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Clark is out of his depth

Why Greg Clark is SO wrong on GKN and takeover policy
Professor David Bailey, Tuesday, April 3rd, 2018


Business secretary Greg Clark gave a remarkably deficient interview on BBC Radio 4’s Today programme last week on GKN and takeover policy. He was inaccurate on many of the points he made. Here’s why.

 

Other countries’ takeover arrangements are like our (“our practice is very consistent with those of other competitors”)

No it isn’t. Rather, other countries intervene on a much greater scale than in the UK.

 

For example, takeovers in France can be frustrated by a government that intervenes to protect what it sees as ‘strategic’ industries.

 

Even in the US a special ‘Committee on Foreign Investment in the US’ (CFIUS) vets foreign takeovers in high tech and strategically sensitive areas. It has generally taken a liberal stance but has intervened in a few cases to restructure bids and can even block deals it finds against the national interest.

 

And the Canadian government is quite prepared to step in to prevent takeovers not deemed in the national interest. A few years ago a proposed takeover by BHP Billiton of a Canadian mining firm, the Potash Corporation, was stopped 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.”

 

In the UK, in contrast, the UK government has no power to intervene except on narrow competition grounds. I’d argue for the restoration of a ‘public interest’ element to takeover policy so that if need be the UK government has the same sort of policy instruments available as in Canada.

 

But even those against outright government intervention might note that 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.

 

So even without direct government intervention, takeovers are more difficult anyway because of different institutional arrangements.

 

Clark criticised Lord Heseltine, the former defence secretary, who said the GKN should be stopped on national security grounds. Yet Heseltine was right in saying “no other country of our sort would have allowed this to happen”.

 

‘We’ve extracted binding commitments from Melrose’

Clark’s last minute ‘intervention’ just before the bid deadline – with so called ‘binding commitments’ from Melrose and one voluntary offer – really amounts to a political escape valve to let him not block the deal under existing powers.

 

The so-called ‘commitments’ – including a pledge to keep GKN’s aerospace division for five years –  are unenforceable and probably won’t even be monitored by BIS. And given the length of aerospace R&D and production life cycles, five years is anyway ‘in the blink of an eye’ for this sector.

 

Despite Clark’s claims, the commitments mean nothing and look as though they were dreamt up by him to give the impression of being seen to be doing something.

 

Melrose isn’t anyway going to be too bothered about keeping its HQ in Britain or a listing on the London stock market. Big deal; it does this anyway.

 

It’s a classic BIS ruse; there’s a long history of British governments extracting so-called commitments or ‘assurances’ in (admittedly foreign) takeover situations but then never bothering to monitor them, let alone enforce them.

 

Think Chrysler-Rootes back in the 1970s, BMW-Rover in the 1990s and more recently Kraft-Cadbury.

 

If Clark had intervened earlier in the process that might have given GKN more ammunition in its defence.

 

Rather, Clark’s intervention was too little, too late.

 

Takeovers promote better performance (listed firms are “constantly under scrutiny” from alternative managements “who say they can do a better job”; no firm is “immune from the challenge of being kept efficient and strategically focused”).

Wrong. Takeovers are a very costly way of trying to improve firm performance. A mass of academic and other research suggests that takeovers don’t work (at least two-thirds of them fail).

 

After takeover profits usually stay the same or go down. Takeovers largely fail to lead to improved performance post takeover and fail to deliver returns to shareholders of the acquiring firm.

 

Essentially, most mega-takeovers fail to deliver the goods, and simply end up wasting huge amounts of shareholder value, even before we consider the wider social and economic damage done.

 

We still need legislation to slow the takeover process down, to give other stakeholders than just shareholders a say, and to promote longer term thinking.

 

Actually, GKN should never have been in this position; it was a well performing firm investing heavily in future technologies and should never have been so wide open to an opportunistic Melrose attack.

 

It was ‘in play’ because of the system of rules and laws that we have in the UK that leave British firms vulnerable to takeovers (whether by foreign or British firms). That needs to change.

 

We don’t want to be protectionist (“The approach that we have reinforced in our industrial strategy very explicitly is not to have a protectionist approach”)

When threatened with a reform of takeover rules which might limit the ability of the City to stack up huge takeover fees (hundreds of millions in the GKN-Melrose case), the City usually launches a vociferous counter-attack claiming such a move would be ‘protectionist’ and risks deterring foreign investment in the UK.

 

Clark is effectively acting as a mouth-piece for the City here. But public policy shouldn’t be about defending the City’s interests when the latter are increasingly not in the interests of the wider UK economy.

 

Plus, as detailed above, most countries find ways to give firms a degree of protection from hostile takeover. That doesn’t seem to deter foreign investment in France for example, or indeed in the US, or even Japan.

 

So the apocalyptic view taken by neo-liberals is simply not credible, and we need to better understand that there are subtle but important differences between market economies. All that is being suggested by myself and others in blogs on takeover policy reform is a tweaking of takeover rules to encourage long-termism.

 

Takeover policy reform along these lines won’t deter either greenfield investment to the UK (which can genuinely add to our manufacturing capacity and bring fresh R&D) or long-term and committed investors like Tata which were welcomed when it took over Jaguar Land Rover, or even trade.

 

The ‘protectionist’ card is in fact a fig-leaf for vested interests defending huge fees earned on mega- takeovers.

 

Clark seems either out of his depth and/or captive to the interests of the City.

 

David Bailey is Professor of Industry at the Aston Business School, Birmingham.

This comment first appeared in the Birmingham Post.

 

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