Mega-mergers are back in fashion – and how. This year the value of takeovers and mergers worldwide has just passed the $1,000bn mark, and that is not counting the bid for the UK-based pharmaceutical company AstraZeneca by its US-based rival Pfizer. The initial pitch for this is £60bn, or $100bn, and would be both the largest ever deal in that industry and the largest ever takeover by a foreign company of a British one. What should we make of it?
It is certainly a sign of confidence in the global business community, for you don’t make these huge, transformational bids unless you feel pretty confident about the future. That must be a welcome change from the recent gloom. But it must also be a concern.
There is concern about a country losing management control of one of its biggest companies, a concern evident in the current tussle for control of the French company Ahlstrom between General Electric of the US and Siemens of Germany. There are worries about job losses, about R&D investment being transferred overseas, and about tax status. Beyond these there is a more general distaste about a world where the future of millions of people – customers and suppliers as well as employees – is determined in the headquarters of a handful of giant corporations and financial institutions, not always wisely.
The AstraZeneca/Pfizer story exemplifies most of these issues. Both companies are pretty global. AstraZeneca, which is about half the size of Pfizer, is Anglo-Swedish, the Astra chunk originally founded by doctors and chemists in Sweden in 1913, while the Zeneca side was the pharmaceuticals business of the British chemical giant ICI. It is headquartered in London but its chairman, Leif Johansson, is Swedish and its chief executive, Pascal Soriot, is French.
Pfizer is indeed American, but its CEO, Ian Read, was born in Scotland and did his chemistry degree at Imperial College in London. More pertinently, one of its most profitable drugs, Viagra, was developed in its R&D labs in Kent, a facility that it subsequently has radically downsized. If your reaction to that is, “There’s gratitude for you”, note that AstraZeneca under its new CEO is cutting its research jobs in the UK too.
There is a further twist. The plan, if it goes ahead, would be to locate the merged group in London. The reason is very simple: tax. Pfizer’s top executives would stay in New York and run it from there. But the combined company would pay British corporation tax, which next year will be 20 per cent against a US headline rate of 35 per cent. The effective tax rate Pfizer has been paying is somewhat lower than that, at 27 per cent, but there is still a huge incentive to move. The further lure is that we are bringing in a 10 per cent tax rate on profits from patents, a huge source of revenue for drug companies.
We don’t know whether the deal will go through but if it does it will not only be yet another story of a British company selling out to a foreign one. It will also be the favourable UK tax regime claiming another convert. As for jobs, the pharmaceutical industry as a whole has a problem in that many of its big profit-earners are coming off patent. This means that the rest of us can buy the generic drugs at their cost of production, which is good news for healthcare generally. But it also means that the drug companies are under pressure to cut costs, and a squeeze on R&D spending is one reaction to that.
As for national champions, note that the French President, François Hollande, is not at all ruling out the bid from GE versus the one from Siemens. It looks as though France will lose control of most of the Ahlstrom business anyway, so it is more a question of which bidder will protect more jobs in France, rather than favouring Europe over America.
Anyone who is worried that we seem to be selling everything should also be aware that the UK still owns more stuff abroad than foreigners own here, somewhat surprisingly since we have run a persistent current account deficit.
Maybe the most sensible way to think about all this is to recognise that global business is indeed global. Companies with operations in many parts of the world and sales just about everywhere will mostly make rational decisions on where to locate their various plants – mostly because while they make mistakes, those mistakes are punished by financial failure. Recession has increased the pressure to make the cuts, but the recovery is now increasing the pressure on where to make investments. The new twist is that countries are now competing much more aggressively not just to get companies to build plants and preserve jobs, but where to move their legal and tax location. It is a tough world, but it is the world we live in, and this deal exemplifies it.
WHAT HAPPENS AFTER GROWTH?
So growth in the first quarter is indeed confirmed to be running at a bit over 3 per cent a year and the onshore economy (ie excluding North Sea oil and gas) is officially past its previous peak. Actually the economy probably passed its peak last year, the divergence being explained by activity not yet caught in the official stats, which will be revised upwards in the years ahead.
What happens next? There is and will continue to be a political debate about the past – could different policies have encouraged a faster recovery? – but the practical issues now are whether the economy is growing too fast and how much spare capacity there is to allow us to go on growing at this pace.
To worry about over-rapid growth might seem a bit masochistic given what we have been through, but overly fast growth brings distortions, notably in property. Inflation at a current level is under 2 per cent; inflation in housing is over 9 per cent. As for spare capacity, there is still slack in the jobs market, as there jolly well should be with unemployment only just under 7 per cent, but companies are starting to report both skill shortages and a squeeze in the supply line.
It is anecdotal and it is uneven, but the story coming through from many smaller businesses is that things have really changed in the past three months: customer orders coming through faster, and the difficulty of getting construction materials - building costs in particular – is increasing. The question we really cannot answer is how quickly output can be cranked up to meet this demand, and when a welcome change of mood becomes a problem.
Maybe the thing to watch most closely will be housing. If the new duty of care being placed on lenders starts to restrict supply of mortgages, as seems to be happening, then maybe the recovery will become better balanced and therefore more sustainable. Meanwhile, though, that first rise in interest rates looms ever closer.