Do national champions merit protection?
By Hugo Dixon
Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.
The French always protect their national champions, while the British have a laissez-faire approach to foreign takeovers of their top companies, right? That is certainly the caricature. Witness how France deterred PepsiCo from bidding for Danone in 2005 on the grounds that yoghurt was a strategic industry, while the UK allowed U.S.-based Kraft to move ahead with its hostile bid for Cadbury, the confectioner, in 2010.
Recent events, though, show that the picture is somewhat more complex. When news first leaked that General Electric, the U.S. industrial giant, was negotiating to buy Alstom’s power generation business, the French government’s knee-jerk reaction was hostile. But by last week, Alstom had reached a deal to sell its power unit to GE for 11.4 billion euros and Paris had softened its opposition.
The main reason is that Alstom itself was determined to do the deal, since it considered its energy business too small to thrive on world markets and was worried about its debt load. Meanwhile, GE has softened the blow to Gallic pride by promising to maintain high levels of employment in France and to respect French control of its nuclear power business, which arguably is strategic.
Alstom has also agreed to let a board committee scrutinise the deal for a month. During that period Germany’s Siemens may firm up its rival plans for taking over the French group’s power business, paying for it partly by giving Alstom its train unit. That scheme might appeal more to Paris because it would create two European champions – one in energy and the other in trains. But, at present, it looks like the GE option will win favour with Alstom, and market forces will prevail.
Now look across the English Channel, where an even bigger deal is being concocted: Pfizer’s proposed $106 billion offer for fellow drugs giant, AstraZeneca. The UK government hasn’t been as laissez-faire as one might have expected. Stung into action out of fear that Britain’s science base might be eroded, it negotiated a series of reassurances from the U.S. group, including a promise that at least 20 percent of the combined group’s research staff will be based in the UK for the next five years unless circumstances change.
At first blush, it might look as if London is trying to defend a national champion. But on further examination, it looks like the UK may have unintentionally made it easier for AstraZeneca to fall into foreign hands.
This is because Pfizer’s approach is a hostile one – unlike GE’s friendly approach to Alstom. Statements by various ministers welcoming the assurances they have wrung out of Pfizer have given the impression that the takeover has the government’s blessing, especially since the finance ministry seems to be salivating over the prospect that the U.S. giant will domicile itself in Britain for tax purposes.
Some AstraZeneca directors are furious, saying the government intervened behind its back. Contrast this with France, where Montebourg was angry because he said he’d been kept in the dark about Alstom’s talks with GE.
The British government seems to have realised that it made an error, putting out a statement last Friday that it was up to shareholders to decide whether to accept the proposal. So, at the end of the day, both AstraZeneca’s and Alstom’s fates are likely to be decided by market forces – which is as it should be.
This is not because the market is perfect. There are lots of cases of companies overpaying when they take over other businesses. There may also be examples of shareholders in target companies selling out too cheaply because they are don’t appreciate the long-term value – although such cases are harder to come by.
AstraZeneca could be one of these latter examples given that it has some cancer treatments in its pipeline which could eventually become blockbusters. Its job now is to convince its shareholders that its independent future is really valuable.
But if the British group does fall to Pfizer – either because it fails to win the argument or because the U.S. company makes an offer AstraZeneca’s shareholders cannot refuse – that should be the end of the matter. That’s partly because, although markets are imperfect, governments are even worse at picking winners. Protected industries tend to become inefficient.
What’s more, companies are increasingly global. AstraZeneca, for example, is the result of a merger between Swedish and British companies. Its chairman is a Swede, its chief executive is French and more than half its shareholders are not British. One strength of the British economy is that it is open to talent and investment from abroad. Many UK companies benefit from making international takeovers too.
What about Britain’s science base? Wouldn’t that be damaged if Pfizer slashed research spending? Not necessarily. In such a scenario, the scientists would be free to work elsewhere or even start their own biotech companies. The main role for governments in these situations is to help foster entrepreneurship and encourage investment.
There are, of course, exceptions to the rule – when the target company is genuinely strategic and the predator may not have the country’s interests at heart. This is why Britain was right to deter Russia’s Gazprom from acquiring Centrica, its main gas distributor, eight years ago. But except in extreme cases, governments should stay neutral, neither erecting barriers to protect their champions nor selling them down the river.