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June 11, 2014 5:10 pm
Many countries have liberalised their takeover regimes in the past three decades. Thanks to this and the impact of globalisation, the number and value of deals have climbed across the developed world.
But few have gone as far as Britain in embracing the takeover, not only as a mechanism for allocating capital to society’s benefit but as some sort of cure-all for corporate ills.
Since the 1980s, the UK has tested to destruction the notion that the risk of dismissal through a change of control is a way both to wring superior performance from corporate executives and to align their interests with those of investors.
True, there has been a backlash against large hostile bids for well-known companies. Kraft’s takeover of Cadbury in 2010 produced much lamenting about lost jobs and taxes, and prompted some tightening of takeover rules. Last month’s attempt by Pfizer to buy AstraZeneca stirred an even fiercer debate. This time the concern was that a tax-driven deal with limited commercial logic would not obviously make Britain’s second- largest drugmaker go any better. Rather, it threatened to strip the country of part of its science base in one of the few industrial sectors where the UK remains pre-eminent.
These few high-profile cases cannot obscure the extent to which the deal has become woven into the UK’s corporate culture. British companies tend to be bought and sold with far greater frequency than those in other advanced economies. Between 1998 and 2005, for instance, the value of all Japanese mergers and acquisitions amounted to just 2.5 per cent of that country’s gross domestic product, and US deals to some 10.7 per cent. Over the same period, the UK managed to turn over companies with a value equivalent to an astonishing 21.8 per cent of its GDP.
Britons are much more prepared to see companies sold from under boards’ noses without consent. Between 1991 and 2005, unfriendly bids for UK companies enjoyed a success rate of 61 per cent – far higher than anywhere else in the developed world.
Takeovers and mergers play an indispensable role in capitalism, shifting assets into the hands of those most able to extract value.
Britain’s liberal market for corporate control has virtues. It has helped the country attract a greater share of foreign direct investment than its economic heft would otherwise allow. Capital and expertise from overseas has helped to turn round once moribund sectors such as the car industry, reviving famous marques, such as Mini and Jaguar Land Rover, and adding to the export balance.
Britons are much more prepared to see companies sold from under boards’ noses without consent than other nationalities
But the UK’s takeover bonanza also leads to a lot of restructuring that is neither necessary nor fruitful. Many executives have come to see their job as being primarily about buying and selling assets. This has resulted in the rise of the “meta fund manager” – an executive who seeks to manage a company’s share price by shuffling portfolios of businesses rather as a fund manager shuffles a portfolio of shares.
Hyperactive dealmaking is not just a tax on productive capital. (Some £345m would reportedly have been paid to intermediaries in fees had the Pfizer deal gone through.) It can undermine even well-established companies. This was the case for GEC, the century-old industrial company that collapsed more than a decade ago after overpaying for a string of acquisitions in the hope of reinventing itself as a fast-growing telecoms group.
Poorly executed deals can also stub out innovation and cause the loss of valued staff. Pascal Soriot, chief executive of AstraZeneca, was right to warn that a deal might disrupt the production of lifesaving drugs.
Redressing this balance is not easy. Ideally it would be the job of shareholders. But many professional fund managers are subject to perverse incentives that encourage the extraction of short-term value. Too often they shun patient engagement with managers, preferring the quick fix of a deal.
If the cult of takeover for takeover’s sake continues, pressure will mount for a general public- interest test to be applied to bids. True, Britain has pared back formal political involvement in deals and ministers now have scope to intervene only in specific areas, such as national security. However, it is nonsense to say that politicians take no part in transactions. Ministers and civil servants were heavily involved – if informally – in the AstraZeneca bid.
A test could be devised that allowed for intervention – by an independent entity – in egregious cases. Its existence would strengthen ministers’ hands in cases where companies offered undertakings to push bids through.
Britain’s takeover obsession leads to a misallocation of resources that undermines companies and fails underlying investors, such as savers and pensioners. There is a wider social interest in putting grit in this machine. Any intervention will inevitably raise cries about industrial policy and the dead hand of the state. But, after decades of waste, a new approach is needed.
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