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OPINION

Takeover land

Takeover land
May 21, 2014
Takeover land

Because what we saw in Pfizer's intention to bid for Astra - mixed with its own idiosyncratic agenda - were two major factors of corporate life that have been highlighted by Investors Chronicle and which won't go away. The first - and the more important - is what we once caricatured as the 'shocking, disruptive and profitable' wave of takeovers that is on the way (IC 25 Nov 2012) as the business world adapts to the knock-on effects of the 'Great Contraction'. The second factor ensures that UK-domiciled companies will be at the core of that adjustment simply because - among the world's leading economies - no other country comes close to matching the combination of smoothly-functioning rule of law and open capital markets that the UK offers (see 'The activists are coming', IC 2 May 2014).

So there will be other bids for major UK companies. Maybe, for example, when Halliburton (NYSE: HAL) of the US bids for Scotland's national champion, The Weir Group (WEIR); or when Cargill, the biggest private company in the US, bids for the venerable Tate & Lyle (TATE). What fun and games those would spark.

Meanwhile, there are two issues that arose out of the tilting between Pfizer and Astra to be resolved. The 'sensible' issue is whether shareholders alone should decide the outcome of a bid for a major company - more of that in a moment. The 'silly' one - also the populist one that voters and politicians could grasp - is about defending so-called 'national champions' and the closely related matter of protecting jobs. Integral to this is the false assumption that that cross-border takeovers are a zero-sum game where jobs 'here' are sacrificed for jobs 'over there'. Voters and politicians seem incapable of grasping that foreign takeovers are just another form of inward investment - a flow of capital that hugely benefits the UK, which attracts more inward investment than any other country in the EU.

Despite this, Britons - much like any national grouping, it has to be said - are intuitively hostile. Thus they cried into their beer when Carlsberg (CARL B) of Denmark and Heineken (HEIA) of the Netherlands carved up Scottish & Newcastle in 2008, and binged on chocolate when Kraft Foods - now Mondelez International (MDLZ) - took over Cadbury in 2009. No doubt they would have reached for the pain killers had Pfizer - best known for its cholesterol-lowering statin, Lipitor - succeeded in buying Astra, whose greatest success has been its stable of anti-ulcer drugs, which, it seems appropriate to mention, came out of the Swedish side of the Anglo-Swedish group.

As for that 'sensible' issue - whether shareholders alone should decide the outcome of a bid for a major company - there are two obvious comments. First, as it stands, shareholders alone don't exclusively decide anyway. The EU and the UK have quasi-legal bodies that, in effect, have a veto. In particular, there is the new Competition and Markets Authority, which has taken over most of the functions of the Competition Commission and the Office of Fair Trading.

Second, to the extent that a bid is left for shareholders to decide, the question is: what's the better alternative? Sure, in a big listed company, such as AstraZeneca, its employees seem as deserving of a say in the outcome of a bid as its shareholders. Put the same argument another way - why is it that shareholders' rights to the residual profits of a company should also carry the right to decide the company's ownership? True, those companies with a structure of both voting and non-voting shares already address that question. But such structures have limitations - they shield a company's controllers from the discipline of the capital markets, often to the detriment of all parties, both voting and non-voting shareholders, and employees too. Meanwhile, giving employees of major companies a vote on some matters but not on others would seem like a great way to drive companies out of the public arena altogether. Private equity might like that, but would employees? And who's to decide where to draw the line between what is and isn't a 'major' company?

All of these questions mean that the messy issues highlighted by Pfizer's approach for Astra won't be solved in a hurry. And that indicates UK plc will stay open for takeover business. It's even possible that Pfizer's approach isn't actually dead. At least the US company is keeping open its option to bid the cash-and-shares equivalent of £55 per Astra share, and the next approach does not necessarily have to be a friendly one. That might put a floor under Astra's share price, which has now slumped to £42.90. Meanwhile, Astra's shareholders may want to question why its board was so sure it should reject an approach that was 35 per cent above the all-time high that Astra's share price hit before Pfizer announced its intentions. So, on a prospective yield of just about 4 per cent, the shares might even scrape into the Bearbull Income Portfolio where their status as 'takeover candidate' might bring extra stability into the fund's value. Worth a thought.