The proposed takeover of British-based pharmaceuticals firm, Astra Zeneca, by US rival Pfizer is now off the agenda: the board of the former has rejected Pfizer’s “final” bid of £69bn to buy it up. This deal has been much in the press in recent weeks—partly due to the size of the would-have-been combined entity—but principally because it would have meant the disappearance of a “British” company.
Astra Zeneca, the tenth-largest constituent of the FTSE 100 by market capitalisation, would have ceased to exist as an independent entity; its shareholders effectively bought off. Now that the dust has settled a bit following the proposed transaction, this is an ideal opportunity to examine the wider question of takeovers and what we might term “the national interest”: to put it bluntly, should it bother us if ‘our’ companies are owned from abroad?
This raises the wider question as to whether government should have an “industrial policy”—should it intervene directly to support national businesses and, where necessary, protect them from international competitors? Suppose British Widgets plc employs 5,000 people at its factory in, oh let’s choose Wigan for sake of argument, and it can turn out ten million widgets a year at £100 each and make a reasonable profit. If Amalgamated Widgets Inc in Michigan can turn out said widgets for £80 each, and can increase capacity to match the output of its British competitor, the Wigan factory could be in trouble. Does the British government have a duty to step in and protect these jobs?
If it does nothing, the 5,000 people could soon be out of a job: bad news for the local area—and for the Exchequer. However, the alternative is likely to involve, in essence, the State’s making up the difference in the price at which Wigan and Michigan can make widgets: they now sell for £80 each but a £20 subsidy emerges to protect British Widgets plc. This might be in the form of a direct subsidy, a ‘soft loan’ or similar, perhaps in exchange for some equity in the business. Problem solved? Alas, it’s seldom that simple. The subsidy solves the problem for today, but does nothing to address why the British company cannot compete effectively in the widget-making market.
Technological developments could reduce further the price of widgets to £70: does this mean that the subsidy should be increased? The subsidy reduces the incentive to find new ways of doing things more cheaply: the company’s priority becomes about serving the government in its role as the most important stakeholder. This is ultimately how Britain looked pre-Mrs. Thatcher: moribund industries that had been starved of cash for new investment but subsidised in the name of protecting jobs. It took a liberalisation of the markets, new capital and a culture of rewarding success in the ‘bright new dawn’ that followed to turn this around.
But back to our original question regarding Astra Zeneca: should foreign attempts to take over the business be resisted? Would British jobs suffer as a result? Well, first up, there is no promise that keeping the company based in the UK will protect jobs itself: the big banks have all shed large numbers of staff since the financial crisis took hold in 2007.
Secondly, it doesn’t follow automatically that a US company will want to transfer jobs back to the mother country: it was suggested that one of the reasons for Pfizer’s proposed takeover was to allow it to move its headquarters to the UK to take advantage of a more favourable tax regime. The question that any government that finds itself in this position should be asking is: what are we going to do to ensure that the business environment remains competitive here? It should consider this wider, general question rather than the specifics of any one business deal. Here are the areas where I would suggest that the UK government might wish to focus its attentions.
- Employment law flexibility—a culture where it is very difficult to reduce headcount will deter outside investors, but the flip-side of that is the possible collapse of an entire business. The purchase of a struggling company from overseas may well be its salvation: this is less likely to happen, however, should the laws make it nigh on impossible to reduce costs. A sensible balance of rights needs to be struck here.
- Taxation—capital will flow to those jurisdictions where the state will interfere with it the least, which appeared to be one of the motivations behind the Pfizer deal. The argument also extends to the taxation of income: high marginal rates for high earners are likely to influence the decision-makers in their choice of where to locate a company’s global headquarters.
- Infrastructure—whether its high-speed rail, having a hub airport, a modern road network or extensive broadband capacity, any investors faced with the decision on what to buy and where to build are likely to place this high amongst their concerns. This is one factor where government expenditure can make a positive difference, providing of course that it is spent in the right way.
- Education and welfare reform—a country with a skilled workforce that is ‘employment-ready’ is more use to a would-be employer than one with long-term unemployment problems and unsustainable welfare programmes. The reforms by Messrs Gove and Duncan Smith go at least some of the way to making the UK an ideal place to locate a business.
A change from the known—a takeover by a foreign company—is bound to produce uncertainty, but there are good reasons to believe that such a transaction is a sign of strength, not weakness, in the nation’s economy and its workforce.
