Just a few years on from Cadbury, the proposed takeover of British pharma giant AstraZeneca by US-based Pfizer has whipped up the takeover debate again. This time, the £63 billion offer would make this the largest ever foreign takeover of a British company.
AstraZeneca is the second biggest UK pharma company. It employs 6,700 workers, accounts for 2.3 per cent of British exports, and invests £2.8 billion in research and development.
It’s about as ‘strategic’ as you can imagine when considering what’s important for the UK economy, especially in the context of a government claiming to want to “rebalance” the economy.
That means nothing of course to the City of London which is set to enjoy another fees’ bonanza. The combined fees for bankers, accountants and lawyers on both sides of the Kraft–Cadbury battle stacked up to several hundred million pounds. Nice work if you can get it.
So what will happen? The usual story goes something like this. The board of the target firm plays hard-to-get, driving up the offer price.
Eventually the white flag goes up and shareholders approve the deal. The bid may be considered by competition agencies in the UK and Brussels but won’t be blocked.
It will be waived through, of course, in the main part because the Government has no legal power at all to intervene even if it wanted to, other than on competition grounds.
Some so-called “assurances” may be given by Pfizer as a political escape valve for the Government. These will be forgotten about as soon as the takeover is completed, and will never be monitored by the Government anyway.
Pfizer will then make lots of money through the tax advantages of keeping money it has earned out of the hands of the US tax authorities, from selling off assets, and from ‘synergies’ – in other words cutting jobs and research and development. Another chunk of the British manufacturing base will be foreign owned and vulnerable to strategic decisions being made elsewhere.
The City will have made hundreds of millions in fees and George Osborne will boast how attractive the UK is for foreign firms.
Defenders of free markets will say governments anyway don’t have the necessary skills to intervene in such cases and are bad at ‘picking winners’. We should leave it to the market.
But that all ignores some rather basic facts. Study after study has shown that most big takeovers fail to deliver benefits, even for shareholders. After takeover, profits often stay the same or go down, despite huge amounts having been spent on the acquisition.
As a Policy Network report highlighted last year, takeovers in the UK are more common, more likely to be hostile and more likely to go ahead than in any other major economy. Evidence suggests that a significant proportion of takeover activity is not beneficial to the creation of long-term shareholder value, the industrial base, the national economy or to society as a whole.
And, as we saw with the Kraft takeover of Cadbury, shareholders are increasingly driven by short-term value. It was hedge funds piling into Cadbury shares on a ‘one-way bet’ which helped undermine long-term commitment, with such funds buying up Cadbury shares, pushing up the share price, voting for the takeover and then ‘cashing out’ at a nice profit once the deal was done. Careful custodians of the corporate entity? Er, no.
Meanwhile, the situation is rather different elsewhere, where governments are much more likely to intervene. The French government often gets involved in takeovers it doesn’t like the look of – the GE bid for Alstom being the most recent case. A usual tactic is to slow things down to find a French ‘white knight’.
Similarly, just a few years ago the Canadian government stopped a proposed takeover by BHP Billiton of a Canadian mining firm, the Potash Corporation, with the Canadian industry minister stating that he was unconvinced that a BHP Billiton takeover would create a “significant net improvement in the level and nature of economic activity.”
Even in the US, that bastion of the free market, a special government committee vets foreign takeovers of firms with ‘national security’ elements to their work. That definition of national security has been getting broader and broader over the years and now applies to areas like infrastructure, telecoms, the internet and firms with key scientific assets.
Here, though, we have been reducing the power to intervene. A key mistake came in the early 2000s under the Labour government’s Competition Act, which critically removed the public interest test from examining such takeovers (except in relation to defence and the media).
But even those against outright government intervention (which I suspect would include some business people) might note that takeovers – especially hostile ones – are anyway often more difficult in other countries.
In the US, firms can use ‘poison pill’ defences to resist corporate raiders, while in Germany the key threshold for gaining control is 75 per cent not 50.1 per cent as here in the UK. And in Japan cross share-holdings make hostile takeovers very difficult. So even without direct government intervention, takeovers are more difficult anyway because of institutional arrangements.
This is something I’ve been banging on about for years. But in the past, when making the case, I’ve usually been up against outright free marketeers eager to defend the position of the City of London to broker such deals and earn fat fees.
But Cadbury changed things and we’re now seeing a wider range of actors converging on some sort of rule change – witness Lord Heseltine’s intervention last week on AstraZeneca.
That might not mean the restoration of a ‘public interest’ test in government policy as I’d like to see, but might at least mean raising the bar in takeover situations and only allowing longer-term shareholders (who have held shares in the firm for at least a year) to have a say.
That, at least, would be a welcome and much needed change and, taken together, may have been enough to enable Cadbury to remain independent.
Sadly, this government, like the last one, continues to hide behind the pretence global finance flows benefit us all. They don’t in takeover situations. Who really benefits? The bankers who set up the deal and the target firm’s shareholders who sell out.
Cadbury brought these issues to the fore and AstraZeneca has highlighted them again. We urgently need to throw some sand in the wheels of the takeover machine to protect long-term thinking and enable other stakeholders to have a say.
* Professor David Bailey is from Aston Business School
