Monday, July 10, 2006
A deal too far?
Posted by David Smith at 06:45 PM
Category: David Smith' s magazine articles

Barely a week goes by without news of a new takeover of a British “asset” – a UK company – by a foreign firm. This year we have seen BAA, the airports operator, taken over by Spain’s Ferrovial, and O2 being acquired by Telefonica, also from Spain. Other recent instances of high profile firms falling into foreign hands include P & O, Pilkington and Associated British Ports.

Why is this spate of foreign takeovers occurring, and does it matter? The figures show that it is not just an impression that UK plc is being snapped up by foreign buyers.

Official statistics show that in the first quarter of 2006 foreign companies paid £19.4 billion in taking over businesses in Britain. On the other side of the balance sheet, overseas acquisitions by British firms were a mere £6.8 billion.

Figures like these are always likely to be distorted by large “lumpy” transactions and, sure enough, the first quarter numbers were significantly boosted by Telefonica’s £17.7 billion takeover of O2. In the other direction, there were few big deals, the most significant being Old Mutual’s £3.4 billion purchase of Skandia.

There is, however, a pattern here. In 2005 British companies spent £32.7 billion in 365 transactions buying overseas companies, but this was swamped by the £50.3 billion spent on acquisitions by foreign firms in the UK. Foreign takeovers are fewer in number - last year there were 242 in total - but they are typically bigger in size.

Britain went into “deficit” on mergers and acquisitions relatively recently, the shift occurring in 2004, when foreign takeovers in the UK were worth £29.9 billion, against £18.7 billion of British acquisitions abroad.

Before that, for many years, British firms had ensured that, in net terms, UK plc steadily built up its assets. Between 1996 and 2003, for example, British firms spent £469 billion acquiring overseas companies; an average of nearly £60 billion a year. Foreign acquisitions in Britain, in contrast, totalled only £234 billion. Each year, the balance was heavily in Britain’s favour – we were more predators than targets.

There is another element in the story. British firms with existing investments abroad are scaling back their overseas presence at a faster rate than foreign firms are in the UK. UK disposals overseas in 2005 raised almost £13 billion, against £8 billion of foreign disposals in Britain.

Why is this occurring? Part of the reason is the breakdown in the old cosy relationships between British firms and their institutional shareholders. Hedge fund managers tend to be less sentimental, perhaps, than shareholders were in the past.

The shareholder base of many quoted UK firms now tends to be both wide and varied, and usually includes a high proportion of foreign-based shareholders. Times have changed from the days when the old boy network meant that shareholders would stay loyal to the existing management, often through thick and thin. That is still the case in Germany, Spain and many other continental countries, but rarely in Britain. The loyalty of shareholders is to themselves and the clients for whom they are managing funds. That means, very often, firms are up for grabs by the highest bidder.

British firms are also often cheap relative their overseas competitors. The underperformance of the London stock market in recent years, coupled with the continued strength of sterling, has made British firms attractive to foreign predators.

The wave of foreign takeovers has also undoubtedly been helped by the green light provided by the government. Since it was elected in 1997, the Labour government has had a very different philosophy to its predecessors.

Ministers have argued that the only way to create a competitive UK economy was to expose all sectors to the maximum amount of competition. That has meant encouraging free trade at a global level; it has also meant free movement of capital. Foreign takeovers, on this view, have benefited the economy.

They also, argue ministers, benefit employees. Research from Nottingham University showed that workers in firms taken over by foreign firms enjoy 13 per cent higher wages, partly on the back of an improved productivity performance.

But how much is too much? Some in business are concerned that foreign predators have unfair advantages, to do with the structure of their shareholdings, borrowings and tax system. Telefonica and Ferrovial, for example, benefited from Spanish tax relief on the goodwill acquired in taking over foreign firms.

Business concern about the ease with which foreign firms can acquire UK targets is shared by voters. A Harris poll in June found that 68% of people in Britain though it was “too easy” for overseas companies to take over UK firms.

This was higher than in countries which have acted to block foreign takeovers. In Germany, 57% of people thought takeover controls were too lax, in France 52% and in Italy 50%. There’s a balance in these things. Perhaps we should indeed be asking whether we in Britain have got the balance right

From The Manufacturer, July 2006

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