Stop Messing with European Mergers
Recent corporate upheavals in Europe show a fundamental disconnect between the interests of corporate shareholders and governments, which appear to have forgotten that they preside over capitalist economies.
The French government's attempt to impose its will on Alstom SA, which wants to sell its energy business to General Electric Co., is a good example. The government's meddling is mostly criticized outside France, where economy minister Arnaud Montebourg has taken to using phrases such as "patriotic vigilance" that sound like something out of Mao Zedong's Little Red Book.
This kind of talk understandably rubs international investors the wrong way. Worse, Montebourg has also taken it upon himself to propose alternative schemes, such as an equal partnership between Alstom and GE that would see the French company take over the U.S. one's railroad business. Patrick Kron, Alstom's chief executive, who is firmly behind the current deal, was incredulous: GE's freight train business has little in common with Alstom's production of France's high-speed TGV trains. Kron is not interested in "diversifying into a business in which we are not present."
In other words, here is a government telling business what to do in the most obnoxious way possible, as it tries to avoid the political fallout that would follow from letting foreigners take over a company that was already saved for France once (Nicolas Sarkozy put together a partially taxpayer-funded bailout package for nearly bankrupt Alstom in 2004, preventing its sale to Germany's Siemens).
Meanwhile in the U.K., many important and intelligent people believe that a similar situation involving a U.S. company and a crown jewel of local industry calls for government interference. Pfizer's hostile bid for AstraZeneca carries the potential of a hefty premium for the company's shareholders, but non-financial considerations prevail in arguments against the deal.
"I am not in favor of the takeover of excellent and strategically important British companies by failing foreign companies whose actions are fuelled by tax avoidance, and who want to asset-strip the intellectual property of the British company and then dismember it," former science minister David Sainsbury wrote in The Guardian.
Martin Wolf, the influential Financial Times columnist, has also weighed in against the deal, which threatens to lead to layoffs in AstraZeneca's research division. "The merger is likely to go ahead," Wolf wrote, "because the only people whose interests count are shareholders, whether they have owned their shares for 10 years or 10 seconds. AstraZeneca can be sold and bought like a sack of potatoes. Does this make sense? Until recently I believed it to be the least bad arrangement. Now I am not so sure." Wolf argued that the shareholders are not the primary risk-bearers at AstraZeneca, whereas employees with "company-specific skills" are. So shy should the shareholders have exclusive control over the company's fate?
Montebourg and French president Francois Hollande also say they have intervened out of concern for Alstom employees. There is no obvious reason why a foreign company making an acquisition should be interested in laying off key employees. If there is a danger of layoffs, perhaps those threatened by the axe are not essential to the business? And if their qualifications are unique, perhaps they will thrive elsewhere, especially considering the recent trend toward research outsourcing in the pharma industry.
It is more likely that politicians' major motive for meddling is to show voters who is in control. For Italian Prime Minister Matteo Renzi, a recent attempt to impose new ethics rules on politically important companies has been a similar test of strength. Shareholders in the oil and gas company Eni rejected Renzi's clause, which would have required directors indicted for financial crimes to step down. They feared that in Italy's imperfect justice system, the new rule could be used by the political establishment to remove directors at will. Renzi, however, will push the rule at other companies in which the Italian government has stakes. To the social-democratic reformer, government influence on major companies is a matter of principle.
The idea that shareholders should ultimately control companies may appear outdated in a world where it's more fashionable to discuss inequality than growth. Its critics, however, should consider the endpoint of the alternative logic. Countries such as Russia and China, where paranoid leaders are bent on the "national champions" model, have long held that shareholders should not have the final word. Ultimately, that leads to a government takeover of key industries and a situation where the remaining private institutions are entirely at the mercy of government. Investing in such economies carries considerable risks.
If the Western world wants to go down that path, believing that it's possible to stop somewhere along the way, the governments should state clearly that the role of shareholders is to quietly trade purely nominal ownership rights called shares, while bureaucrats make all the major business decisions. Investment flows will then refocus on countries that elect not to make such a statement.
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