The UK is the go-to destination nowadays for anyone shopping for companies. With foreign buyers awash with cash, great bargains and no real impediments, it’s little wonder so many names are being snapped up.
At the centre of quite a few foreign takeovers over the years has been deal-maker Sir Nigel Rudd. He’s chairman of bid-target Meggitt and this will be his seventh mega deal involving an overseas buyer. In March Rudd expressed to the Financial Times his concern that British companies, including many with strong market positions, would be sold cheaply as the UK emerged from the shadow of Brexit. Well, given Parker Hannifin’s bid for Meggitt is at a 71 per cent premium to the closing price before the announcement, he probably doesn’t feel too bad on that score (that still doesn’t mean the buyer isn’t getting a good deal), plus the Parker-Meggitt deal looks like a great fit.
Why are UK companies so undervalued? Yes there’s the Brexit penalty, and the pandemic which has hit some sectors worse than others. Even Meggitt’s revenues were hit by reduced air travel. The ongoing undervaluation could also be linked to onerous-looking burdens coming down the track. Britain may be trying on lighter-touch regulation for size post Brexit, but companies are being corralled by regulators, government and campaign groups into being the best version of themselves, to deliver not just to shareholders, but also to employees, customers, and wider society.
These new policies and pressures include big new rules on audits and company reporting aimed at restoring trust and increasing transparency (the consultation period on these has just closed) which are likely to mean substantial changes. There are proposals from the FCA in relation to Consumer Duties which the regulator itself says would require a significant shift in culture and behaviour for many firms. The FCA, and government ministers, are also keen to get the recommendations of the Hampton-Alexander equality on boards report into action later this year – the regulator says it would like to see board composition have a minimum of 40 per cent of women.
Now clearly in themselves, these new policies had nothing to do with the bids for Meggitt or stock market stalwart Charles Stanley this week by US group Raymond James. But as worthy and necessary as the initiatives are, they could be a weight on share prices in the same way that the passing of the Sarbanes-Oxley legislation in the US weighed heavily on US companies for a time, or in the same way that trade union power and high taxes once weighed on equity prices in the UK as Chris Dillow describes. Whatever the mix of factors, one thing is clear. Good quality companies are slipping through the market’s short-termist fingers. Downsides to a change of ownership include an increased risk of job losses (The Guardian points out that following a successful Morrison’s takeover more than 1 million British workers will be employed by companies with private equity owners), the risk that the whole company will be moved overseas, with the potential loss of tax revenue and control over key infrastructure and energy sources, the dent to national pride and the risk of the ultimate destruction of an entity especially those newly loaded up with debt – a particular concern if, further down the line, the UK goes into recession.
The number of companies on the London Stock Exchange has fallen by around 40 per cent since 2008 so it’s easy to understand fears that the spate of deals is hollowing out the nation’s industrials and defence sectors
But bemoaning how the UK is giving up its gems isn’t the only side to this story. Smart investors watching for undervalued companies and making the most of this opportunity should continue to be handsomely rewarded. And takeovers are not a one-way street. Many British companies are themselves targeting others overseas too as Arthur Sants and Harriet Clarfelt report in their analyses of AstraZeneca and Rentokil.
