5 Feb 2015 10:09am

Navigating international takeovers

Few corporate activities set the nation’s heart racing and the politicians’ rhetoric flowing quite like a move by an overseas predator on one of the UK’s national treasures. Jane Simms examines why

The capitulation of confectioner Cadbury to US conglomerate Kraft Foods in 2010 was the result of an offer the board felt it couldn’t refuse. But while directors, advisers and shareholders profited handsomely from the deal, other stakeholders were underwhelmed.

There was widespread regret that one of Britain’s most loved, long-established and socially-responsible brands had fallen prey to what was felt to be a faceless foreign financial engineer, and bitterness lingers over Kraft’s closure of Cadbury’s Somerdale manufacturing plant, with the loss of more than 400 jobs. MPs were furious when Kraft CEO Irene Rosenfeld refused to appear before a parliamentary committee to explain why the company had reneged on its promises to keep the plant open.

As David Petrie, head of ICAEW’s Corporate Finance Faculty says: “MPs don’t like sand being kicked in their face by the CEO of a business that has acquired a well-known and well-loved UK company. It was the arrogance of it that led Secretary of State for Business, Innovation and Skills, Vince Cable into discussions about what could or couldn’t be done.” When US pharmaceuticals giant Pfizer launched a bid for AstraZeneca, one of the UK’s two remaining major pharma firms, hackles rose again.

The bid failed because the board felt it undervalued the company, but critics of the deal breathed a sigh of relief given Pfizer’s questionable track record on research and development and the fact that its main motive appeared to be tax inversion – that is, moving its corporate headquarters out of the US to reduce taxes.

AstraZeneca’s narrow escape (or stay of execution – the cooling-off period after which Pfizer can renew its pursuit recently ended) reignited the debate about whether the UK government should have greater intervention powers to protect “national interests”.

Following consultation with organisations including ICAEW, which consulted widely with its members, the UK Takeover Panel introduced a new regime in January this year to regulate statements of intention made by bidders and targets in the course of an offer. Under the regime, parties can choose between making a post-offer undertaking (POU), which is treated as a binding commitment, or as a statement of intention, which is not binding (but which is not consequence-free under the Code).

But some feel this doesn’t go far enough, particularly given other countries’ more protectionist stances. France and the US, for example, regularly play the national security card to fend off unwanted foreign advances on businesses whose strategic importance is debatable. “The French certainly stretched that argument a bit with Danone,” says Scott Moeller, finance professor and director of the M&A Research Centre at Cass Business School. “Does the French army eat yogurt for breakfast or something?”

The UK is an open market but, in fact, northern Europe and Australia are similarly liberal, and, whatever barriers the French might try to erect, France is subject to the same foreign takeover rules as the rest of the EU, Moeller points out.

Some people believe the UK could be more open still. “We should have been cheering the Pfizer deal,” claims David Haigh, CEO of brand valuation company Brand Finance. “It may have been driven by tax advantages, but it would have been the Americans who lost out: the UK would have profited from having Pfizer headquartered here.”

When your plant is owned elsewhere it can be shut down immediately [...] Wales suffered very badly from that

And, of course, there are strong precedents for successful foreign investment in the UK. Indian conglomerate Tata, German giant BMW and Japanese manufacturers Honda and Nissan have rejuvenated the UK car industry.


“Data from the Society of Motor Manufacturers and Traders makes very pleasing reading,” says Petrie. “More units are being produced in the UK now than when the industry was at its ‘peak’ in the mid-1970s – and more efficiently. It is also creating tens of thousands of jobs. It’s a clear case where foreign ownership has delivered clear gains to the UK economy.”

Jonathan Hall, president of consulting for North America at marketing consultancy Added Value, points out that Tata, as well as applying world-class manufacturing techniques to Jaguar Land Rover, which it bought from Ford in 2008, saw the market potential more clearly than previous managements. It has built Jaguar and Land Rover into global brands: sales in China alone are now higher than total sales at the time of the takeover, and, says Hall: “Those brands are arguably more British than ever.”

Clearly, an acquirer’s stewardship is more important to the success of an acquisition than its nationality. Mark Goyder, founder-director of the think tank Tomorrow’s Company, points out that Tata is widely admired for “its great stewardship values”. Tata’s main holding company is majority-owned by philanthropic trusts, making it less susceptible than many large corporations to the pressures of having to deliver short-term shareholder value.

Yet there can also be “quite dramatic downsides” to foreign direct investment (FDI), warns James Meadway, senior economist at the New Economics Foundation.

“The basic problem is that FDI tends to be more mobile than domestic capital, especially where production is cost-sensitive,” he says, illustrating the point with reference to the dramatically changing fortunes of Wales over the decades since the 1980s.

The government responded to the decline of traditional industries such as coal mining by encouraging FDI, and Wales grew rapidly during the 1980s and early 1990s due to investment by overseas firms keen to take advantage of low production costs and the proximity of the European export market. But the expansion of the EU prompted a shift of manufacturing to even cheaper places, like the Czech Republic, and then, with globalisation and falling transport costs, to east Asia.

“When your plant is owned elsewhere it can be shut down immediately, and Wales suffered very badly from that,” says Meadway. “In all, 171 plants closed and 31,000 jobs were lost between 1998 and 2008.” And even where foreign investors are in it for the long term, many of the highest-value jobs – in design, technology and research and development, for example – typically remain in, or shift to, the owner’s home country.

Both Cable and shadow business secretary Chuka Umunna are talking a good game. Both support a widened “national interest” test, for example. At present the government can only block a takeover where national security or economic stability is threatened, or where a foreign company is set to acquire too dominant a position in the media.

Cable has said he wants to rewrite the definition to protect companies that own “critical infrastructure” in the UK and firms that receive public funding for science and R&D. He has also suggested the government could intervene if it doubted the motives of the foreign bidder – tax inversion, presumably, being a case in point.

Umunna also wants to address the short-termism that he believes results in deals being pushed through that are in the interests of a narrow group rather than the economy as a whole. For example, he would like to see greater transparency on advisers’ incentives, voting rights restricted to shareholders who have held shares for at least six months and a further clarification of the law requiring directors to make recommendations based on the interests of all stakeholders, not just shareholders.

But those who argue that Britain is best served by “leaving it to the market” fail to recognise that, actually, Britain is already protectionist – witness the fortune it has spent on keeping the financial services industry afloat over recent years.

“Financial services enjoys enormous privileges as ‘a national champion’,” points out Meadway. “It even has its own minister. But it isn’t useful. It created no net jobs between 1997 and 2007, and it created no wealth – other than a considerable amount for some working in it.”
While politicians “do a lot of jumping up and down and shouting every so often, there is no systemic thinking about what needs to be done”, argues Meadway. “The government should look at the kind of economy it wants to build – and healthcare, which we do well, might be one industry to focus on.”

John van Reenen, director of the Centre for Economic Performance at the London School of Economics, agrees, but suggests that building excellence in such strategic industries might best be served by welcoming foreigners in rather than trying to keep them out.

He explains: “When you create a successful base, you attract more companies to it, and they bring skills, useful competition and so on.”
Indeed, he believes that the biggest advantage of foreign takeovers is the injection of management expertise they bring with them. He explains that when Nissan first set up its Sunderland factory in 1984, cynics said it could never replicate Japanese productivity levels using British workers and managers, given British industrial relations, onerous regulations, the different culture and so on. But the car plant became, and remains, the most productive in Europe thanks to Japanese management practices and culture.

Likewise, adds van Reenen, US firms get more productivity out of their computer investments because they manage people better than their British counterparts. “There is a big question mark over the quality of British management,” he claims. “I have been working on measures of quality of management for 10 years, and, overall, the UK fares worse than either the US or Germany.”

So it seems that the UK government’s best defence against foreign takeovers might be to help raise British managers’ game to the point where shareholders believe that they are the best people to run them.

And better quality managers might also be more proactive in terms of seeking longer-term shareholders, suggests Goyder, who points out that the UK is more exposed than other markets to dispersed shareholdings. In Continental Europe there are more state holdings, while countries like Japan, India and the US are rich in the kind of hybrids (family/trust/listed) that are not only more resistant to takeovers, but, according to Tomorrow’s Company research, out-perform others too.

“The best CEOs and boards know that they don’t need to be passive about who owns them,” says Goyder. “Many of the chairmen and CEOs we interviewed for our report 2020 Stewardship said that they would like 50% of their shares to be owned by long-term stewards. Even 25% gives effective controls. So why don’t they target more of these people? That creates a pattern of ownership that becomes self-reinforcing.”

Those who would pull up the UK drawbridge against foreign investors could do us more harm than good. Studies demonstrate the benefits of openness to growth and productivity, says van Reenen, while Added Value’s Hall points out that some of our more protectionist neighbours are having to dismantle their own barriers to entry because they are impeding their growth.

“Spain is rushing through legislation designed to open its markets to attract entrepreneurs,” he says. “And France may be forced down the same route because of pressure for change from the younger generation, who are leaving in droves for what they see as the more dynamic UK economy.”

For the moment, France remains largely protectionist. Last year industry minister Arnaud Montebourg announced a decree requiring prior state approval for most foreign bids as part of its battle with General Electric over its €13.5bn (£10.6bn) deal to buy Alstom’s energy business. The government also spurned a bid from American media giant Yahoo to buy French online video site Dailymotion in 2013.

But critics argue that such foreign investment could be a shot in the arm for France’s sluggish economy.

Mountebourg insists the new decree is narrower in scope than the remit of the Committee for Foreign Investment in the US (CFIUS), a cross-ministerial apolitical body that assesses all foreign bids according to their impact on a range of factors, including security, the economy and jobs. But Cass Business School’s Moeller says that CFIUS “rarely stops a deal taking place”.

We’d be disadvantaged if we became protectionist ourselves, says Petrie. And other than a bit of tinkering around the edges, Moeller believes that the UK government’s practice of looking at each deal on its merits will continue to serve us well. “You can’t say that foreign acquisitions are either good or bad; there really is no one-size-fits-all policy,” he says. “We would lose more than we would gain by arguing for reciprocity – and rather than bringing ourselves down to the lowest common denominator we should be a beacon on the hill, an exemplar of how to do it better.”


Added Value’s Jonathan Hall says the heightened sensitivity in France, the US and the UK to threats to national corporate icons is a symptom of global uncertainty.

Speaking to economia before the attacks in Paris, he said: “We’re still in the wake of a great recession, and we’re worried about the rise of China, the growing terrorism threat and now ebola. At times like these a large proportion of the population holds on to establishment figures and symbols for certainty and reassurance.”

But it’s difficult to define a British company these days. “Is it based on where it was founded, where most of its shareholders are, where its manufacturing is concentrated, the nationality of its CEO or where it’s domiciled for tax purposes?”

As David Petrie points out, it’s very difficult to determine exactly who owns what of global multinational businesses. Pfizer’s chairman, chief executive and most of its senior executives are foreigners; most of its employees live, and most of its revenue is generated, overseas.

Most big companies are now international hybrids – Brand Finance’s David Haigh points out that more than half the shares in UK listed companies are owned by overseas investors, and that some of the most British of “British” brands are in foreign hands.

“Gieves and Hawkes and Harvey Nichols are owned by the Chinese, Fortnum & Mason by Canadians and Harrods by the Qataris,” he says. “Does that make them any less ‘British’, particularly when foreign owners seem to have a greater recognition of British brand values than we do?”

Jane Simms


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