(by Bruce Lyons) Lord Heseltine, a former UK trade minister, has just published a review, invited by the Prime Minister, titled ‘No stone unturned in pursuit of growth’. One of the stones he proposes to turn is to empower government ministers to intervene in foreign acquisitions of British companies “to ensure our long term industrial capabilities are given proper consideration”. The objective would be to negotiate commitments to build R&D capacity in the UK, develop domestic supply chains and develop the skills base against a threat to prohibit the merger. This siren call might sound enticing, but it would not be wise to listen.
One thing we can agree on is that too many mergers are unsuccessful. The academic literature suggests that around half of all mergers destroy value. This is an important matter for shareholders to address as a corporate governance issue, but it is not a reason to politicise merger control. It is not sensible to modify the Enterprise Act (as advocated by Heseltine) to allow direct intervention by a government minister against foreign acquirers on public interest grounds.
How does Heseltine propose to decide which capabilities should be kept out of foreign hands? He provides a list: ‘Our R&D capability, intellectual property, advanced manufacturing capabilities and expertise in complex finance and insurance are all vital to the UK’s future prosperity’ (#5.102). It is odd to find ‘expertise in complex finance’ protected in this list. Much of this ‘expertise’ has been imported into the UK by recruitment of American and other foreign nationals into British companies and not by foreign acquisition of British banks (e.g. Barclays, RBS). Complex finance was also one of the causes of the financial crisis and current recession. My point is not simply to exclude one capability from Heseltine’s list – it is that any list is bound to be flawed. No bureaucratic or politically hot list can determine what is truly best for the economy.
Nevertheless, suspend disbelief and suppose a sensible list of national firms that justify protection could be determined. How would intervention work in practice? Suppose, for example, that British company X was considering alternative merger bids from firms Y and Z. Can we really expect a sensible political decision to discriminate between the two bidders on public interest grounds? Politicians cannot understand the business realities as clearly as people with a serious stake in the company. The consequence may then be an unseemly squabble of competing political prejudices. No doubt this appears cynical, but consider the case of Westland helicopters which was subject to competing bids by foreign buyers at a time when the UK had a public interest test for mergers. One cabinet minister favoured a European bidder and another favoured an American. The argument famously ended with one minister storming out of a cabinet meeting and resigning in front of the press. The incident nearly brought down the government. It was hardly a great advertisement for political interference in foreign mergers. Some readers will recall that the resigning minister was Michael (now Lord) Heseltine.
A more recent sorry example is Lloyds-HBOS which is the only case of political interference in the competition test for mergers since the Enterprise Act (2002). It has been an unmitigated economic disaster (see Lyons and Zhu ‘Compensating Competitors or Restoring Competition? EU Regulation of State Aid for Banks During the Financial Crisis’, Journal of Industry Competition and Trade).
These arguments highlight the problems of political interference, but there is one thing that competition law could do to help the corporate governance problem of too many ill-considered and value destroying mergers. The UK is in a very small minority of countries that does not require mandatory notification of mergers. It is also frightening how much effort goes into the financial side of merger proposals and how little effort goes into careful consideration of the operational and competitive costs and benefits. These are exactly the issues that firms must confront in a mandatory notification system for mergers. When the UK merger regime was being reviewed in April 2011, I argued for mandatory notification, not least on the grounds that it would cause firms to reflect more thoroughly on merger proposals. Regrettably, I appear to have been in a minority of one at the time, when the political climate prioritised the cutting of supposed red tape. A mandatory system was not introduced and a great opportunity was missed to throw some thoughtful grit onto the slide of thoughtless mergers.
Postscript. The preface to the Heseltine review is a full page portrait of Joseph Chamberlain. Chamberlain was a self-made businessman and activist mayor of Birmingham, before moving into national politics and becoming minister for business and trade in the late nineteenth century. The portrait is clearly meant as an echo of Lord Heseltine’s own career. The Heseltine review does not refer to Chamberlain anywhere else, so there is no mention of Chamberlain’s lengthy and divisive campaign at the turn of the century to introduce tariffs and Imperial Preference. The Corn Laws had been repealed only 50 years before. These protectionist measures had kept landowners wealthy while the urban poor had to pay high food prices. Their repeal had been a global milestone in free trade and modern economic policy. Chamberlain’s pro-tariff crusade tore apart the cabinet and lost the next election. Do we all look in the mirror for our heroes?