The wrong reasons to kill a merger – by Eric Reguly (Globe and Mail – May 24, 2014)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

Bidding companies with a history of breaking investment and employment promises
of the companies they buy should be treated like a hostile witness under
questioning from a prosecutor. Foreign buyers of big Canadian companies have
a dismal record at keeping promises. Demanding ironclad commitments from
buyers, perhaps backed by performance bonds, is not unreasonable.
Eric Reguly (Globe and Mail – May 24, 2014)

ROME — Merger mania is back and the great wailing and gnashing of teeth that typically go with such festivals of ego, greed and, very occasionally, corporate logic have returned with it.

What’s different this time is that the proposed deals would be financed with a mix of cash and shares, all the better to avoid the leverage that pummelled so many debt-soaked deals struck before the 2008 crisis. What is not different is that nationalistic emotions will again play a big role in their outcomes. The “national interest,” that hoary euphemism for protectionism, should never be discounted by CEOs, shareholders and employees.

In Europe, the national interest argument seems to have already wrecked one deal and may yet derail another. The first is in France, where the French economy minister, Arnaud Montebourg, published a decree that would allow the state to block takeovers in allegedly strategic industries, from transport to water (although not in the wine, cheese and lingerie industries, which any self-respecting French citizen would consider more strategic than the navy). It was no coincidence that the decree came after General Electric of the United States went after the energy business of Alstom, the French maker of power-generation equipment and high-speed trains.

The French move comes as no surprise. The surprise is that French-style dirigisme is also hitting Britain, the alleged champion of open markets. A few days ago, the members of a House of Commons select committee urged business secretary Vince Cable to tighten up the takeover rules to protect pharmaceuticals giant AstraZeneca from a $100-billion (U.S.) bid from Pfizer, an American rival (AstraZeneca has rejected the takeover attempt, although it could come back). Even Conservative members of the committee said they feared that the “crown jewels” of corporate Britain could be carted off by any foreigner with an open chequebook.

Canadians no longer look at the government meddling in takeovers with something akin to revulsion. In 2010, the government of Prime Minister Stephen Harper blocked BHP Billiton’s bid for fertilizer giant Potash Corp. of Saskatchewan because the deal would have failed the net benefit test.

Some takeovers should be blocked. But jingoism or nationalism is never a good reason to do so. Canada’s (former) open-market ideology triggered the eradication of the country’s biggest mining and steel companies in the past decade, leaving behind a few big banks, Suncor, Bombardier and not much else that could compete on a global scale. Not all of those takeovers should have been approved.

At the same time, ideology should not prevent the takeover of AstraZeneca, which is barely “British.” As the Economist magazine pointed out, the company paid no British corporate tax last year, has a French CEO and only a quarter of its shareholders are British. While big, it’s also a stretch to label AstraZeneca an industrial champion that must be shielded at all costs. The company is struggling to develop blockbuster drugs and its overall sales have been in rapid decline; ditto its British employee head count, whose numbers have fallen to 6,700 from 11,000 since 2009.

When should takeovers be blocked? Any government should feel no regret in rejecting a takeover when the playing field is grotesquely lopsided. That would happen if the bidding company is state-controlled (as many big Chinese and Russian companies, such as Gazprom, are) or effectively takeover proof.

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