Are Britain's Business Leaders Seeking Shelter for Domestic Businesses from FDI?
Kraft Foods’ acquisition of Cadbury PLC has led at least one prominent British policymaker and one prominent business leader to consider whether Britain should take steps they believe will discourage short-term investment in its companies and encourage long-term investment, as if the two can be distinguished. They are suggesting that legal and regulatory changes may be necessary to offset the market’s focus on short-term trading in favor of what they perceive as Britain’s need to retain the benefits of long-term investment. They appear to be advocating these changes without regard to the detrimental effects that their protectionist actions will have on worldwide foreign direct investment (FDI), including that originating in Britain.
In an opinion piece published in the Financial Times in mid-January, Peter Mandelson, Britain’s Secretary of State for Business, Innovation and Skills, asked what steps might be taken to better align the interests of short-term and long-term investors and the interests of the owners and managers of publicly listed companies. He argued that financial markets often separate financial assets from real assets, with the consequence that the trading of financial assets leads to insufficient recognition of the importance of real assets. Lord Mandelson convened a roundtable discussion with investors, fund managers and company executives to establish a dialogue between investors and management of the companies in which they invest. The implication is that the lack of alignment between these groups too often results in a takeover of a real asset which in turn leads to the loss of the business itself to Britain. Additionally, the inability to assemble a pool of “patient capital” may be at odds with Britain’s needs for new technologies and infrastructure investment.
Lord Mandelson made clear that he was displeased with the failure of mergers and acquisitions strategies to create additional long-term value during the past 20 years. Although acknowledging that M&A can create economies of scale and technology synergies, he advocated openness by acquirors with respect to their intentions and robust criticism by shareholders. It is difficult to disagree with his analysis of the problem. The recommendations for cure are quite another matter.
More recently, Roger Carr, the chairman of Cadbury who resigned on February 3, called for an overhaul of M&A regulation in the UK. Mr Carr is arguing that his country’s regulatory scheme for takeovers works against the long-term interests of British businesses. According to news reports, he cited takeover practices as predatory and stated that the current rules reward short-term traders at the expense of owners with longer-term views. He suggested that the rules had resulted in too many UK business being sold off to foreigners, and that the sale of a domestic business to a foreign business was a loss to the UK. His sentiments were plainly protectionist and sounded like those of a sore loser. He seems to have said little about those UK companies who have walked the globe, acquiring businesses for strategic and other reasons or those UK businesses, such as Cadbury itself, who build plants outside of the UK to enhance profits.
The thrust of the comments of both Lord Mandelson and Mr. Carr is that differentiation should be made between those who will hold their shares for the long term and those who will not. However, a requirement that shareholders be locked in or locked up means that investors give up their ability to sell their shares when the situation warrants. This stratagem shifts risk to shareholders, who will expect and in fact be entitled to a greater reward. These types of restrictions have existed in the past and have often allowed management to be less accountable to owners, since the owners cannot exercise their right to show their ultimate displeasure—by exiting their investment.
Ultimately, however, changes in risk allocation and the balance of management/owner power in one geographic market can disadvantage companies in that market in terms of global capital allocation. If investment in British companies is stickier than in U.S. or Australian companies, then British companies may well lose value in comparison with their non-British peers. Given choices, FDI will always seek investment opportunities that are less encumbered.
Then again, Lord Mandelson and Mr. Carr may believe that it is Britain’s best interest to erect a wall around its industry, buying some time to create Britain’s future. Deflecting foreign ownership will, however, likely lead to retaliation. It would not be surprising if other countries were to preclude British business from investing in or acquiring their businesses. Worse yet, it could lead to rounds of similar restrictions on investment in other developed countries and then to trade restrictions. This could have a disastrous effect on FDI and the strong world economy that has been developing since 1945, despite the shocks of 2008. Lord Mandelson and Mr. Carr could better serve their countrymen by leading UK businesses to build stockholder loyalty through the creation of true stockholder value and to be strong competitors in the world economy.
