Opinion: The UK’s takeover laws and short-termism

London Stock Exchange photo by Jam_90s

In the rest of the world hostile takeovers are uncommon or even unknown. Britain is alone in its belief in the benefit of hostile takeovers, a belief which is not supported by the evidence of its large current account and fiscal deficits.

Vince Cable on 13th July wrote on this website that changes are needed to Britain’s takeover laws.  However, the problem is that Britain, unlike for instance Germany and the USA, doesn’t really have any takeover laws.

The most damaging effect of hostile takeovers is that they cause short-termism. The constant threat of hostile takeover compels public companies to take short-term measures in order to satisfy their shareholders. In contrast in the rest of the world, where hostile takeovers are rare, companies can plan for the long-term and consequently invest heavily in research and development.

The results of this short-termism are clear to see, from outside London anyway, with the continued hollowing out of Britain’s manufacturing sector.

If the government is serious about restoring manufacturing and re-balancing the economy, then it needs to bring Britain into line with the rest of the world and introduce anti-takeover laws similar to those in the USA.

The idea of re-introducing a public interest test is a distraction. It would in any case only apply to certain companies. There is no need for the government to intervene in individual takeovers; all it has to do is to give all public companies a reasonable chance to defend themselves against hostile takeovers.

Similarly, as Vince said, making changes to the City Takeover Code will not be enough. The Code is essentially self-regulated by the financial sector and is principally concerned with the interests of shareholders.

An additional problem occurs when takeovers are by foreign companies like Kraft and Pfizer. It is disingenuous to suggest that these companies are investing in Britain. They are not building new industries; in fact they often relocate production elsewhere.

The question of hostile takeovers has been debated in Parliament many times. As far back as 1954 the chancellor R.A. Butler described them as an “adventure of an antisocial type with a view to speculative profit for one’s own personal self without proper regard for the company”; while Roy Jenkins explained that “companies exist for a great number of reasons other than making profits for shareholders”.

The matter has been debated in Parliament, considered by parliamentary committees, and numerous reports have been commissioned. Such is the inertia of our system of government, and the powerful vested interests of the financial sector, that nothing has been done.

Meanwhile manufacturing output continues to fall (Gross Value Added 1997: 18.7% of the economy to 2012: 10.1%), manufacturing employment continues to fall (1982: 21.5% to 2012: 7.8%), and investment in manufacturing has continued to fall as a proportion of business investment (1997: 22% to 2012: 11%).

In 2012 Britain imported £285 bn and exported only £225 bn of manufactured goods. Unsurprisingly the current account, having been in deficit ever since 1984, is now at record levels.

Britain cannot go on like this without serious financial and social consequences. We cannot go on commissioning yet further reports and investigations. If we are ever going to reverse Britain’s economic decline, the government has to make a decision to introduce an anti-takeover law to bring Britain at least into line with the USA.

 

* John Hann is a party member in Winchester

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16 Comments

  • Eddie Sammon 26th Aug '14 - 2:04pm

    One thing I’m pretty sure of is Vince’s first proposal was too anti-business. Making companies sign job guarantees with no get out clauses is not fair and would mean if politicians plunged the country into a crisis then companies could get fined for it.

    What actually is a hostile takeover? No one is forced to sell their business. If the board is hostile towards it then maybe it is because they are over-paid or under-qualified and the new owners are going to get to grips with it.

    Who says that board members are less short-term than shareholders? There is no scientific evidence for this and it just sounds like something the left has come up with to justify attacking businesses. The Co-Op and the Labour Party have been short-termist in their past conduct too. So have the Lib Dems.

    However, it is good that the article defends business against the public interest test. Regardless of the rights and wrongs of this, at least it is not a one sided article.

    When it comes to foreign take-overs: if the UK doesn’t want this then don’t introduce the most competitive tax system in the G20.

    I’ll conclude by saying that an anti-takeover law could be introduced, but any proposal would have to be a slight change and not one that kicks business pretty much for the sake of saying you’ve done it, which the previous proposals and this article leans toward.

    Regards

  • The comments here are better informed than the article.

    The article basically says that because the UK has had challenges with manufacturing, we must find a way to disincentivise hostile takeovers, without any effort at linking the two. The two “problematic” companies listed aren’t even in manufacturing. The suggestion is that we should create laws more like those imposted the nationalised Republicans in the US in order to protect vested interests. It goes without saying that’s a bad idea. It’s also untrue that the UK is some kind of odd hostile takeover heaven (especially when compared to the US). With the exception of Pfizer, the top 5 hostile takeover attempts this year (that I could find) have been American.

    There’s nothing particularly special about hostile takeovers – and I seem to remember that they’re no more or less likely to offer a positive return on capital for shareholders. After all, it is the shareholders who own the business and if they’re going to accept an offer (hostile to the Board or not), they’ll be doing so after considering what they think is likely to be the best course of action.

    Peter

  • David Evershed 26th Aug '14 - 3:08pm

    John Hann says that the UK “doesn’t really have any takeover laws”.

    Well he will be surpried to find that there are 390 pages of laws in the Takeover Code which is enacted in law by a UK Companies Act and an EU Directive.

    Following the implementation of the EU Takeovers Directive (2004/25/EC) by means of Part 28 of the Companies Act 2006, the rules set out in the Takeover Code have a statutory basis in relation to the United Kingdom and comply with the relevant requirements of the Directive.

    If John Hann wants to promote the central planning of industry rather than free markets then he should join the Communist Party. The Liberals have always been in favour of free trade and small government.

  • Many thanks for the comments.

    Foreign investment is indeed valuable e.g. Nissan and Honda, but hostile takeovers are not investment in that sense. They are simply a change of owners, which particularly if they are competitors may ultimately lead to the relocation of the business.

    There are a number of academic papers on this subject e.g. by among others Professors Mayer (Oxford), Hughes and Singh (Cambridge) and Franks (London). Many of these suggest that poor prior performance is not a factor in becoming a target.

    According to Professor Baum (Hamburg) the turmoil caused by the Vodafone takeover of Mannesmann lead to the strengthening of the German laws with the introduction of the WpUG anti-takeover law.

    In a takeover situation many shareholders will have held their shares for only a matter of weeks or days, and are much more likely to be short-termist than managers.

    The City Takeover Code is indeed lengthy and enacted in law. Nevertheless it is essentially self-regulated and is principally concerned with the interests of shareholders.

    It is not anti-business to criticise Britain’s takeover laws. The short-term interests of the City are not the same as the long-term interests of business (and the economy as a whole)

    John

  • David Evershed 26th Aug '14 - 4:58pm

    If there is a problem with takeovers it is that a narrow majority are value destroying for the owners of the businesses doing the taking over – if beneficial for the shareholders who are selling out..

    The takeover of ABN Amro by RBS and the takeover of HBOS by Lloyds Bank are two of the more dramatic illustrations of egotistical managers pushing for takeovers of other companies but which were not in the interests of their own shareholders. Of course it was in the interests of the owners of the companies being taken over.

    Companies are generally valued at 15 or more times their current year net profits after tax. So share prices reflect future profits over the long term. Companies who have strong prospects for future growth will be valued even more highly. When companies make good long term investments to grow their future business, their share prices increase. Companies with high share prices rarely get taken over because they can not be run better.

    So the free market works except when poor managers seek to make value destroying acquisitions of other companies. As individuals with direct or indirect shareholdings through pension funds and insurance policies, we need to vote against or apply pressure to prevent the egotistical managers being appointed who might attempt takeovers which are value destroying for their shareholders.

  • Stephen Donnelly 26th Aug '14 - 8:09pm

    Reasonable comments here, the subject matter must be too difficult for the trolls. Liberals seeks to protect the freedom of the individual not the freedom of finance which often represents a concentration of power.

    These days many politicians look to Germany for answers. It is tempting to pick a single element of their business culture and attempt to transport it in to the UK. Both the US and Germany have two tier boards, but they have very different business cultures.

  • Paul Reynolds 26th Aug '14 - 8:49pm

    Good that this subject has been raised. It helps remind us that ‘industrial & commercial policy’ is not about state ownership and privatization, but much wider systemic issues. From Meeks’ ‘Disappointing Marriage in the 1960s to today, academics have puzzled as to why UK Chairmen and CEOs are so much focused on M&A despite on average how such deals destroy value. To me this is a problem of undue influence and weak competition policy. Banks seek seats on the boards of companies (and pressure for their consultants to be hired), not so much because they are stakeholders but more to promote actions which lead to more lending… such as M&A and divestiture of assets. It is especially damaging where banks target companies’ governance structures in the same sector for extra lending, since there are frequently anticompetitive implications of bank representatives sitting on the boards of ‘competing’ businesses. This can be a precursor to M&A and one of the reasons why M&A deals appear from the outside to be economically irrational.

  • Eddie Sammon 26th Aug '14 - 9:07pm

    One thing that has been in the back of my mind for a while is banning leveraged management buyouts where the loan is secured on the acquired company’s assets. If you buy shares you should use your own money or risk your or your company’s assets. There is no excuse for risking the assets of the company you are buying.

    I’ve tried to find out more about this in the past but been unsuccessful. It is almost too bad to be true that this is allowed to happen and there is so little said about it.

    According to investopedia:

    “It can be considered ironic that a company’s success (in the form of assets on the balance sheet) can be used against it as collateral by a hostile company that acquires it. For this reason, some regard LBOs as an especially ruthless, predatory tactic.”.

    You could put me in that category.

  • Eddie Sammon 26th Aug '14 - 9:30pm

    Just emailed the Department for Business, Innovation and Skills about the worst kinds of leveraged buy-outs take-overs. EU action might also be required. Hopefully someone will pick it up.

    Regards

  • Simon McGrath 27th Aug '14 - 8:08am

    @Paul Reynolds :”Banks seek seats on the boards of companies”
    No they don’t.

    Simply not the case.

  • I agree with most of the comments but not the original article.

    Let’s be clear what we mean by a “hostile” takeover. The only difference between a hostile and a friendly takeover is that in the former, the existing directors don’t want it to happen. From the point of view of the shareholder, there is no difference at all. No shareholder needs to be protected from a hostile takeover – a simple “no thank you, I won’t sell my shares” is all that’s needed.

    One key point in the article is that foreign takeovers of UK companies could be bad for the public interest. There’s certainly a case to be made, but only as the exception rather than the rule – for example, Pfizer / Astra Zeneca. But we have a “public interest” test which could be applied in such cases (which in this case was used). On the whole though protectionism – including “protecting” UK companies from takeover – is more bad than good. If shareholders believe more value could be derived from a company by a change in ownership than by sticking with the status quo, the presumption should be that they might be right. In the long run, free markets tend to benefit consumers. As a party I really hope we don’t go down the protectionist route.

  • David Evershed 27th Aug '14 - 4:21pm

    Eddie Salmon is concerned that acquiring companies use the acquired company assets as security for their acquisition financing.

    Well, the acquired company could have leveraged the assets itself if it wanted by increasing borrowing and returning cash to the shareholders. Of course if a company becomes too highly borrowed, the interest rate on the borrowing makes it uneconomic – but this applies for both the existing company and a potential acquirer.

    Part of being a performing company is to have the appropriate gearing of equity and borrowings, taking account of the company’s stage in its life cycle; the business it is in; and other risks. RBS and HBOS are examples of companies who took their own (bad) decision to be too highly geared amongst other mistakes.

  • Eddie Sammon 27th Aug '14 - 4:48pm

    Hi David, you make a good point that a company could leverage their assets and return money to shareholders anyway, but perhaps this should be banned too? All the proceeds of leverage should be re-invested back into the business and giving the money to shareholders isn’t re-investing. For leverage to make sense it has to produce a return greater than the borrowing cost.

    I first came to this idea a few years ago when reading how Malcolm Glazer bought Man Utd and saddled the company with debt. If you want to buy a business you should risk your own money and assets, not the business’s.

    People say that the business might go bust without new owners, so that justifies the leveraged buy-out, but if the business is that important then temporary nationalisation would be a better option.

    A lot of my business policy ideas involve de-regulation, but I think this is an area that might need to go the other way. Thanks for better informing me on the subject.

  • Once again many thanks for the comments.

    My personal view is that the “protectionist” argument confuses the free market in goods and services which almost all countries favour, and a free market in companies which only Britain favours.

    Whatever theory may say, Britain has proved that in practice the “shareholder value” concept works for shareholders rather than the economy. It has improved dividends at the expense of growth and investment.

    There is a public interest in curbing the power of shareholders to affect the investment decisions of public companies.

    Martin Wolf in his article in the Financial Tomes of May 8th “AstraZeneca is more than investors call” pointed out that shareholders do not provide resources for the company, do not really control it, and do not bear the biggest risks.

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