AstraZeneca and UK prosperity
- 30 April 2014
- From the section Business
Barely a day goes by at the moment when a big British company isn't flogging a big asset or isn't on the end of a takeover bid; and banker chums tell me the "deal flow" (dread phrase for takeovers of companies) looks set to be strong.
The explanation is psychological. The economy is recovering. There hasn't been a big economic whoopsy since the eurozone's banks almost went splat two years ago. And most substantial companies accumulated mountains of low-yielding cash in the years of the Great Recession.
When it comes to investing and buying businesses, companies aren't a good deal more sophisticated than sheep: when they sense the big bad wolf of recession or crisis is over the hill, they all rush in a flock to spend.
Which raises that hoary issue once again of whether companies buying other companies is a good or bad thing, for investors and the wider economy.
There is so much empirical evidence that takeovers regularly damage shareholders' wealth, and yet the bids-and-deals game goes on and on, that it is probably fatuous to expect the owners to exercise caution, and block deals.
As for the economic impact, well it is not cut and dry. Many of the UK's more successful industrial competitors, including the US, see politicians intervene to block or amend deals for national strategic reasons in a way that almost never happens here.
Which begs two questions.
First, whether the government should intervene to frustrate takeovers in a way that hasn't been fashionable for decades.
Or whether the boards of companies in receipt of takeover offers should explicitly take into consideration more than the price being proffered.
In the UK, this is once again a semi-urgent issue, following the announcement that the US pharmaceutical giant Pfizer wants to buy AstraZeneca.
This transaction is particularly resonant because AstraZeneca has great intellectual property, it employs significant numbers of scientists and brainy researchers in the UK, and it has important links to top British universities.
The legitimate fear would be that - whatever promises and undertakings are given by Pfizer - over time the deal would hollow out an industrial sector important to British prosperity.
The noises from government are that ministers understand this concern.
But the British industrial convention of the past 30 years is that everything is for sale - and that the UK attracts much more inward investment than other comparable rich countries because it rarely frustrates the operation of the market.
And even if ministers wanted to block the deal, it is not clear they could, on the basis of current competition law.
So what about the directors of AstraZeneca?
The point is that since the great Crash of 2008, caused in large part by short-term, financially driven deal-doing by reckless banks, most big companies have talked the talk that short-term profits and the short-term share price isn't everything.
They all make a big deal of their responsibilities to employees, to customers and to the local and wider communities.
So could AstraZeneca's board cite the interests of these other interested parties or stakeholders to reject Pfizer's offer? Err no. Its primary and overwhelming responsibility is to its owners, the shareholders.
But they could perhaps discuss the effect of the deal on the UK's economic prospects in a full and frank way, so that - if they think the effect would be negative - the public and politicians would know what is genuinely at stake.
If they did not believe there would be a cost to the UK, that would be worth knowing too, of course.
Opening up in this way would be a scary prospect for most boards. Most company directors hate engaging in that kind of public debate.
That said, if they don't do it willingly, there is a strong likelihood they will be compelled to give their views, by MPs on one of a number of relevant select committees.
One other thing.
In my too-long experience, bankers, brokers and public-relations advisers working for a target company always want the deal to happen - and that all they are really striving to do, underneath the rhetoric of "defending" the company, is to secure the highest price in an auction.
That is unsurprising, given that typically they receive more millions for their services if the takeover happens above a threshold price set by the board, than if it is not completed.
Which, given the powerful influence of these advisers, on the opinion of investors, media and politicians, means the probability of the deal collapsing is minimal.
Some might therefore argue that advisers should be rewarded for the quality of their advice, not for the outcome.