New foreign takeovers regime is no guarantee of balanced approach
Written by Rother Radio News on 11/11/2020
The UK government is tightening up its laws on takeovers and, for a lot of people, it is not a moment too soon.
There has been widespread dismay over many years at the UK’s relatively relaxed stance on who can buy British businesses and particularly when those takeovers concerned pieces of national infrastructure.
For example, four of the so-called ‘big six’ household energy suppliers were acquired by French, German and Spanish buyers, while all three of the big former state-owned electricity generating companies – National Power, Powergen and nuclear generator British Energy – were also bought by German and French companies.
BAA, the-then owner of Heathrow, Gatwick and Stansted airports, was bought by Ferrovial of Spain. And P&O, the port and ferry operator, was bought by Dubai-based DP World. A number of the privatised water and sewerage companies, most notably Thames Water, were also bought by foreign buyers.
Both Conservative and Labour administrations were happy to adopt a laissez-faire approach.
Tony Blair’s government even indicated, in 2006, that it would not intervene to block a takeover of Centrica, the owner of British Gas, by the state-owned Russian energy company Gazprom.
The process appeared to accelerate during the first decade of the current century with iconic British companies like ICI, Boots, Orange and Scottish & Newcastle all being snapped up by buyers from overseas.
Ironically, it was not the takeover of a piece of national infrastructure that attracted the most public disquiet, but that of a confectionery company.
US giant Kraft’s deal to buy Cadbury for £11.5bn in 2010 was greeted with fury, particularly after the buyer reneged on a promise made during the takeover battle not to close a factory at Somerdale, near Bristol.
That prompted the government to make changes to the City’s Takeover Code, strengthening the ability of target companies to fight off predators by making bidders disclose more information about their plans for the acquired company, particularly around job cuts.
Yet things more or less continued in the same vein.
UK tech companies such as Autonomy and Wolfson Microelectronics began to attract foreign buyers. The drugs giant AstraZeneca narrowly avoided being snapped up for £69bn by Pfizer of the US in 2014.
It is now the UK’s second most valuable company and worth £111bn.
DeepMind, a UK-based artificial intelligence company, was bought by Google in January 2014 for $675m – a price recently described by the Google executive who oversaw the deal as “a steal”.
On the day she became Prime Minister, in 2016, Theresa May stood on the steps of 10 Downing Street and promised tougher scrutiny of foreign takeovers of British companies.
However, just a few months later, she waved through the £25bn takeover of the chip designer Arm Holdings, one of the UK’s flagship tech companies, by Softbank of Japan. Her government’s clearance of the deal was seen as conveying a vital message to the outside world that the UK would still be open to business following Brexit.
Now the rules are being toughened again – a story broken by Sky News.
A couple of things have influenced the government’s decision. The first is concern flagged by the security services about investment by some overseas companies in sensitive pieces of national infrastructure.
The matter was highlighted when the UK, under pressure from the Trump administration, decided to ban the Chinese telecoms equipment maker Huawei from the roll-out of 5G services.
The second is the realisation that the UK’s takeover regime has fallen behind those of some of its peers in how it addresses issues like national security. Unlike nearly every other western democracy, the UK does not have what the law firm Linklaters describes as “stand-alone foreign investment legislation”.
The template appears to be the United States. It has had a very long-established approach with the Committee on Foreign Investment in the United States (CFIUS), a body that was set up as long ago as Gerald Ford’s time in the White House, but which has assumed greater importance under the presidencies of both Barack Obama and Donald Trump.
It is certainly significant that the new UK regime will include something called the Investment Security Unit, a body sitting within the Department of Business, Energy and Industrial Strategy, which will be notified of planned deals in sectors such as defence, civil nuclear, space technology or artificial intelligence. It looks very much, as some commentators have noted, like an attempt to create a UK version of CFIUS.
There are a couple of concerns.
One is whether this is all too little, too late. Arm Holdings has already been sold to Japan and is now in the process of being sold again to the US chip company Nvidia.
Similarly, the defence contractor Cobham was sold last year in the teeth of opposition from the former First Sea Lord and Lord Heseltine, a former Secretary of State for Defence under Margaret Thatcher.
So critics will argue that this represents shutting the stable door after the horse has bolted.
The other big concern, by way of contrast, is that this new regime will deter overseas companies from buying British in future.
No-one will seriously oppose takeovers of strategic businesses being blocked if there are valid reasons for doing so.
But the UK has a huge current account deficit with the outside world that was famously characterised by the former Bank of England governor, Mark Carney, as leaving the country dependent on the “kindness of strangers”.
Selling UK businesses to overseas buyers has been one way in which that deficit has been kept manageable. Some will worry that overseas buyers may be put off by lengthy referrals to the Investment Security Unit. Natural caution on the part of M&A bankers and lawyers means that some transactions will be referred to the unit that might not have to, in the process, further putting grit in the wheel.
Paul Everitt, chief executive of the ADS – the trade body representing companies in the UK aerospace, defence, security and space sectors – summed it up well: “The government’s plans must strike an appropriate balance between putting protections in place and continuing to ensure the UK remains an attractive environment for international investment.”
Yet others will welcome the clarity that this decision provides.
At present, the UK government can intervene in, or block, takeovers only where they put at risk national security, financial stability or media plurality. There have been concerns that these have been used as an excuse for wider interventions on political grounds, as with Cobham, where Andrea Leadsom, the-then Business Secretary, obtained guarantees from the buyer on jobs and investment.
So there are still plenty of questions about how the new rules will play out in practice.
As Nicole Kar, head of UK competition at the law firm Linklaters, put it: “It remains to be seen whether the introduction of a standalone regime [will deliver] a swift and proportionate review for the majority of cases based on clear national security concerns.”
© Sky News 2020