Two striking takeover developments in recent days neatly illustrate the predicament the UK market finds itself in, and hint at the opportunities that lie ahead.
First, there was the blocking of Microsoft’s $75bn acquisition of games developer Activision by the UK’s Competition and Markets Authority over concerns it would cement the tech giant’s dominance in the cloud space and reduce innovation.
The CMA’s opposition wasn’t entirely a surprise. The EU regulator, which has yet to announce its decision on the deal, and the US watchdog have already expressed similar concerns. Yet the verdict provoked pretty scathing rebukes from Microsoft and Activision (the UK has declared itself “closed for business”, signalled that its markets are “more Death Valley than Silicon Valley” and other mutterings about Brexit).
If the goal of kicking the Microsoft deal into touch is to protect competition and prevent new forms of excessive domination in markets, then the CMA’s instinct is correct, especially at a time when the UK faces a real anti-competitive threat from the Inflation Reduction Act, a piece of legislation that is highly likely to reduce investment levels here. The Act has been described by Lord Jonathan Hill, the architect of listing reforms planned for the UK markets, as “a dirty great Hoover on full suction mode”.
Creating a business-friendly, pro-competition environment is vital for the health of the British stock market and economy. Companies don’t like to be thwarted, but creating the right environment for innovation is important.
In any case, the claim that Britain is closed for business is nonsense. The UK is one of the world’s most open-for-business nations with overseas buyers snapping up good (compressed valuation) deal after good deal. They know that companies can be bought with little resistance, as many in Britain have complained bitterly for years.
That’s why the takeover machine has whirred back to life this year after a brief hiatus while rising interest rates and recession risk kept buyers away. And that’s the second development that underlines a risk that’s been bubbling away for UK markets: bids keep rolling in on a market that’s down on its luck in terms of valuations.
It’s why Deutsche Bank was able to make such a generous offer for investment bank Numis last week. An offer priced at a 72 per cent premium is not to be sniffed at, especially when the company has been in the doldrums for some time, and there is no sign of a turning point up ahead. Yet the price is well below previous highs when the company was living off a bustling M&A market.
In a healthy thriving market, takeovers can catalyse sluggish businesses, create perfect combinations, and keep management focused on delivering value to shareholders. But when undervaluation is an issue, there’s an IPO drought, the number of listed companies has slumped by 40 per cent in just 15 years and managers’ heads are being turned by the US’s higher valuations and lack of criticism of high executive pay, takeovers can be a depressant rather than a tonic, a deterrent not an inspiration. Numis’s own research from just a few weeks ago highlighted that 88 per cent of FTSE 250 bosses believe that UK plcs’ vulnerability to takeovers is heightened.
How can the UK pick itself up from the floor, and successfully address what London Stock Exchange’s Julia Hoggett has described as the “de-equitisation of the UK for the last 20 years”? My colleague Chris Akers highlighted some of the options in a recent feature, and this week the FCA moved a stage closer to making London more enticing by publishing its consultation document on rule changes. These revolve around easing the rules burden and creating a disclosure-based regime, plus axing eligibility rules that require a three-year financial track record as a condition for listing. But the watchdog issued two warnings with the plans. First, the changes, expected to be implemented early next year, will clearly mean greater investment risk for investors. Second, given that there are other factors that influence a company’s decision on where to list such as tax and the availability of capital, substantive change will “require a concerted effort from government and industry as well”.
