Kraft is a not-much-loved US food giant. Cadbury has a 135-year history and philanthropic roots. It is well-managed, wasn’t bust and didn’t apparently need fixing. And of course it makes chocolate, which is a necessity of life in the UK.
For a nation, does it matter who owns its industry? Let's assume that the aim of a government is to achieve the best path of per capita national income now and in the future – so that’s what ‘matters’.
The UK has been extremely successful at attracting direct, green-field, foreign investment. The UK motor industry is now more or less foreign-owned, but these foreign owners have shown us how to make high-quality vehicles that people want to buy, they have created a lot of high-value jobs, and they source a lot of their design and R&D from the UK. Of course everyone would rather have the German motor industry, but you’d need to turn the clock back 100 years for that. Short of that, the UK motor industry is in a better place than might have been.
But compared to its competitors the UK is also uniquely open to foreign takeover of existing businesses. This is much more dangerous and, at the moment, the UK is particularly exposed.
Peter Mandelson [Mansion House, 1 March 2010] was right to argue for throwing some more grit into the takeover process. He argued for revisiting the Takeover Code and for looking at the voting threshold for a change of ownership. There is also a case for greater transparency on advisors’ fees and incentives. There is a case for requiring fuller public disclosure of the acquirer’s intentions, off the assumptions that lie behind its valuation of the target, and the advisors’ fairness report on that.
But we need to be clear about the limits to what is possible. For the UK, there is no going back to the ownership structures that protect companies in many other countries. And I, for one, would argue strongly against reintroducing a protectionist public-interest test to guard British companies.
We know that acquisitions often destroy value for acquiring shareholders, and it may turn out that Kraft has overpaid for Cadbury. But, equally, it may not. Either way, the focus on corporate governance in this debate is something of a distraction. Even if an acquisition is in the long-term interests of all the shareholders, it doesn’t follow that is in the public interest. The tough challenge for the UK is how to maximise UK national income in an open global economy. Solving the short-termism/corporate governance problem won’t make that problem go away.
For good practical and political reasons, the UK will conclude that it cannot intervene in takeovers on public-interest grounds. But this should not be on the basis that the public interest is indefinable. We know pretty well from research evidence how to measure the public interest/national income impact of direct investment in terms of employment, skills, R&D spillovers, and other externalities. These impacts also arise in cross-border acquisitions.
When the parent company and the head office are no longer domiciled here, the organisation’s loyalties inevitably change and it becomes less susceptible to political influence. This can have negative consequences for the future location of employment and investment. There may be a significant loss of tax revenues after foreign acquisition. I believe there is currently a knowledge gap here and a need for an evidence-based, open, discussion of these effects. At that point government can take an informed view on just where and when foreign ownership matters.