Outlook: WorldCom deals another body blow to US triumphalism

Gunboat diplomacy; Dixons and Kingfisher

Stock markets have been signalling some great disaster to come for months now and with WorldCom's admission to what the SEC described yesterday as an accounting scandal of "unprecedented magnitude", they seem to have been proved wholly correct. On one level, WorldCom's now certain collapse shouldn't come as much of a surprise. It always did look like a house of cards, from the moment Bernie Ebbers, with the backing of Salomon Smith Barney, began his fast fire series of acquisitions. Even before yesterday's revelations WorldCom was subject to any number of investigations for dodgy accounting, loans to directors, Wall Street boosterism and much else besides. It was also audited by Andersen, so what do you expect.

None the less, the sheer enormity of what was announced yesterday has shaken financial markets to the core and understandably so. To charge operational expenses as capital spending is one of the oldest accounting fiddles in the book. In most companies there will be an argument of some sort about how to categorise such spending, and it is by no means a black and white debate. But in this case the evidence seems unambiguous. A deliberate attempt was made to deceive, and on a quite massive scale. All the questions raised over Enron have been amplified a hundred fold. US standards of corporate probity and disclosure seem to have hit rock bottom. Already disillusioned investors hardly needed another reason to steer clear of equity markets. They've just been given it in spades. Trust and confidence has evaporated.

In time, WorldCom and Enron will come to be seen as a cathartic experience for corporate America. Those responsible will be punished, standards will be tightened, the system strengthened and the economic model reinvented. In that sense, the WorldCom scandal may mark the bottom of the cycle. But it is going to take some years to get from here to there and for the time being things seem more likely to get worse than better. Again, the accounting scandals that have so far come to light are largely confined to the acquisition hungry creations of the New Economy. These always were little more than castles made of sand. Companies like Coca-Cola, Microsoft, General Motors and other backbone constituents of the US economy, look as rock solid as ever.

None the less, the damage to confidence is deep and serious. America's claim to economic and corporate supremacy has been badly dented, and the great capital inflows that have sustained US growth and consumption over the past 10 years threaten to dry up and go into reverse. No one wants or trusts US assets any longer, and you only have to look at WorldCom and Enron to see why.

Gunboat diplomacy

If England fans and Tim Henman supporters can wrap themselves in the Union Jack, then why not Britain's biggest defence contractor? BAE Systems is bidding to build the Royal Navy's next generation of aircraft carriers and thinks the Ministry of Defence should pick it because the alternative is to give the order to the French.

If this were France, say the BAE men with incredulity in their voices, then they would not even bother with a competition. The contract would have been sown up long ago. But the MoD is different. It believes in competitive tendering and unfortunately that means giving the foreigners a shot, BAE having bought up its only serious UK rival Marconi three years ago.

This, of course, is not the first time that BAE has played the nationality card. It deployed it successfully in winning the Meteor contract to arm the Eurofighter. It played and lost, however, when the Astor airborne battlefield radar contract went to the wrong bidder, Raytheon of the US.

Undaunted, BAE has opted for gunboat diplomacy again. The Defence Procurement Agency was warned in no uncertain terms yesterday of the damage that would be done to the UK's industrial military base if, by some extraordinary error, the carrier contract goes to the French bidder Thales.

The new carriers will positively bristle with the latest state-of-the-art hardware including a few squadrons of F35s. But if BAE is not selected, then the two vessels will be platforms for French military knowhow while the UK's technical prowess will be blunted forever.

On this occasion, there is not much to chose between BAE and its French rival. Both bidders would build the ships entirely in the UK and Thales has a list of UK industrial partners every bit as long as BAE's.

In addition, Thales thought it had a deal with the MoD. When the French entered the UK defence industry by buying up Racal Electronics, they were greeted with open arms by a Government still smarting from BAE's decision to merge with Marconi. Thales was told it would be viewed as a "second force" in the market and rewarded accordingly. Two years later it is still waiting for payback time and muttering darkly about maybe having to review its entire UK operation. The MoD has to blow someone out of the water. But who will it be?

Dixons and Kingfisher

John Clare, Dixons chief executive, was playing a straight bat yesterday to questions about whether he will try to snaffle the Darty electricals business in France from Kingfisher.

He certainly made some interesting points, though he was careful not to rule anything out. The world and his wife knows that Dixons would love to get its hands on Darty which is the leading electrical retailer in France, a market in which Dixons is barely represented. Kingfisher's decision to demerge its electricals division gives the Dixons boys the chance they have been waiting for. Mr Clare has been "keeping an eye on the situation" as he puts it but has so far not made an approach.

What is the problem? There are several. One is that the deal would be messy for Dixons. Darty is not a standalone business but part of a complex Kingfisher electricals division which includes a lot of rubbish. There are loss-making businesses in Germany, Holland, Belgium and the Czech Republic. Kingfisher's UK electricals chain Comet is a decent operation but the competition authorities would never let Dixons keep it.

All this is not to say that a deal could not be done. There would probably be a queue of venture capital buyers for Comet and the continental European loss-makers are mostly fairly small.

And surely, that old stager Sir Stanley Kalms would like to deliver one final knockout blow to Sir Geoff Mulcahy, the departing Kingfisher chief executive. Sir Stanley retires as Dixons chairman in September though his ghost will linger on as wanders upstairs to the position of "lifetime president emeritus". And he will retain an office in Dixons London HQ.

After the tit-for tat bid battle between Kingfisher and Dixons in the 1980s can Sir Stanley resist one last tilt at his old adversary? Mr Clare sensibly says deals should be done on the basis of shareholder value and not past history and emotion. But when has that ever stopped anyone?

jeremy.warner@independent.co.uk