Oh, for Germany's 'deep flaws'

Takeovers keep the City happy but do little for industry, argues David Bowen

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ON FRIDAY the Financial Times' influential Lex column laid into the German takeover laws. They were "deeply flawed", it said, and the column went on to attack a new code because it "does nothing to shake up the cosy relationship between German industry and banks".

Turning to other pages in the paper, FT readers would have seen that there is nothing wrong with the British takeover code. Northumbrian Water has accepted a bid from a French company, Forte is trying to fight off Granada, a Norwegian group is "threatening" Amec, the construction company. Later in the morning they learnt that Amec was in turn bidding for McAlpine. It's going to be a terrific year, with takeover deals likely to beat the record set in 1989.

Clearly, then, things are much better in Britain than Germany, and the sooner the Germans rid themselves of their "cosy relationships", the better it will be for them. Why, they might even become as successful as the British.

As we read yet again that the City has been "cheered" by takeover rumours, it is worth asking yet again a simple question. Are takeovers, as Sellars and Yeatman would put it, a Good Thing or a Bad Thing?

There are two obvious arguments in favour of takeovers. First, they are an efficient method for stripping out the dead wood from an economy. If a well-run company buys a poorly run one, the result is likely to be a wave of redundancies, but also the creation of a more robust organisation for the long term. Lord Hanson, who runs one of the most formidable takeover machines in the world, has compared himself to a game warden who takes out the weakest members of a herd so that its overall strength is improved.

Second, it may be possible to put two and two together and make five. When Nestle bought Rowntree in 1988, it increased its ability to sell its products in Britain, and Rowntree's ability to sell on the Continent. There was, in the jargon, "industrial logic".

But there are few really badly run British companies left, and the industrial logic argument holds only on occasion. Common sense also dictates that there must be a correlation between the lack of takeovers in the German (or Japanese) economies and their success.

Japanese and German companies have been allowed to grow, nurtured by helpful banks, until they have become mighty. Taking Hanson's metaphor, they have lived in luscious game reserves where the wardens would not know what to do with a gun. The animals are healthy, if a bit flabby, and sometimes grow monstrously large.

We can look at Siemens, the German engineering giant, and say that it is overbureaucratic. But we can also note that it is one of the biggest companies in the world, a powerhouse of technology and a world leader in many of the things it does. Compare it with its closest British equivalents, striplings by comparison, and we should be embarrassed. Siemens has been able to grow in a secure environment, while the British constantly fear that the warden could be lining up his gun. The threat of takeover may have kept British managers on their feet, but it has also put them off their grub - new machinery, research spending and the like.

This year's extraordinary splurge of takeover activity in Britain has in small part been "strategic", but mostly it has been hustled along by a less worthy driver, the "bid culture". Recovering from the recession but seeing little prospect of a zippy economy ahead, managers have looked for ways of pushing up their profits to keep shareholders happy. The first tool they pulled out of the box was the takeover, because that is the one they understand and, most important, the one that will keep the City content. Join up with another company, the argument goes, and you can close down one of the headquarters, sack a few hundred people, and extract extra profits to feed the financial institutions that control your shares.

The City is the Rasputin behind the whole process. It loves deals because it thrives on the fees it slices off them - even a tiny percentage of several hundred million is a lot. This year the electricity companies the government so painstakingly separated in 1990 have been busy joining up again. It is unclear yet whether this will be a good thing for the consumers, but it is certainly a good thing for merchant banks, lawyers and others who stand to make pounds 400m in fees - enough to have bought a medium- sized power company five years ago.

Rasputin has his hangers-on. Public relations "spin doctors" live off fees, too, while the financial press tends to glorify deals which provide a glamour in a generally unglamorous world. Who wants to report that International Thingummy has invented a new whatsit when they could be giving a blow- by-blow commentary on a takeover battle? Put the elements together and a powerful, intelligent machine emerges to drive the bid bandwagon ahead.

Most of this year's takeovers are, therefore, not so much a Bad Thing as a Pointless Thing - managers have indulged in them as a sop to the City, which is happily counting its fees as a result. But the management time and energy that has gone into making bids, or defending companies from them, could surely have been spent doing something more constructive.

The Labour Party says it will discourage them, which is a Good Thing. But can they really be suppressed by legislation? Unlikely - there are too many clever people in whose interest it is to keep the wagon rolling.

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