Even the most devout follower of the London Stock Exchange’s RNS feed may have been confused by a statement issued by SoftBank last week.
The Japanese lender published the number of staff employed by British tech giant Arm, a company it acquired in a £24bn mega-deal over the summer, as at 5 September.
The figure, 1,749, is important because it will be used as a base point by SoftBank to ensure that it has at least doubled the number of UK staff employed by Arm within five years.
This means that by the autumn of 2021, Arm will have at least 3,498 employees in the UK.
SoftBank has also pledged to retain the current relative proportion – 76.7 per cent – of technical employees, ensuring the company is not simply filled with an army of minimum-wage cleaners.
In addition, SoftBank will retain Cambridge as the global headquarters of the chip designer for at least five years and increase the number of non-UK staff also.
These terms are set out as so-called post-offer undertakings (POUs) in the deal document.
The deal is seen as a landmark case in UK M&A because POUs – which are legally binding and introduced after controversies involving Kraft and Pfizer – are not believed to have been used previously.
City A.M. can reveal that, after setting out her “national interest” UK takeover agenda, Prime Minister Theresa May immediately welcomed the acquisition of Arm following a phone call with SoftBank’s chief exec before the deal was made public.
Furthermore, Philip Hammond’s first meeting as chancellor was also with the head of SoftBank – and the government was consulted on the drafting of the POUs.
No more Krafty u-turns
Chocolate enthusiasts – particularly those with an interest in the recent history of UK mergers and acquisitions (M&A) activity – may well scoff at the suggestion these commitments carry any weight.
In February 2010, US company Kraft Foods outraged many on this side of the pond by announcing the closure of a Cadbury factory in Somerdale, near Bristol, weeks after completing its £11.5bn hostile takeover of the British national treasure.
Kraft had stated in an offer document three months earlier that it believed it “will be in a position to continue to operate the Somerdale facility, which is currently planned to be closed, and invest in Bournville, thereby preserving UK manufacturing jobs”.
The UK mergers watchdog, the Takeover Panel, issued a “statement of public criticism” in May that year. But the plans to close the factory went ahead in 2011 and Kraft was not fined.
Similarly, as part of its $120bn takeover attempt of Britain’s AstraZeneca in 2014, US pharma giant Pfizer made several public commitments relating to research and development, as well as the retention of UK jobs.
Its boss Ian Read wrote to PM David Cameron highlighting the “binding nature” of the pledges. The UK’s Takeover Code made clear at the time that pledges like these were binding – “unless there has been a material change of circumstances”.
In September 2014, after concerns were raised about Pfizer’s failed attempts to acquire Astra, the UK Takeover Panel proposed a strengthening of the Takeover Code, enabling a distinction between statements of intent and specific undertakings.
These changes were introduced in January 2015, enabling companies to make legally-binding post-offer undertakings (POUs), as opposed to weaker post-offer intention statements.
One senior M&A lawyer told City A.M.: “If you’ve got an intention statement, then if you’re circumstances change you can change your intentions. With a post-offer undertaking, it’s a binding statement.”
It’s all very well giving acquiring parties the option to make POUs. But, perhaps owing to their binding nature, no company had elected to use them – until SoftBank this summer.
A charm offensive May work
Why would SoftBank do this? City A.M. understands it was the result of negotiations between the two companies. But the lawyer quoted above, who is independent of the deal but familiar with its terms and the significance of the POUs, pointed towards the political situation when SoftBank was putting the finishing touches to its deal.
On the morning of Monday 11 July, Theresa May – who was at the time competing to become leader of the Conservative Party and therefore Prime Minister – elivered a speech, setting out her vision for the UK.
The content of her address may have been slightly overshadowed by the fact that, on the same morning, Andrea Leadsom dropped out of the race, leaving May to be named Britain’s second female PM in history.
But the soon-to-be UK leader nonetheless set some M&A alarm bells ringing when she laid out her idea for a “proper industrial strategy”.
As well as being critical of Kraft’s handling of the Cadbury takeover, May also bemoaned how the previous government “almost allowed AstraZeneca to be sold to Pfizer, the US company with a track record of asset stripping and whose self-confessed attraction to the deal was to avoid tax”.
She added: “A proper industrial strategy wouldn’t automatically stop the sale of British firms to foreign ones, but it should be capable of stepping in to defend a sector that is as important as pharmaceuticals is to Britain.”
This agenda continued through to the following Monday when May and her newly-assembled government announced plans for “national interest” tests for UK takeovers, pledging to examine deals on a “case-by-case basis". And Philip Hammond warned the new government would “not stand by and watch British companies be asset stripped by foreign predators".
But City A.M. understands the government was being consulted on the deal’s POUs – which at that stage had not been completed and were later announced in August.
Further, SoftBank chief executive Masayoshi Son had spoken to May on the telephone the day before.
Son also had a head-to-head with Hammond on the Monday morning – the new chancellor’s first business meeting since taking up his position.
What can others learn?
With few other high-profile UK takeovers announced since the Arm deal, it’s unclear how welcoming May and Hammond will be to other transactions involving foreign buyers.
The government’s handling of Hinkley Point C – where the Department of Business, Energy and Industrial Strategy (BEIS) surprised investors EDF and China General Nuclear by delaying its decision to approve the project – suggests serious consideration will be given to the “national interest” in future.
Indeed, announcing the go-ahead for Hinkley Point in mid-September, BEIS said it was developing a “new legal framework for future foreign investment in British critical infrastructure”.
This will allow the UK government to introduce a consistent approach to considering the national security implications of all significant investments in critical infrastructure, including nuclear energy, in the future. The changes mean that, while the UK will remain one of the most open economies in the world, the public can be confident that foreign direct investment works in the country’s best interests.
What this new framework will look like and when it will be put in place is not clear. But the prospect is understood to be weighing on the minds of dealmakers.
For instance, City A.M. reported last month that those working on the sale of the National Grid’s gas pipe network have become increasingly wary of government scrutiny.
In this political landscape, other companies hoping to win UK government approval for British takeovers could look to the example of SoftBank and its use of POUs.
A senior UK M&A banker told City A.M. they felt SoftBank’s use of POUs could be potentially “game-changing”.
The lawyer quoted above talked up the possibility of POUs being used as a way of saying to the government: “This is good news for the UK. Why would you want to intervene and stop this transaction happening?”
On POUs and how they could be best used, he added: “I think what you’ve got to do in these sorts of circumstances is work out where the sensitivities lie. What would the political reaction to a transaction like this be? What would the focus be? Arm clearly thought that increasing UK employment... was a key element of this”.
The tactic appears to have worked for SoftBank and the deal’s backers. Expect to see the same approach used for other blockbuster deals in the near future.