18 June 2014

Government has no place in takeovers


Imagine that a certain Grantham grocer had decided to sell his business. His daughter would have not taken it well had a government official intervened and tried to prevent him, concerned perhaps that there would have been a threat to the employment prospects of a delivery boy or that the  purchaser might want to rationalise the stock.

As far as the grocer’s daughter was concerned, there would have been no locus for government meddling in a commercial deal between two capable parties. She would surely have felt the same about Pfizer’s recent failed attempt to buy AstraZeneca. The scale is different, with a price tag of close to £70 billion, but the principle remains the same.

Yet the calls for intervention were loud and would have become deafening, had AstraZeneca not decided that the offer was not generous enough to justify a sale. The UK government’s Business Secretary Vince Cable even told MPs at Westminster that he might be prepared to resort to primary legislation to deal with the situation. The British science base was at stake, he suggested; there had to be binding commitments on British jobs.

It was as if a great British business was about to be raped and pillaged by a marauding foreigner. And since the alleged ‘marauders’ may return in less than six months, it is important that such jingoism be extinguished before it takes root.

AstraZeneca is not a British business; it is a truly global company. As the UK’s prime minister has repeatedly reminded us, Britain is competing in a global race and, if we are to stand any chance of reaching the winners’ podium, we must not handicap ourselves by wrapping up in a Union Jack flag and trying to repel all boarders.

Little more than a third of the people employed by AstraZeneca are in Europe, let alone the UK. It manufactures in 55 countries and has three major research and development bases, one in Cambridge but others in the United States and Sweden. 

Nor could it claim to be British owned. The shareholder register boasts a slate of investment firms, most of them based much closer to Boston than Bolton. The biggest shareholder at the time of the offer – and such statistics can change in fractions of seconds – was Blackrock, a US headquartered fund manager which claims to have 100 investment teams working in 30 countries. 

The chairman is Swedish and, although he now claims to be ‘an Aussie’, the chief executive was born in France. So, although the company currently has its corporate headquarters in the UK, it is truly international. It has its main listing on the London Stock Exchange but so do Mexican mining companies and Kazakh oil explorers. 

Companies choose to list in London, be headquartered in the UK and do business here for commercial reasons. If they are to succeed in the global market place, they cannot afford to be sentimental about investment decisions. 

There is much that government can do to persuade companies that this is a country in which they will prosper but interfering with ownership rights by trying to restrict takeovers, or demanding promises on job numbers, can only be counter-productive. The first would simply drive businesses to move their headquarters to more accommodating climes; the second would be a threat to commercial viability and thus deter some companies from becoming involved here.

Alternatively, they could just follow the example of Kraft when it took over Cadbury, simply abandoning a promise not to close a UK plant and, in the process, demonstrating that such ‘deals’ merely make governments look silly because they are unenforceable.

The role for government is not to stand in the way of enterprise but to entice business investment by providing a competitive tax regime and a skilled workforce, a sensible regulatory environment and efficient infrastructure . Most members of the current Government understand that and progress is being made on all those fronts. 

In particular, the relatively benign corporate tax regime is attracting companies to the UK and it certainly fanned Pfizer’s acquisition plans. 

However, the appeal is not merely as an alternative to the United States’ determination to collect tax on overseas earnings. The ‘patent box’, which provides for generous tax relief on innovation developed in the UK, is a genuine incentive for pharmaceutical companies, which face huge costs in bringing new drugs to market. It will be far more effective in fulfilling the Government’s proclaimed aim of building the science base than adopting a protectionist line in takeovers. 

That does not mean that takeovers are always in the long-term interests of companies, merely that it is a matter for the owners to decide. The only exceptions should be in that handful of cases where there is a genuine ‘public interest’. A bid by a Russian government-owned organisation to take over the Uk’s energy National Grid right now might be seen to justify Government intervention. A bid from one international pharmaceutical company for another does not hit that button. 

But, say the interventionists, investors are too short term in their thinking to be allowed free reign, interested only in quick profits and not the long term growth of the businesses they own. They have no sense of stewardship.

Seemingly endless reviews in Britain have come to this conclusion and prescribed codes of conduct and that perceived answer to all modern ailments, ‘transparency’, with little obvious effect. Pfizer’s chief financial officer said clearly last week that the only reason that its offer failed was because it was not high enough. Whatever those running the company might have argued about the merits of the deal, for a few billions more, shareholders would have pressurised AstraZeneca into saying yes, so that they could report a juicy return to their investors. A few investment firms do prefer to take a longer term view but they are the exceptions.

This is global capitalism at work. It has seen Jaguar Land Rover boom under the ownership of Tata of India. It has enabled Google and Apple to soar. It is not perfect but government intervention will not improve it.

Baroness Wheatcroft is a Conservative member of the House of Lords and a board member of Fiat.