As a result, whenever a big foreign takeover is in the air there is a recurring debate about whether government should intervene. In the latest episode, in late April 2015, Prime Minister David Cameron made a surprise election promise that he would block any future attempt to take over BP as there had been speculation that Exxon Mobil might make a move. The next morning, in a perfect expression of shareholder value zealotry, the Financial Times published a piece titled ‘BP investors need protecting from Cameron’, saying, “BP shareholders have paid for the right to determine the company’s future. The government has not. It is Mr Cameron, rather than Jonny Foreigner, who should hop it.”
I would like to challenge this very British belief in the primacy of shareholder value. It is the job of government to protect the public interest and that is largely about creating and maintaining high wage employment and protecting and nurturing the intangible assets that sustain it. The modern reality is one in which nations are competing against each other for the investment of mobile, rent-seeking transnational businesses. In that world there is no reason at all to expect the pursuit of shareholder value by corporations to coincide with the self-interest of the UK or of any other individual nation.
The concern about foreign takeovers is at its root a concern about ‘home bias’. This is the belief that companies have a dominant national allegiance, so that replacing domestic ownership by foreign ownership must reduce domestic investment and employment in the long run. Home bias is a factor but the reality is much more complex. Lift the hood on many national champions and you find much of the assets and many of the employees are already located overseas. Anyhow, many of the U.K.’s most successful industries, including the resurgent automotive industry and the dominant financial services industry, are overwhelmingly foreign-owned, frequently as a result of takeover.
This is the reason you cannot generalise about foreign takeovers. What we want is good owners, and it doesn’t much matter whether they are foreign or domestic. Good owners take a long-term view and have a commitment to developing domestic employment and to nurture and build the intangible asset base. Tata Motors has turned out to be a good owner – since its acquisition in 2005, Jaguar Land Rover has become one of the world’s top performing car companies. In the same way, the reason that Kraft’s takeover of Cadbury and Pfizer’s bid for AstraZeneca caused so much anxiety was not that they were foreign but that there was little confidence they would be good owners.
Shareholders vs government
We know from research that corporate acquisitions frequently destroy long-term value for the shareholders, but the thinking is that if we can just cure the corporate short termism that allows these value destroying takeovers, that should do the trick. So despite the fact that the UK already had one of the world's more evolved corporate governance protocols, Kraft/Cadbury turned into an intense debate on short termism, on corporate governance, and on improving the takeover rules to ensure that long-term shareholder value gets delivered.
The tone of the Pfizer/Astra Zeneca debate in 2014 was more pragmatic, with more discussion of the public interest. But, publicly, political statements followed traditional lines. In the event, resistance by Astra Zeneca’s management, the rejection of the bid by some of the institutional shareholders, and the exercise of some political soft power in the background were sufficient to see off the bid. The changes that had been made to the UK Takeover Code following Cadbury seemed to have thrown some grit into the takeover process because Pfizer eventually ran out of time under the ‘put up or shut up’ rules.
Even if an acquisition is in the long-term interests of all the shareholders, it does not follow that it is in the public interest. The interest of the shareholders is in maximising its profit, after tax, and globally, not domestically. The job of government – the public interest – is to maximise per capita national income. Assuming national income is roughly two thirds wage and one third profit, then the prime goal is to create and sustain a high wage economy. We get high wage employment from a skilled workforce supported by intangible resources such as R&D assets, skills, intellectual property, organisational competences and know-how. These intangibles confer competitive advantage on nations just as they do on individual businesses.
A changing landscape
Once upon a time, companies had clear national identities. Now many multinational companies see themselves as truly global, as transnational and essentially stateless. This model is one in which international resource allocation decisions are made purely on the basis of cost and profit. When locating plants, the logic is economic and the decision will balance factors such as proximity to markets, input costs, and spreading production risk. That fits with the UK shareholder-value culture, and also accords with the British instinct for a fair game played on a level playing field.
However, evidence suggests that while there may be a trend towards the transnational model, the model of companies having a national identity remains common and even dominant. Further, economies like the UK now face competition from beyond the traditional developed world, from Asia and Latin America where the rapid accumulation of capital is providing the resources and ambition to become global operators. Much of this capital is accumulating in corporations or investment funds where effective control lies with families or states, rather than being democratised through public capital markets.
The tension between intervention and laissez-faire shows up in the uncomfortable relationship between industrial policy and competition policy. Free-market doctrine says that competition policy is all you need, and that industrial policy is redundant. Effective competition between value-maximising agents will deliver efficient resource allocation and will give you the industry you should want.
Other arguments against intervention include the worry about spoiling the ‘open for business’ image: both the US and Canada have a similar public stance to the UK and generally stand back from the market but they both retain the power to intervene in foreign takeovers and occasionally use it, without any apparent adverse effect. Some people argue that government intervention is futile because the horse has already bolted – big business is now effectively stateless and is beyond the control of nations, so we just have to live with that. So, for example, big pharma will source and outsource its R&D globally and will make that decision irrespective of the will of national governments. Sceptics also say that politicians will make political decisions and that officials don’t have the competence to ‘pick winners’.
However, with the continuing globalisation of capital markets, all developed economies are seeing increased foreign ownership of their assets and are expressing concern about it. There has been a tangible change in international mood in the last decade, in the direction of protectionism. Most of the U.K.’s competitor nations either have broadened their powers to intervene in foreign takeovers, or are doing so.
The UK’s disadvantage from its reluctance to police foreign takeovers is compounded by other factors. Ownership structures that protect companies in some other countries are absent in the UK; liberal labour laws make redundancies easier to effect than in many other jurisdictions; and the very prowess of the U.K.'s financial services industry means that it houses an army of professionals incentivised to facilitate the foreign ownership of UK assets.
I believe that the public interest test for takeovers needs broadening and joining up with industrial policy in the UK. In assessing the impact on national income of a foreign takeover, or of foreign direct investment for that matter, government needs to judge the track record and intentions of the acquirer, and how they will balance the pull between ‘home bias’ and the locational attractiveness of the domestic economy and its endowment of intangible assets. This can at least be done informally, if legislation may be difficult. I envisage a system under which ministers will occasionally refer foreign takeovers for public interest analysis, with oversight from an independent panel.
Without doubt the key to retaining and growing investment and employment is to focus on maintaining the nation’s competitive advantage – those features that make a country an attractive place for mobile international capital to invest and where the best managerial talent will want to work. That has to be the main priority of government and it therefore needs to be willing and able to intervene in foreign takeovers, if needs be.