Business

How and why Vince Cable wants to shrink takeover market

BBC business editor Robert Peston on the takeover market

It happened in the latter days of the last government and is being entrenched by the new coalition government.

I refer to a profound shift away from the idea that there should be the freest possible market in the buying and selling of whole companies.

The ideology of the 1980s, which persisted really until last year, was that it was good for Britain that no company could feel secure from the threat of being acquired by another business.

The theory was that economic growth would be generated by a kind of economic Darwinism: weaker companies would be gobbled up by stronger ones; second-rate management would be kicked out; productivity of the enlarged group would be enhanced; and the proceeds from any takeover would be reinvested in new wealth-creating opportunities.

So who could possibly be against takeovers?

Well only those who noticed that - more often than not - takeovers appeared to be driven less by carefully crafted wealth-creating strategies and more often simply by a crude desire to turn a big company into an enormous one.

Why would that be?

Well, the chief executive of a ginormous company is typically paid a multiple of what he or she would pocket if running a middle-size one.

And there are massive fees for the bankers, lawyers, accountants and PR firms advising on such deals.

The phrase "gravy train" could have been invented for the takeover industry.

Also, it is usually much less hassle for institutional shareholders in a weak company to sell the company rather than kick out the inadequate management. And selling at a premium makes the investment performance of said shareholders look better than average, for a short time at least.

So for decades there's been this great big thriving market in whole companies.

And never mind that there has been evidence for many years that the performance of companies bloated by takeovers is often pretty poor, or that many of the acquirers are overseas interests, which raises questions about the ability of the UK to control its economic destiny, or that periodically such deals are disastrous.

Latterly however, and to use that ghastly cliche, some kind of tipping point has been reached.

Partly it was the storm of protest generated by Kraft's acquisition of Cadbury - though it's pretty difficult to demonstrate that selling Cadbury to US interests is more damaging to British economic interests than any number of other cross-border deals of recent years.

Partly it was the sight of deal-bloated monster companies - the likes of Royal Bank of Scotland and BP - beached and struggling for survival, or the proof that with the fat spilling over a certain belt size, businesses become harder to manage, more inefficient, riskier.

So what will the new business secretary, Vince Cable, do about all this?

Well three things.

First he may insist that all big deals are subject to a period of lengthier advance notification scrutiny, by competition and other regulators, as well as by investors, before a formal offer is put on the table and the formal takeover clock starts ticking. The pros and cons of the deal could then be discussed in a less fraught and pressurised climate than that which pertains once the deadline looms for shareholders to say yea or nay.

Second he may massively push up the so-called merger fees payable to the Office of Fair Trading for examining the competition implications of any deal. These are currently a maximum of £90,000, which isn't even big enough to be described as a rounding error for any takeover.

My understanding is that these fees are likely to be increased sufficiently to add a bit of grit in the takeover wheel, to increase the costs of a takeover sufficiently so that the acquiring management thinks a bit harder and longer before pouncing on prey.

And finally he'll keep an eye on the Takeover Panel's review of the rules of the takeover game, and if it doesn't tilt the playing field to make it harder for deals to be completed, well he could legislate.

What he would want to see from the Panel would be a reform that would make it harder for short-term speculators to deliver a business into the arms of a predator, either by disenfranchising shareholders who've owned stock for only a few weeks or by lifting to 60% or so the voting threshold for deeming a takeover to have succeeded.

All of this will trigger panic attacks in a variety of City firms who live off the fruits of the takeover trade.

Few of you will worry about that. But it might be wise to question whether this reform could do more harm than good if unaccompanied by other reforms.

The British disease, historically, is that management becomes self-satisfied, fat and lazy if not made to feel anxious that the punishment for poor performance would be defenestration.

If that death sentence is no longer to be delivered by an acquiring company, it has to be pronounced by shareholders.

So if the takeover market is to shrink by government fiat, there is a risk to the productivity of the UK unless and until the owners of business can be persuaded to become active and engaged owners, rather than the absentee landlords whom you regularly read about here.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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