In addition, as investors, all Scottish Amicable policyholders will benefit from Prudential’s financial strength.”He said Prudential initially contacted ScotAm in January 1996 but was rebuffed. The Pru’s second contact came in August last year, and was again told that ScotAm preferred to remain independent. “We have respected that and not made a hostile bid for the company. It was only after its demutualisation plans and Abbey National’s bid that we decided to step in,” Sir Peter said.Analysts last night pointed to the fact that, unlike Abbey National’s bid, the real cost to Prudential of its offer would only come to just pounds 250m.Alan Richards, a director at First Marathon, the venture capital house, said: “The way it has been structured is that the pounds 1.1bn paid for the ScotAm life fund is coming from Prudential’s own life fund. A further pounds 150m is coming from ’synergies’ involved in merging the ScotAm and Prudential IFA operations.”The pounds 400m in bonuses are coming from Scottish Amicable’s free assets in its life fund once the fund is closed to new business. Only pounds 250m is coming from Prudential’s shareholders’ funds. This is a clever way of paying for the company by unlocking part of its own assets.”Roman Cizdyn, insurance analyst at Merrill Lynch, said: “The City will be pleased with the way Prudential is paying for ScotAm.”He predicted that only a handful of other companies, including AMP, the Australian life insurer, with sufficiently large life funds to enable a loan to be made for the ScotAm embedded value, might be able to emulate Prudential.

AMP and Fortis, the Dutch giant, are expected to decide either way within days.In addition to the pounds 400m cash or shares, Prudential’s offer includes pounds 150m in annual, or reversionary, bonuses to policyholders. A further pounds 250m would be added to policies when they matured.Prudential’s board, which met yesterday to finalise the bid, is understood to believe that other mutual insurers will look closely at the way in which policyholders’ assets are being unlocked to give better value.The company’s offer puts paid to ScotAm’s own far more modest proposal of a pounds 75m bonus to policyholders, plus a further pounds 200m-pounds 400m, but only if it had managed to grow by at least 25 per cent each year for the next five years.The plans were attacked for paying more than pounds 14m in bonuses to ScotAm directors if these targets were met.The company said it would postpone the issue of its original circular to policyholders. But Sandy Stewart, chairman, said: “From the outset, the board has acted solely in the best interests of policyholders.”Comment, page 21. Morgan Stanley, the top-drawer investment bank, and Dean Witter, Discover, America’s main street securities retailer and credit card giant, stunned Wall Street yesterday by announcing a merger. The deal, worth $10.2bn (pounds 6.2bn), is the largest attempted in the financial sector and promises to forge the biggest securities firm in the world. It could also trigger a wave of consolidations among other securities companies.
Sir David Walker, executive chairman of Morgan Stanley in Europe, said there should be no concern for jobs in London or Europe “This is exceptional among financial institutions mergers This is top-line revenue enhancements, revenue quality. It’s not cost-driven.”The cost savings are very small indeed.

We’re not looking to be laying off on a material scale.”Morgan Stanley employs around 2,000 staff at its London headquarters in Canary Wharf, Docklands, while Dean Witter’s offices in the Broadgate development in the City are much smaller.Sir David saw the merger as a deal between equals with very little overlap. “The two businesses are very substantially complementary,” he said.The new company, to be called Morgan Stanley, Dean Witter, Discover & Co, promised that it would become a daunting international powerhouse that would bring together the retail and credit card clout of Dean Witter and the 60-year tradition of investment banking represented by the venerable Morgan Stanley.”We are bent on creating the pre-eminent financial services firm globally,” said Philip Purcell, the chairman and chief executive of Dean Witter who will retain the same titles in the new organisation. “The only debate is whether we say pre-eminent or dominant.”Together, the two companies will boast a market capitalisation of $21bn and will manage assets worth $270bn, more than any other securities firm and the fifth-biggest amount of money managed by any other firm in the world.The new giant will eclipse Merrill Lynch, which has a capitalisation of $14bn, the only other Wall Street firm that has sought to bridge the divide between retail and blue-chip investment banking services.The new company is expected to take an aggressive tack in pursuing further expansion particularly outside the US, including Europe.Morgan Stanley is primarily an institutional business, involved in underwriting securities, corporate finance and asset management, while Dean Witter derives 47 per cent of its revenue from its Discover credit card, which has 39 million holders. The remainder comes from retail business.”Dean Witter has a pipeline which goes to the retail side but it doesn’t have enough to put in the pipeline,” said Sir David.Morgan Stanley would be able to provide the additional products and at the same time would receive an additional distribution channel.Other attempts by Morgan Stanley to pull off large mergers have failed, most notably its bid in 1994 to buy SG Warburg, the UK house which was eventually snapped up by Swiss Bank Corporation.”Warburg didn’t come off because we couldn’t reach an agreement on asset management, but we’d loved to have done that deal,” said Sir David.Instead, Morgan Stanley expanded its asset management business by two acquisitions of specialist fund management groups – Miller Anderson & Sherrerd and Van Kampen.Morgan Stanley was set up in 1935 when several partners and staff left JP Morgan after the Banking Act of 1933 prevented financial firms being involved in both commercial banking and securities.Dean Witter was spun off from Sears, the retailer, in 1993.

It focuses on selling securities to individuals and has a huge distribution network in the US with 361 branch offices and 9,300 brokers.Expected to be sealed by the middle of this year and already approved by both boards, the merger will involve Dean Witter swapping 1.65 shares for each Morgan Stanley share.Dean Witter shareholders will own about 55 per cent of the new companies and Morgan Stanley holders about 45 per cent. Morgan Stanley staff directly and indirectly hold 40 per cent of the equity in their company, a substantial part of it through “lock-up” agreements that prevent them selling. These will be maintained.The new board will have equal representation from the boards of Morgan Stanley and Dean Witter. The posts of president and chief operating officer will go to John Mack, currently president of Morgan Stanley. Mr Mack indicated yesterday that he and Mr Purcell had first discussed a possible merger of the firms as long as three years ago. He waved his personal Discover Card in front of reporters, claiming he had had it for three years.Richard Fisher, chairman of Morgan Stanley, will be chairman of the executive committee of the board of the new firm. He said the move had been driven in part by anticipation of consolidation in the sector.”We have believed for some time that there will be consolidation and convergence in many industries around the world and, of particular relevance, in financial services,” he said.While the companies conceded that some cost-savings arising from the merger would be pursued aggressively, they gave no lay-off figures yesterday.

Mr Mack underlined that redundancies would be a small part of the picture.The reception to the deal on Wall Street was warm with shares in Morgan Stanley jumping $7.75 in early New York trading to $65.125 and Dean Witter stock rising $1.875 to $40.50.Comment, page 21The rivals(value, in $)Merged group 21bnJ P Morgan 19bnMerrill Lynch 14bnGoldman Sachs 10bn (est)Bankers Trust 7bnPaine Webber 3bnThe rankingsGlobal M&A – topResearch – secondBiggest securities industry investment manager9,300 retail broking account executives3.2 million retail customersBiggest US credit card by customer number (39 million)Second biggest US credit card by sales volume ($54bn)The mergerMorgan Stanley Dean Witter Merged group($) ($) ($)Market cap 9.081bn 12.267bn 21.349bn’96 pre-tax profit 1.572bn 1.545bn 3.117bn’96 net revenues 5.776bn 6.23bn 12.006bnSource: Morgan Stanley. BSkyB is pressing ahead with plans to launch a 200-channel digital satellite service later this year despite its unexpected alliance with the rival broadcasters Carlton and Granada in a bid to run a smaller 30- channel digital terrestrial service from the summer of 1998. Confirming its plans, Sam Chisholm, chief executive, said the company was poised to issue orders for up to a million set-top decoder boxes for the planned service.
The satellite broadcaster also said it was proceeding with plans to take a stake in Germany’s leading pay-TV group, Premiere, despite concerns that a deal would be blocked by that country’s competition authorities. BSkyB would join forces in the venture with Germany’s Bertelsmann and Kirchgrupp and France’s Canal Plus.Striking a deal with Premiere’s current owners, however, looks likely to be frowned on by the Federal Cartel Office, which said yesterday it would view “critically” any attempt by BSkyB to take a stake. A spokeswoman said: “We have not said that we would not approve it, but we would view it critically because of the potential damage to competition.”Commenting on record half- year profits, Mr Chisholm said: “Subscribers are switching on to Sky in record numbers and we are now in more than 6 million homes. BSkyB is now well positioned to capitalise on the introduction of digital television.”The market welcomed Mr Chisholm’s bullish assessment of BSkyB’s prospects yesterday, with the shares closing 30p higher at 623p.