The aborted £115 billion takeover of British-Dutch firm Unilever by the American giant Kraft Heinz has raised, once again, the question of when foreign takeovers should be welcomed.
During her July 2016 bid to be Conservative Party leader and Prime Minister, Theresa May mentioned Kraft’s 2010 takeover of Cadbury as an example of the kind of deal that should be blocked.
Since the current merger control framework is, by and large, set by the EU, post-Brexit, the UK will have more control. So should we be more sceptical about certain foreign takeovers in the future?
There are a series of common objections raised. Some foreign takeovers, it is suggested, are in order to shut down a rival and increase market power, with no offsetting gain from larger employment and higher profits at the foreign-based acquiring firm.
Other attempted takeovers of “strategic” industries (eg defence, mineral extraction, food, energy or nuclear power) from potentially hostile rival countries are sometimes seen as a threat (cf China’s bid for National Grid’s gas business last year).
Moreover, a global conglomerate is alleged to feel no emotional connection with the targeted firm, its products or its workers. By contrast, according to Theresa May, these acquired firms are often ones in which “the whole country has a stake”.
Some objectors worry that new innovations are “lost” to the domestic economy via takeovers by firms from countries that specialise more in commercialisation. This is seen in the common complaint that the UK produces good ideas but then sells those ideas to foreigners.
Another concern is that instead of investing domestically, those who sell domestic firms will invest their money abroad. And those who take an interest in tax matters complain that takeovers are intended to allow the acquirer greater ease of allocating tax liabilities internationally.
Others worry that the remoteness of global multinationals creates scope for managers or executives to act in their own interests rather than in the best interests of the owners of the firm.
Most of these objections can be countered straightforwardly.
It is already the case that the EU’s merger control framework is designed precisely to prevent mergers that would materially reduce effective competition without some sufficient offsetting gain. There are certain sectors (mainly defence-related) where it is already recognised that takeovers require governmental approval.
A lack of emotional connection, and the “empire building” ambitions of managers, are not per se an issue of domestic versus foreign ownership — rather they are about small and local versus large and global. If one country is good at producing innovations and another at commercialising them, it is only natural that there will be takeovers at the interface between these phases of the product life.
Nor does investing abroad mean that capital is “lost”. The investors remain domestic citizens, and will receive dividends or interest income on their investments abroad.
Foreign takeovers might appear (wrongly) associated with negative economic and social implications for various reasons. Foreign takeovers could prove to be a mistake for the acquiring firm (as indeed takeovers very often are for domestic acquirers). Perhaps foreign acquirers are less well informed and get it wrong slightly more often.
One interesting possibility is that international comparative advantage means that companies that specialise in takeovers of distressed entities where the best outcome is closure or asset-stripping might be based in only a few countries. That will mean that those sort of takeovers are usually foreign.
Indeed, that might be facilitated by the fact that national governments have little means to prevent a foreign parent company from shutting down operations or limiting investment. It’s easier for the acquirer to absorb the political flak if it’s being fired from abroad.
A couple of years ago, the firm I work for, Europe Economics, did an empirical study of the impacts of foreign takeovers. We found that productivity tends to be higher in foreign-owned firms and investment per employee tends to be twice as great.
When we did more formal statistical modelling, we found no significant relationship between an increase or decrease in the number of foreign-owned firms in an economic sector and key indicators of economic performance (such as productivity, investment and the gross operating rate).
We concluded that empirical analysis identifies no problems with foreign ownership in sectors, or increasing proportions of sectors that are foreign-owned, that might not have been obvious from the theory alone.
If anything, foreign ownership appears to be associated with better economic performance — though it is possible that it is the anticipated improved economic performance that causes foreign takeovers, rather than foreign takeovers driving the improved performance.
Thus, although one can understand why some folk are sceptical about foreign takeovers, once we reflect properly upon what is happening, we can see that there is no good reason to impose additional restrictions beyond those already in place to protect competition and a very small number of strategic industries.
Brexit should leave the UK just as open to foreign capital as it has long been. Imports of goods are not bad for our economy. And imports of capital are very rarely bad, either.
