PFIZER’S bid for Astrazeneca is the biggest potential foreign takeover of a UK company ever, and the most controversial since Kraft’s successful acquisition of Cadbury in 2010.
Politicians and much of the scientific establishment have called for the public interest test for takeovers – which now only permits the government to intervene when national security, media plurality, or the stability of the financial system are threatened – to be extended to protect Astrazeneca’s independence. Such dirigisme is mirrored in France, where economy minister Arnaud Montebourg is seeking to matchmake the right takeover partner for Alstom.
But it would be illusory to think of Astrazeneca as some kind of UK national champion. It is a true multinational, created through the earlier mergers of UK, Swedish and American firms. Most of its employees are based outside Europe, and it has major R&D centres in the US and Sweden. Its shareholders are overwhelmingly foreign institutional investors (like most FTSE companies). It is run by a Frenchman and chaired by a Swede.
Just as Pfizer does not see itself as a US national champion – and is ready to abandon its Delaware seat of incorporation, largely for tax reasons – Astrazeneca will undoubtedly pursue its business in a way that makes sense for its own interests. For this reason, there is no sense in the UK government intervening to shield multinational executives from the discipline of a potential bid. Any extension of the existing public interest test for takeovers should therefore be resisted.
Of course, the government has a part to play in establishing a world-class environment for life sciences in the UK. It has a crucial role in ensuring that the university sector remains at the leading edge of research and training. It should renew its efforts to nurture the financing and support of entrepreneurial activity in the sector. And it will remain instrumental in determining the fiscal and regulatory environment that will attract high value-added R&D activities.
But attempting to second guess the industrial logic of takeover decisions is not one of government’s strengths – as demonstrated throughout the 1970s at British Leyland and elsewhere. Any return to this approach risks the UK’s hard-won reputation as a compelling destination for inward investment. This would cost far more jobs than would be saved in the short term.
But even if Astrazeneca’s fate rightly rests in the hands of its shareholders, it is by no means obvious that Pfizer's bid should be accepted. A key role in the process will be played by Astrazeneca’s board, which has a duty to advise shareholders as to whether the offer is in the company’s interests. The experience of previous hostile bids shows that the board’s perspective is extremely influential – and Astrazeneca’s directors must be in no doubt about how they should evaluate the offer.
During Kraft’s bid for Cadbury Schweppes in 2010, for example, it became apparent that many believed the sole factor that should determine the viability of the bid was the offer price. This perspective was reflected in the rapid reversal of the Cadbury board’s recommendation to its shareholders – from vehement rejection to support – following the tabling of a higher offer by Kraft in January 2010.
However, this perspective was based on a misconception. In the wake of the Cadbury takeover, the Takeover Code has been revised to clarify that the board “is not required by the Code to consider the offer price as the determining factor, and is not precluded by the Code from taking into account any other factors which it considers relevant”. The directors of the target company are not simply obliged to auction off the firm to anyone with a bundle of cash. The acquiring company must present a strategy that works in the interests of long-term value creation.
Consequently, Astrazeneca’s directors will now have to justify their fees by showing they have a more compelling vision for the company that will work in the interests of all shareholders, not solely those prepared to sell-out. As Warren Buffet has said, “I believe in running the company for the shareholders that are going to stay, rather than the ones that are going to leave”.
Pfizer’s strategic proposals for the combined entity should be critically scrutinised, not least because the rationale appears to be based on a desire to escape the reach of the US taxman, rather than any compelling industrial logic. Further, takeovers are inherently risky, as Pfizer’s own chequered record of acquisitions over the last 10 to 15 years has shown. Astrazeneca’s board will need to be persuaded that this would be one of that minority that produces results.
Ultimately, the decision will rest with Astrazeneca’s shareholders. But as they ponder their decision, they should appreciate that the eyes of the public and corporate Britain are upon them. Many fund managers and asset owners are signatories to the Stewardship Code, which defines long-term ownership principles for institutional investors. Investors should seek to act in a way that is consistent with those principles, or ultimately they will face their own regulatory backlash.
Dr Roger Barker is director of corporate governance and professional standards at the Institute of Directors. www.iod.com