Takeovers: Why don't we protect like the French?
As France increases its power to veto bids and the UK debates Pfizer's move on Astra Ben Chu considers the case for protectionism
To protect, or not to protect? That's the economic question currently dominating the political debate. Pfizer's attempted takeover of AstraZeneca is cleaving opinion and throwing up vast dust clouds of muddle. Some vehemently insist that the matter is the proper concern only of the shareholders of the two companies. According to this view of the world, politicians should not even voice an opinion on the deal.
Others counter that the prospective takeover will affect the interests of far more people in Britain than AstraZeneca's shareholders. Crucial research jobs and the country's science base are at stake, they argue, so politicians are right to intervene in the national interest.
Many are left in the middle, unsure what to think, including, apparently, the Prime Minister, who has blown in different directions on the issue.
One argument often heard is that economic protectionism along national lines ultimately makes countries that engage in it poorer. This chimes with the principle established by Adam Smith – that free trade increases general prosperity. But while this may hold true for the trade in goods and services, things are not so clear cut for the trade in corporate ownership.
France is the advanced country most prone to protectionism. François Hollande's Government has just appropriated new powers to block foreign takeovers, in the wake of General Electric's bid for Alstom's power business. How much damage, if any, does this do? While the French economy might be struggling at the moment, its private sector boasts many world-beating enterprises, among them LVMH, the luxury goods business, and the retail giant Carrefour. One might argue that France would have even more of an international competitive edge, and that its domestic economy would be healthier, if its takeover regime were as liberal as Britain's. But that is difficult to prove.
America dabbles in protectionism on national security grounds from time to time, as when Congress blocked the purchase of Unocal by a Chinese oil company in 2005. Has that protectionist streak been detrimental to the US's economic performance? Again it's possible, but hard to prove.
Have foreign takeovers been shown to bring wider social benefits? Tata's rescue of Jaguar Land Rover in 2008 is now viewed as a great success and is cited as evidence of the benefits of a liberal approach. But there are counter examples. Pfizer stands accused of hollowing out pharmaceuticals firms that it has absorbed over the past decade, including Sweden's Pharmacia. And there is a difference between foreign rescue deals, like Tata's acquisition of Jaguar, and takeovers that are motivated by corporate tax savings, as Pfizer's pursuit of AstraZeneca seems to be.
In the era of multinationals and globalised trade, there is an inescapable conceptual problem in defining protectionism and so evaluating its economic costs and benefits. AstraZeneca is considered a "British" company. But it was formed out of the merger of ICI's pharmaceutical arm and a Swedish firm in 1999. Its chief executive is French and it sells in markets across the world. In the run-up to the 2009 takeover by Kraft, Cadbury was presented in the media as a venerable British institution being hunted by an American manufacturer of processed cheese. But at that time it already had an American chief executive and sold its chocolate internationally. Some two-thirds of the revenues of FTSE 100 companies now come from overseas.
What about protecting British jobs? This is not clear cut either. Pfizer's recent decision to close a research facility in the UK has been used to argue against the takeover. Yet despite those cuts it still retains a 2,500-strong workforce in Britain. The Japanese car maker Nissan is a sizeable employer in the North-east. Feted British companies such as the hi-tech Dyson have moved their supply chains offshore. AstraZeneca itself has slashed research jobs in the UK in recent years; most of its workforce is based abroad. All of the world's large drug companies are accused of underinvesting in research.
The truth is that some managements take a short-term view, others are patient. Some create domestic jobs, others don't. Some companies add value, others destroy it. The category into which they fall does not seem to be determined by nationality.
Ownership is will o' the wisp too. More than half of UK-quoted shares, by value, are owned by investors based abroad. The British public increasingly hold their savings in foreign-quoted firms. Many of the same investment funds hold stakes in Pfizer and AstraZeneca. It is all very well to designate a "national champion", but whose financial interests are being upheld?
Where does all that leave us? In a state of uncertainty is the honest answer. But there are some useful principles. First, a liberal approach to takeovers is generally sensible, but not always. Companies may be increasingly multinational, but they do not float free of the societies around them; they draw on their infrastructure and resources. Second, free markets are a means to an end, not an end in themselves. The objective of politicians should be to foster a business sector that delivers innovative and popular goods and services. The relevant economic question for politicians evaluating foreign takeovers is: will the deal further that objective? Ideology is the worst possible guide.
Big Deal? The controversial takeovers
In 2005 China's state-owned National Offshore Oil Corporation (Cnooc) sought to acquire America's Unocal. It was the largest-ever corporate bid in the US by a Chinese company but it foundered after running into opposition from the US Congress. American politicians argued that Cnooc was a front for the Chinese Government.
In the same year France's Danone was rumoured to be the subject of a bid from America's PepsiCo. In response, the French Government drafted a law to protect companies in "strategic industries". Danone was listed among them.
The venerable Birmingham chocolate maker was subject to a hostile takeover bid by the US food giant Kraft in 2009. Kraft promised to keep a Bristol plant open but reneged on it shortly after the deal was concluded.
Anglo-Australian BHP Billiton tried to buy Canada's Potash fertiliser group in 2010. The Canadian Government blocked the bid, saying it was not a "net benefit" to Canada..
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