After Astra-Zeneca/Pfizer – Is Protectionism Part of the ‘New Economics’?
August 4, 2014
‘If Britain advertises itself as a tax-friendly country it would be a strange position to adopt by saying to foreign firms you shouldn’t come here’. These were the wise words of Business Secretary, Vince Cable, a little over a fortnight ago.
In the aftermath of the highly controversial, failed bid by US pharmaceutical firm, Pfizer, in May for its smaller UK counterpart, Astra Zeneca, Dr Cable had been rightly anxious to still market nerves. Whilst the dust had started to settle, confused political signals had fed concern that rules on foreign takeovers would be tightened.
Yet less than a week later, Dr Cable was upping the ante. Sketching out a new set of plans to govern the bids of international firms, the Business Secretary suggested ministers should be able to prevent foreign takeovers if they doubted the bidder’s motives. This is designed to complement existing powers to intervene in deals threatening financial stability, national security or media plurality. Dr Cable’s brave new world would also see hefty fines for foreign firms in breach of any conditions imposed during a takeover, such as guarantees on jobs and research.
It is, perhaps, an irresistible temptation. Politicians as a breed like to hand themselves additional powers to counter accusations of impotence whenever media storms take hold. But it is one which must resolutely be resisted if the UK is to maintain its reputation as an open, mercantile nation that embraces global investment.
Mr Cable’s plans have already been criticised by BAE Systems Chairman, Sir Roger Carr, who has suggested the reforms could place governments in an invidious position, meddling in deals that should rightly be left to the market. This from a man who, when Chairman of Cadbury in 2009, aggressively battled to defend the British confectioner against a hostile takeover bid by American food giant, Kraft.
At that time, fears abounded among the public and shareholders alike that the beloved British firm would be gobbled by a low-growth, inflexible American behemoth, with jobs and factories shed in double-quick time. Indeed shortly after the takeover, Kraft cut 200 jobs from its Cadbury division and announced the closure of its Somerdale factory. But this does not tell the whole picture. What nobody knew at the time was that Kraft was planning to split into two more dynamic entities. Cadbury was the final acquisition in this regard, giving the new snacks side of the business sufficient scale to compete in key markets like India. After the jobs were shed, £50 million of fresh investment flowed into the UK, £14 million of which was poured into the historic Bournville site to make it a cutting-edge research centre.
And here lies the point. Nobody knows what impact a foreign takeover will have on British jobs, innovation and competitiveness. Job losses often immediately follow mergers because the new entity is reducing overlap in the two firms’ operations. Of course this feeds the very panic that preceded the deal, reinforcing the notion that foreign takeovers are ‘bad for Britain’. But seldom is any analysis undertaken a few years down the line into the longer term benefits of a merger. Our financial services and car manufacturing businesses, many of which are foreign-owned, thrive in the UK not because of jobs guarantees but because their operations in the UK are lean, well-managed and operate within a well-regulated and competitively-taxed jurisdiction.
In adopting greater powers to impose conditions on any deal, ministers risk exposing themselves to lobbying from MPs naturally anxious to keep jobs and investment in their constituencies. Yet the preservation of a colleague’s career by securing in their seat short-term jobs guarantees, should not be the basis for assessing the worth of a commercial deal. That is a decision best dictated by shareholders. Furthermore, even if guarantees are written into any deal, how might they be enforced? Should economic or market conditions change, surely we would want the merged firm to be able to respond flexibly, shedding jobs in the short term if it allows for a company’s longer term survival, with all the benefits to jobs and growth.
Here in the UK, we have in place a takeover regime regulated by independent bodies (including the Competition and Markets Authority and Takeover Panel), as well as existing government powers to frustrate truly disadvantageous bids. Should we succumb to short-termist meddling by ministers in addition to this regime, we open ourselves up to legal challenge and longer-term damage to our reputation as a liberal, open economy.
The Business Secretary’s plans, revealed just under a year before the General Election, must be called for what they are – protectionist, political posturings designed to booster the brand of a Party which may soon have to consider a couple of merger bids of its own.