Amid the raft of multi-billion-dollar mergers and acquisitions this year, a new player has entered negotiations: politicians.
Two Congressional committees are studying AT&T Inc. (T)’s $48.5 billion takeover of DirecTV (DTV), while Comcast Corp. (CMCSA)’s $45.2 billion offer for Time Warner Cable Inc. (TWC) faced tough questioning last month at a House hearing. Politicians are also trying to crack down on overseas mergers intended to escape U.S. corporate taxes. Across the Atlantic, U.K. lawmakers fought Pfizer Inc. (PFE)’s shelved $118 billion offer for AstraZeneca Plc (AZN), and their French counterparts have challenged General Electric Co. (GE)’s $17 billion bid for Alstom SA (ALO)’s power assets.
As the U.S. and Europe struggle with weak job creation and stalled wages, lawmakers are increasingly injecting themselves into announced mergers by raising concerns over layoffs or industries dominated by a few huge companies. Such attempts are putting some of the biggest transactions under the magnifying glass, and are likely to become more common, especially in high-profile industries like telecommunications and healthcare.
“Once in a blue moon, takeovers do spill into the public consciousness, and in terms of doing deals it completely changes the dynamics,” said Stephen Blackshaw, a partner in London at law firm Sidley Austin LLP. “There’s no doubt that we are in a wave of popular debate or outrage.”
In this environment, Blackshaw added, corporate public relations has moved to the fore. That was evident in the $43 billion deal announced June 14 between Medtronic Inc. and Covidien Plc. Medtronic Chief Executive Officer Omar Ishrak called Minnesota Governor Mark Dayton on the same day to inform him that the merger wouldn’t cost any jobs in the state, where Medtronic is based. Dayton said that he was “greatly reassured” by Medtronic’s promise.
The political concerns reflect the economic insecurity that remains from the global financial crisis. The U.K. is emerging from its longest period of below-peak economic output in a century. In France, which has a history of objecting to foreign takeovers, jobless claims are at a record high.
“This may be the first time we have seen a large number of high profile M&A deals in a low-growth environment in which countries might argue that mergers that reduce local employment should be stopped,” said Roy Smith, a professor at New York University’s Stern School of Business.
Jobs aren’t the only factor driving politicians. Some Democratic lawmakers have called for legislation that would curb U.S. companies from making certain acquisitions abroad as a way to lower their tax bill.
Medtronic’s deal to buy Dublin-based Covidien made it the latest of some 44 American companies that have moved their legal residence abroad, or planned to do so, after acquiring a foreign firm. European countries including the U.K., Switzerland and Ireland have corporate tax rates substantially lower than the 35 percent U.S. levy.
Michigan Senator Carl Levin has submitted a bill that would require U.S. companies seeking a so-called tax inversion to acquire a company with a market value at least 50 percent of their own, up from 20 percent currently. That stricture would have eliminated the tax benefits of most recent inversion deals.
In the U.K., lawmakers lack any legal mechanism to block mergers, yet that didn’t stop many politicians from voicing objections when Pfizer announced its bid for London-based AstraZeneca in April. British Prime Minister David Cameron last month said he was “not satisfied” with Pfizer’s bid for AstraZeneca because of its impact on employment.
Some politicians invoked the experience at British confectioner Cadbury Plc (CADBURY) after it was bought by the company now known as Mondelez International Inc. in 2010. The U.S. firm went back on a pledge to keep open a factory in south-west England that employed 400 workers.
AstraZeneca has refused to enter discussions with Pfizer, putting any deal on hold for now. Pfizer is unlikely to proceed without the government’s blessing, since relationships with national regulators are crucial in the drug industry, according to a person with direct knowledge of the matter who asked not to be identified.
In France, GE’s attempt to purchase the bulk of Alstom prompted President Francois Hollande to demand job guarantees and led to the government strengthening its takeover defenses. In a decree signed last month by Economy and Industry Minister Arnaud Montebourg, France said it would automatically review foreign deals in industries including energy, transportation and power plants.
Montebourg and other ministers even played dealmaker by soliciting a rival proposal from Siemens AG in an effort to derail the GE bid. The Fairfield, Connecticut-based company has tried to allay political concerns by promising to create 1,000 jobs in France and committing to future spending in the country.
It’s certainly not the first time the French government has intervened to protect companies it deems to be of national importance from being acquired. In 2005, the government passed an anti-takeover decree amid speculation PepsiCo Inc. was planning a bid for Danone.
Both Pfizer’s and GE’s bids make easy targets for European politicians eager to show they feel citizens’ pain. The deals would mean the absorption of prominent local companies into larger American rivals, with the threat of job losses.
While merger-related layoffs are often inevitable, “it feels like governments are taking more of a proprietary interest around jobs,” said John Challenger, the CEO of human-resources consultant Challenger, Gray & Christmas Inc.
Pfizer’s 2009 acquisition of Wyeth resulted in the loss of more than 19,000 jobs, while Merck & Co. (MRK)’s deal for Schering-Plough meant about 17,000 positions lost, data from Challenger, Gray show.
After the Sept. 11, 2001 terror attacks, it was national security concerns, not jobs, that most often provoked political uproar. Chinese oil firm CNOOC Ltd. (883)’s $18.5 billion bid for Unocal Corp. in 2005, and Dubai-based DP World Ltd. (DPW)’s 2006 attempt to take over management of large American ports, were both withdrawn under political pressure.
With this year’s U.S. M&A activity dominated by large domestic players trying to get even larger, politicians have shifted focus to the possible consumer impacts of increasing consolidation in certain industries.
Comcast would extend its dominance of the American cable-TV market by buying Time Warner Cable, which is the main operator in New York and Los Angeles. The company also owns media group NBC Universal, making it a vertically-integrated provider of everything between Hollywood studios and consumers’ living rooms.
Sprint Corp. (S) is nearing an agreement on the main elements of an acquisition of rival mobile carrier T-Mobile US, Inc., according to people with knowledge of the matter. That deal would reduce the number of full-service U.S. mobile operators to three, potentially raising prices.
“If you look at industries, it’s a natural process that over time you develop these dominant players, but that creates a lot of uneasiness with politicians,” said Jan Hagen, a professor at the European School of Management and Technology in Berlin.
Senator Patrick Leahy, a Vermont Democrat who chairs the Senate Judiciary Committee, said last month he was “concerned that the telecommunications marketplace is trending even further toward one that favors big companies over consumers.” The House Judiciary Committee also pledged to closely review AT&T’s planned DirecTV purchase “to ensure that consumers’ interests are protected.”
The eagerness of politicians of many ideological persuasions to show their concern about major deals reflects in part public cynicism about coziness between governments and big business, said Chris Oates, an analyst at consultancy Oxford Analytica.
For some politicians, “there’s already this perception you’ll go along with whatever a CEO wants,” Oates said. In that context, he added, “no politician wants to be seen as in bed with big business.”
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