Legislation needed to prevent hostile takeovers
Whitehall must wake up to the dangers of asset-stripping. The government need not intervene directly, but should give public companies the chance to defend themselves.
Britain should introduce US-style anti-takeover legislation to help combat the continued decline of manufacturing, a new paper published by the cross-party think tank Civitas argues.
The UK is almost alone in tolerating the constant threat of hostile takeovers, such as Kraft’s takeover of Cadbury’s and Pfizer’s attempted takeover of AstraZeneca, despite the damage they cause to British manufacturing.
John Hann, who spent 35 years as the director of a number of small engineering firms, says that public companies have in recent decades become less willing to build up assets and reserves because it makes them more of a target for takeover and asset-stripping. This has encouraged a culture of short-termism.
“Britain needs to introduce an anti-takeover law to bring Britain at least into line with the USA,” Hann writes in the latest of the Ideas for Economic Growth series.
“In most of the world, hostile takeovers are rare or almost 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 budget deficits… Britain is in effect suggesting that it is right and the rest of the world is wrong.”
US firms are protected by anti-takeover statutes which enable the use of so-called poison pills, whereby more shares are made available at a discount to other shareholders if one particular shareholder buys more than a certain percentage of shares.
In ‘Hostile Takeovers in the UK and Short-termism’, Hann accuses the British government of failing to distinguish between good and bad investment in British business.
“There appears to be an unfortunate confusion in the Department for Business, Innovation and Skills. They seem to be unable to distinguish between investment in new factories and plant as performed by Nissan and Honda, and hostile takeovers, for example by Kraft and Pfizer,” he writes.
“These are not investment as such but are simply a change of owners which, particularly if they are competitors, may ultimately lead to the relocation of production.”
Research shows that mergers and acquisitions tend to result in a reduction in shareholder value and no improvement in performance.
“The most damaging effect of hostile takeovers is that they cause short-termism. The constant threat of hostile takeovers compels public companies to take short-term measures in order to satisfy their shareholders,” he says.
Hann argues that tackling hostile takeovers must be part of the response to rising inequality.
“Wealth is not ‘trickling down’ from the wealthy financial sector in London to the rest of society. Or if it does, then this is outweighed by the adverse effects of its operations.
“The problem of rising inequality in Britain, exemplified by the protests and the occupy movement, has not gone away. It has merely been postponed by allowing Britain to live beyond its means. The inequality between London and the rest of the country is apparent in the increasing demands for regional autonomy.
“In the wake of Pfizer’s attempted takeover of AstraZeneca, Business Secretary Vince Cable suggested re-introducing a public interest test, abolished in 2002 (when it was restricted to certain industries). This is a distraction.
“The problem has not suddenly re-emerged since 2002, and the test would in any case only apply to certain companies, as EU public interest rules restrict the ability of the government to intervene.
“There is no need for the government to intervene in individual takeovers. What it needs to do is to give all public companies a reasonable chance to defend themselves.
“Britain cannot continue to commission yet further inquiries into this matter. The government has to make the decision urgently to introduce an anti-takeover law to bring Britain at least into line with the USA.”
Hostile Takeovers in the UK and Short-termism: The need for an anti-takeover law