Why guilty Rolls-Royce just rallied 8%

Twenty minutes after dealers switched off their trading screens last night, Rolls-Royce confirmed it had accepted a fine of £671 million to settle allegations of bribery and corruption to win big orders overseas. It might seem odd, then, that Rolls shares have just rocketed as much as 8% to a two-month high.

Make no mistake, this is big. Rolls is rarely the lead story on the late news. Last night it was, yet the sharp rally in the share price Tuesday morning clearly suggests the City had expected worse.

A five-year investigation, sparked by allegations of wrongdoing in China and Indonesia, has ended with Rolls agreeing hefty fines with the UK Serious Fraud Office (SFO), US Department of Justice (DoJ) and Brazilian authorities. It will pay almost half-a-billion pounds plus interest to UK investigators, nearly $170 million (£138 million) to the Americans and $25.6 million to Brazil's Ministério Público Federal (MPF).

No prosecution and a fine it can easily afford - total payments in the first year will be £293 million"These agreements relate to bribery and corruption involving intermediaries in a number of overseas markets, concerns about which the company passed to the SFO from 2012 onwards," explained the aerospace engineer.

"These are voluntary agreements which result in the suspension of a prosecution provided that the company fulfils certain requirements, including the payment of a financial penalty."

So, no prosecution and a fine it can easily afford - total payments in the first year will be £293 million. This result also removes a significant overhang in terms of the Rolls story.

We're promised a clearer idea of the implications alongside full-year results on 14 February, but Rolls is tipped to make over £800 million of profit in 2017 on sales of almost £13 billion.

Cost-cutting and a significant benefit from the weak pound will also ease the pain.

And it was never likely we'd see top brass in the dock, given the cosy relationship between such a significant exporter and central government. Rolls employs 50,000 people and in 2015 invested £1.2 billion on research and development.

Of course, this is not the first scandal involving a major UK exporter. In 2010, BAE Systems got off lightly when it agreed to pay a $400 million fine to US authorities for false accounting and making misleading statements. It had been the subject of a long-running probe into alleged bribes and kickbacks. It also accepted a £30 million fine from the SFO.

And GlaxoSmithKline is no stranger to courtrooms, especially in China, where the drug major coughed up $490 million, or nearly £300 million, in 2014 after being found guilty of bribing doctors and hospitals to promote their products.

Rolls has bigger problems, including fixing the marine division and slower growth in demandNeither company suffered any long-term damage. GlaxoSmithKline remains one of the biggest and most successful drug companies in the world, and BAE Systems shares have just hit a record high.

For Rolls chief Warren East, it's implementing the findings of an operating review, fixing the struggling marine division, and slower-than-expected growth in demand for big jet engines that's occupying his time these days.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.