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Last Updated: Monday, 18 December 2006, 23:27 GMT
Foreign takeovers: good or bad for UK plc?
Robert Peston
By Robert Peston
Business Editor, BBC News

Heathrow airport
Heathrow is one of a host of assets to have fallen into foreign hands

The volume and value of takeovers of British companies by overseas entities has been unprecedented in 2006.

Notable deals during the past year have included:

  • Dubai Ports World's purchase of P&O
  • Macquarie's purchase of Thames Water
  • Ferrovial's purchase of BAA
  • Linde's takeover of BOC
  • Tata's or CSN's purchase of Corus
  • Nasdaq's investment in the London Stock Exchange that may or may not lead to a full takeover
  • Dubai's proposed takeover of Liverpool FC
  • The Icelandic takeover of West Ham
  • The probable acquisition of Scottish Power by Iberdrola

So it seems an opportune moment to rehearse the respectable arguments for and against cross-border deals - we'll leave the thinly disguised xenophobia to others.

Here's why the British Government, led on this issue by the Treasury, generally regards takeovers by overseas entities as a good thing.

Importing talent

The threat of takeover keeps UK managers on their mettle, to ward off the possibility of an unwanted bid.

The completion of a takeover supplies the vendors, typically British pension funds and other UK investors, with investible capital and this capital is redeployed to grow other UK businesses or create new ones.

There are some respectable arguments against overseas takeovers, but in polite business circles it is not the done thing to air them in public

The takeovers import talented overseas managers into the British economy.

Thus our automotive industry has been saved by foreigners. And our most successful economic sector, financial services, is dominated by foreigners. Hip hip hooray for all of them.

The UK's openness to such takeovers is a manifestation of our economic dynamism and confidence, which is an example to the rest of the world.

To be clear, these are potent and reasonable arguments. The big point is that the UK economy is, in general, more open and flexible than other European economies, and that openness and flexibility have contributed to our superior economic performance over the past decade.

Level-playing field

But here's an odd thing: there are some respectable arguments against overseas takeovers. However in polite business circles it is not the done thing to air them in public, for fear of being labelled a sceptic about the benefits of globalisation - although plenty of people will acknowledge these issues sotto voce.

Almost the only argument against such deals made in public by senior British business people is the "level-playing-field" one. It was for example made recently by Sir John Sunderland, president of business lobby the CBI.

Port of Miami
Some firms wanting to buy into the US have faced obstacles

It's a complaint about a lack of fairness: it bemoans the fact that it's far easier for overseas companies to buy here, than it is for our companies to buy in almost any other country.

Most of the European countries spawning acquisitive businesses are closed to big takeovers by foreigners.

Even the US is less permissive than we are when it comes to cross-border deals, as was shown this year when US legislators went bonkers over the idea that Dubai would end up in control of some US ports through the takeover of a British company, P&O.

But it is, in itself, a pretty facile argument. It equates companies with football teams and is like saying that if Centrica hadn't encountered such obstacles in buying continental power companies, we could be as proud of it as many are of Man U in winning the Champions League.

So here are the more potent arguments against cross-border deals that most politicians and business people are too pusillanimous to make.

Sabotage theory

There is the Trojan horse argument.

As it happens, this argument has recently been made by the London mayor in his submission to the competition authorities against Nasdaq's attempt to buy the London Stock Exchange.

London Mayor Ken Livingstone
Ken Livingstone questions Nasdaq's motives for wanting to buy the LSE

It rests on the reasonable assumption that some overseas companies are run by economic nationalists. And what it argues is that some companies buy rivals in foreign parts with the aim of doing them down and undermining the threat they pose to their domestic business.

I am sure this doesn't happen very often.

But Mr Livingstone contends, in a not wholly incredible way, that Nasdaq perceives the LSE as a threat and that it would be rational for Nasdaq to buy the LSE in order to run it down, in the hope that mobile international businesses looking to list would desert the City of London for New York.

Then there is the so-called headquarters effect.

When a British company is bought by an overseas one, the HQ of the enlarged entity is normally based in the home state. Abbey's HQ is now in Madrid; Corus's will soon be in Brazil or India, etc.

This matters because HQ's tend to award lots of valuable financial and advisory business to local banks, local brokers, local consultants, local IT firms, local lawyers, etc.

So the wholesale takeover of British companies by foreign ones could end up being very damaging to the City and our service economy.

Also, top management jobs tend to go to nationals of the parent company. So fewer really senior leadership jobs would go to Brits.

Debt v investment

And there are other causes of concern: in a global economic slowdown, the parent company is more likely to cut jobs and investments far from where its domestic politicians can embarrass it. Thus, there were recently allegations that a French car manufacturer reduced capacity in the UK largely to avoid the embarrassment of having to do so at home.

What's more, overseas takeovers are often financed with debt. This is always the case with private equity bids of British firms and in this category I am including bids by infrastructure funds like Macquarie.

Peugeot Citroen's Ryton plant in Coventry
Are British jobs less safe under foreign ownership?

And most giant private equity funds are effectively overseas entities. But this use of debt finance is also a characteristic of the Nasdaq bid for the LSE, the Ferrovial one for BAA, Linde's of BOC and so on.

Why does this matter?

Well, if interest rates were to rise and the economy was to slow down, these borrowings would prove hard to repay.

In the first instance, investment in the UK subsidiaries would suffer. In a worst case, these UK subsidiaries could run into serious difficulties.

There are one or two straws in the wind on this, with the apparent difficulties being experienced by KwikSave and Little Chef.

Corporate governance

Finally, lamentable overseas governance could be imported to the UK.

The UK government has recently made clear it sees no problem with a company like Gazprom buying Centrica or a similar energy business.

But in the light of recent disclosures about Russia's disregard of normal property rules when it comes to overseas ownership of Russian assets, would the British government really nod through such a deal, if Gazprom ever decided to pounce?

We are witnessing a reduction in the pool of decent UK equities available to UK pension funds, to the detriment of the future retirement income of UK pensioners.

Isn't there an issue about handing control of one of our bigger businesses to companies or individuals whose behaviour in their home market indicates a lack of respect for what we perceive as the rules of proper behaviour?

Where to invest?

Perhaps what should worry us most is that we are witnessing a reduction in the pool of decent UK equities available to UK pension funds, to the detriment of the future retirement income of UK pensioners.

This would not be an issue if UK pension-fund-managers were more talented and adventurous in allocating capital overseas. But they are stunningly mediocre in that sense.

So in the medium term at least, the transfer of UK assets and future increases in capital value to overseas holders may be damaging for UK pension funds, which ultimately represent millions of UK savers.

I know this looks as though it contradicts my earlier point about debt, but it doesn't really.

The idea that we are selling out too cheaply is consistent with the idea that some acquired businesses are being loaded up with too much debt and may run into difficulties.




SEE ALSO
Steel firms in battle over Corus
11 Dec 06 |  Business
Thames Water to be sold for 8bn
16 Oct 06 |  Business
Q&A: Britain's asset sell-off
15 Jun 06 |  Business
BAA agrees to Ferrovial takeover
06 Jun 06 |  Business
BOC and Linde agree 8.2bn deal
06 Mar 06 |  Business
DPW to sell off all its US ports
15 Mar 06 |  Business
High Court clears P&O's takeover
02 Mar 06 |  Business



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