A high level of corporate takeover activity has long been a feature of the British financial landscape. But who benefits from this vibrant market?
In a recent paper for Policy Network (1), my co-authors and I ask whether high levels of takeover activity really work to the long-term benefit of the British economy, and society. We argue that it is time to look again at the institutional mechanisms for regulating takeovers in the UK, and to focus attention back on the public interest.
Since the 1970s, the idea that corporate takeovers have implications not just for shareholder returns, but for the wider public interest, has been challenged. The “public interest” has come to be seen narrowly, through the prism of competition. Too great a concentration in any particular market is seen – rightly – as being inimical to the public interest. However, evaluating the anti-competitive impact of a takeover has become ever more quantitative rather than qualitative.
Economic consultants are engaged by the parties involved to undertake econometric analyses of a takeover, and regulators (the Office of Fair Trading and Competition Commission, soon to be replaced by a unitary Competition and Markets Authority (CMA)) make their decisions on pure competition grounds.
The other main regulatory player – the (now statutory) Panel on Takeovers and Mergers – exists not to take a wider view of the consequences of the takeover, but to ensure fair play for target company shareholders.
It is time for a new approach. The need for change is demonstrated best by the protracted and ultimately successful hostile takeover of Cadbury by Kraft in 2009/10. The fall-out – including the closure of a UK factory and the shifting of production to Poland – has been well documented. The long-term consequences of the takeover were mooted at the time, but short-termism prevailed.
As Professor Scott Moeller noted subsequently in the FT, target company shareholders “may not (and often will not) be the long-term traditional owners of the target company stock, but rather very rational hedge funds and other arbitrageurs (in Cadbury’s case, owning 31 per cent of the shares at the end), who are swayed only by the offer price and how quickly the deal can be completed.”
A broader conception of the long-term public interest could help avoid such outcomes in the future. Our paper looks at four possible pathways to reform, including inserting – to use Peter Mandelson’s phrase – more “grit in the machine”: for example, limiting voting rights attaching to shares acquired in the course of an offer period.
However, our key recommendation is that a broader public interest approach for certain takeovers is reintroduced and applied through a new independent body and public interest test. This public interest test proposed would be:
- applied by an independent body that does not include the Secretary of State. This might involve substantial reform of either the existing Takeover Panel or new CMA, or require the initiation of a new body altogether. Membership of the new body would be carefully determined to both avoid political interference and reflect broader economic interests and stakeholders beyond the City of London; and
- applied by reference to a statutory list of factors, in a manner similar to that adopted for the key duty of a company director in section 172 of the Companies Act 2006. Setting out the criteria to be considered would help tackle the understandable concern that the proposed public interest test is too vague to be rigorously applied in practice.
A One Nation politics entails a broad conception of the public interest. It is time to take a rigorous look at the benefits – or otherwise – of high levels of takeover activity to the UK economy and society.
1. Aeron Davis, David Offenbach, Richard Stevens and Nick Grant, “Takeovers and the Public Interest: Responsible capitalism in practice” (Policy Network, 2013)
Richard Stevens is a solicitor who trained and qualified into the corporate team at a major City firm, and now works as an in-house counsel for an international publisher
“Wall Street, Main Street” photo by: Eric Ortner, United States