Merger mania is back and the great wailing and gnashing of teeth that typically go with such festivals of ego, greed and, very occasionally, corporate logic have returned with it.
What’s different this time is that the proposed deals would be financed with a mix of cash and shares, all the better to avoid the leverage that pummelled so many debt-soaked deals struck before the 2008 crisis. What is not different is that nationalistic emotions will again play a big role in their outcomes. The “national interest,” that hoary euphemism for protectionism, should never be discounted by CEOs, shareholders and employees.
In Europe, the national interest argument seems to have already wrecked one deal and may yet derail another. The first is in France, where the French economy minister, Arnaud Montebourg, published a decree that would allow the state to block takeovers in allegedly strategic industries, from transport to water (although not in the wine, cheese and lingerie industries, which any self-respecting French citizen would consider more strategic than the navy). It was no coincidence that the decree came after General Electric of the United States went after the energy business of Alstom, the French maker of power-generation equipment and high-speed trains.
The French move comes as no surprise. The surprise is that French-style dirigisme is also hitting Britain, the alleged champion of open markets. A few days ago, the members of a House of Commons select committee urged business secretary Vince Cable to tighten up the takeover rules to protect pharmaceuticals giant AstraZeneca from a $100-billion (U.S.) bid from Pfizer, an American rival (AstraZeneca has rejected the takeover attempt, although it could come back). Even Conservative members of the committee said they feared that the “crown jewels” of corporate Britain could be carted off by any foreigner with an open chequebook.
Canadians no longer look at the government meddling in takeovers with something akin to revulsion. In 2010, the government of Prime Minister Stephen Harper blocked BHP Billiton’s bid for fertilizer giant Potash Corp. of Saskatchewan because the deal would have failed the net benefit test.
Some takeovers should be blocked. But jingoism or nationalism is never a good reason to do so. Canada’s (former) open-market ideology triggered the eradication of the country’s biggest mining and steel companies in the past decade, leaving behind a few big banks, Suncor, Bombardier and not much else that could compete on a global scale. Not all of those takeovers should have been approved.
At the same time, ideology should not prevent the takeover of AstraZeneca, which is barely “British.” As the Economist magazine pointed out, the company paid no British corporate tax last year, has a French CEO and only a quarter of its shareholders are British. While big, it’s also a stretch to label AstraZeneca an industrial champion that must be shielded at all costs. The company is struggling to develop blockbuster drugs and its overall sales have been in rapid decline; ditto its British employee head count, whose numbers have fallen to 6,700 from 11,000 since 2009.
When should takeovers be blocked? Any government should feel no regret in rejecting a takeover when the playing field is grotesquely lopsided. That would happen if the bidding company is state-controlled (as many big Chinese and Russian companies, such as Gazprom, are) or effectively takeover proof. It is unimaginable that Potash Corp. could have bought BHP Billiton, not because of its size – it’s the world’s biggest mining group – but because the Australian government would never have let it go, even though it is not a crown corporation. Remember, Australia approved the merger of BHP and Billiton on the condition that its headquarters remained on Aussie soil.
Bidding companies with a history of breaking investment and employment promises of the companies they buy should be treated like a hostile witness under questioning from a prosecutor. Foreign buyers of big Canadian companies have a dismal record at keeping promises. Demanding ironclad commitments from buyers, perhaps backed by performance bonds, is not unreasonable.
While it’s difficult to define “net benefit” or “public interest,” some takeovers would obviously deliver neither. A company whose takeover strategy is merely based on “synergies” – that is, cost cutting in the name of shareholder value – should be treated with suspicion. Bosses who pray at the altar of shareholder value are typically overly fond of share buybacks, not innovation. Every dollar spent on buybacks is one less dollar that can be spent on R&D. Talent vanishes when R&D vanishes.
For politicians, the main question is whether the takeover can deliver innovation and new competitive products and services. In other words, is it a real investment as opposed to merely a takeover that shuffles the chairs around?
Germany’s BMW took over Britain’s nearly moribund Mini car company, pumped a fortune into it a decade ago and turned it into a world beating brand. India’s Tata Group bought Britain’s Jaguar Land Rover Automotive in 2008 and turned it around too. They are examples of takeovers that brought innovation, jobs and national prestige.
Sadly, many other takeovers have done nothing of the sort. The purchase of AstraZeneca by Pfizer could build up Britain’s drug development industry. Or it may not. The point is, it shouldn’t be blocked just because Pfizer is based in the United States. It’s up to the politicians to squeeze investment commitments out of Pfizer instead of dismissing it as a barbarian at the gate.