Dentsu tried to buy two much of the 2020s – that is, before years ago for $600m (£389m). £4.5bn debt interest payments are taken The Tokyo-based firm was similarly into account – but will plunge back unsuccessful in its 2009 attempt to DENTSU into deficit in the 2030s. acquire Microsoft’s digital agency net- Without further changes, the work Razorfish for $700m, losing out & AEGIS national debt will rise to almost 90 to a rival offer from Publicis. £3.8bn per cent of GDP by 2060-61, accord- But Dentsu’s multi-billion bid for ing to the OBR’s central forecast. Aegis, which comes with irrevocable Tadashi Ishii of Dentsu (left) and Aegis’ chief executive Jerry Buhlmann Much of the problem comes undertakings representing 30.5 per because 26 per cent of the popula- cent of its shares and unanimous biggest in Europe. he said was healthy for the business. deal with a loan from the Bank of tion will be over 65 years old in 2061, board backing, will catapult the firm However, senior ad industry sources Analysts have not noted client con- Tokyo-Mitsubishi UFJ and its own cash compared with just 17 per cent now, into the advertising magic circle. pointed out that the two groups flicts as a problem and think that a pile, which was boosted recently when adding substantially to medical and The joint income of Dentsu and could face client conflicts, citing rival bidder is unlikely. Publicis bought back €644m (£508.5m) care bills. However, the report did Aegis – £3.8bn based on 2011 rev- Dentsu’s work for Toyota and the Alex DeGroote at Panmure Gordon worth of its shares from the Japanese note that coalition reforms have enues – nears that of US giant IPG, the $3bn a year General Motors account said the support of Vincent Bolloré – firm, ending a nine year long relation- reduced the burden of state sector ad world’s fourth biggest agency Aegis won from Publicis in January. Aegis’ biggest shareholder – makes a ship. The deal, expected to complete in pensions – by changing the uprating behind Publicis, Omnicom and WPP. An Aegis spokesperson dismissed counter bid improbable, also noting the fourth quarter of this year, will of pensions to use the consumer Dentsu will become Asia’s biggest these concerns, saying it is “not a signif- that most other would-be buyers have require approval from 75 per cent of price index measure of inflation, not marketing agency when it absorbs icant issue”, adding that the group also been active on other deals lately and Aegis’ shareholders when it is put to the higher retail price index, the gov- Aegis’ clients – 20 per cent of which has internal competing clients – it might not have the spare cash. the vote on 16 August. ernment has saved roughly £126bn. are based in Asia – and the second works with BMW as well as GM – which Dentsu said it would finance the MORE: Page 3 ALLISTER HEATH: Page 2 Certified Distribution FTSE 100 M 5,608.25 -56.23 DOW M12,573.27 -31.26 NASDAQ M2,866.19 -21.79 £/$ M 1.54 -0.01 £/€ 1.26 unc €/$ 1.22 unc 30/04/12 till 27/05/12 is 132,076 FRIDAY 13 JULY 2012 2 NEWS To contact the newsdesk email [email protected] Demographic timebomb will force government to downsize N the long run, we are all dead, as 2020s, before rising to 89 per cent of nies is down from 3.3 per cent of GDP orating. The net rate of return on cap- John Maynard Keynes used to say. GDP. That is the kind of level which in 2008 to a catastrophically low 1 per ital for non-oil non-financial compa- But plenty of us will still hopefully EDITOR’S leads to a permanent reduction in cent of GDP in the first quarter. nies has dropped to 11 per cent, the Ibe around by 2061, by which time growth. There is simply no way that Increasing that number would be the lowest level for two years. the Office for Budget Responsibility the state will continue to afford to best way to kick-start growth. It is not just that returns have informs us the public finances will LETTER provide as many services as it does There are lots of reasons for this cor- slumped: the cost of capital has gone once again be in crisis. The UK faces a today. Of course, one could increase porate reluctance, including up substantially, in a devastating pin- demographic timebomb which will, in immigration – but that is unlikely to Eurozone fears. But there is an even cer movement. One metric that shows my view, test our current welfare state ALLISTER HEATH be politically palatable. more fundamental reason why firms this is the earnings yield on UK equi- model beyond destruction. So whether we like it or not, individ- are not investing more: they are not ties, which has shot up from 6.5 per The proportion of the population and health spending is expected to uals will have to save more for their making enough money from their cent in early 2011 to 9.9 per cent in aged 65 and above is expected to rise rise from 6.8 per cent of GDP in 2016- own retirement and in most cases existing capital, while the opportuni- the second quarter. from 17 per cent in 2012 to 26 per cent 17 to 9.1 per cent of GDP in 2061-62 on also contribute more to their own ty cost of investing has gone up. Profits have become a dirty word in in 2061, assuming net inward migra- the central estimate, which feels like healthcare costs. The sooner we Manufacturing has become hugely today’s Britain. But companies won’t tion flows of half the recent level. The far too little given the huge expecta- accept that the current model is bro- unprofitable, an analysis of the offi- open their wallets and spend and hire result, according to the OBR, is that tions from voters. Even more signifi- ken the better. cial figures by Citigroup reveals. The unless they think it is worth their on current policies public spending cantly, higher spending is bound to net rate of return on capital for man- while – and that is something that other than on debt interest will rise reduce sustainable GDP growth. WE NEED MORE PROFITS ufacturing remained at an appalling- those who want to tax and regulate from 35.6 per cent of GDP in 2016-17 But even if we assume that the OBR COMPANIES are not spending much ly low 4.9 per cent in the first quarter, everything that moves would do well to 40.8 per cent of GDP by 2061-62. is not too optimistic, the impact will on factories and computers. That is the same as for the prior two quarters to bear in mind. Even that may be too optimistic: the be disastrous: net debt will fall from one central reason for our non-recov- and the lowest since 1991. Services OBR is almost certainly underestimat- 74 per cent of GDP in 2016-17 to a ery. Net of depreciation, business (excluding finance) are doing better [email protected] ing non-interest spending by 2016; trough of 57 per cent in the mid- investment by non-financial compa- but even there the situation is deteri- Follow me on Twitter: @allisterheath G4S denies its IN BRIEF Wells Fargo pays $175m fine Olympics guard Firms slam government’s n Wells Fargo yesterday agreed to pay $125m (£81m) to resolve allegations it discriminated against certain borrowers on the basis of race is a shambles and national origin in its mortgage lending, the US government said BY JAMES WATERSON slow progress on aviation yesterday.