CITY AND SUBURBAN
Needed: new tests for takeovers competition is not enough
CHRISTOPHER FILDES
We need a new law to govern the takeovers of British companies. The pre- sent law is effectively made and unmade by successive ministers. Some invent it as they go along, some — like Lord Young, now in charge — believe in having one plain rule and sticking to it. Governments learn the hard way that neither will do, and are about to learn it again.
Rowntree is the case now in point, a major British company put under auction by two of its competitors from Switzerland. It is a distinctive company, with its Quaker background, its charitable foundation, its northern base and local loyalties. It is also a successful company, with brands which are household names in many markets, Which is why the competitors want it. The Swiss face political opposition, led by Michael Hese!tine, who has asked Lord Young to refer Rowntree's case to the Monopolies and Mergers Commission.
The law leaves it up to Lord Young, as Secretary of State for Trade and Industry. Almost any bid of any consequence is eligible to be referred to the Commission. The bid goes first to the Office of Fair Trading, which must recommend whether It should be referred to the Commission, but the decision is the Secretary of State's. He can pass a bid which the OFT would have referred, and refer a bid which the OFT would have passed. If it goes to the commission, he may still have the last word. He cannot ban a bid which the Commission would allow, but he can allow a bid which the Commission would ban.
Armed with such arbitrary powers, some Secretaries of State have been content to use them, and have in their turn been used. They become the lobbyists' mark, and (as Lloyd George said of Lord Derby) like the cushion, bear the imprint of the last person to sit on them. Odd and inconsistent decisions have inevitably followed. Lord Young and Norman Tebbit are two Secretaries of State who thought this not good enough. Mr Tebbit laid down that there should be one test, which was com- petition. If the Office of Fair Trading thought that the effect of the bid would be to reduce competition, and if he agreed, he would refer it to the Commission. If not, he would let the market decide. Lord Young agrees, and that is the theme of his current Green Paper on merger policy. His policy has the merits of even- handedness and certainty, and the addi- tional merit of posing questions to the Commission in a form which it can answer. The test which the law sets the Commission could scarcely be more sweeping. It is not asked to say whether a monopoly exists. It has to say whether the possible monopoly or merger in front of it would tend to operate against the public interest.
The Commission is happier trying to answer that question in specific terms. Its members are mostly part-timers, from business, the trade unions and academic life. They have a small permanent team and secretariat. They are confident in their judgment in matters of competition and market share, which, after all, is something which can be measured. In judging the public interest without defined standards to help them, they feel no better qualified than any other group of people sat round a table and asked what they think. They find themselves judging by standards which in retrospect are hilarious, or no more than rationalisations for decisions reached on other grounds. A veteran of the Commis- sion speaks for his colleagues: 'Ask us a silly question', he says, 'and you'll get a silly answer.' Even so, to treat the public interest solely in terms of competition, because that is what the Commission can handle, is to look for the latch-key under the street-lamp rather than where it was dropped. With some kinds of company, the law recognises this. The Banking Act gives special powers to the Bank of England. No foreign bank may do in Britain what a British bank would be unable to do in that bank's home country — and that includes making a bid. Reciprocity is the test. It is the test which Lord Young's own depart- ment has applied in the long negotiations to get British financial firms into the Tokyo markets — you license us, and we'll license you. Reciprocity makes Michael Heseltine's case. If it is good enough for banks, he would argue, it is good enough for chocolate-makers. Would Rowntree in practice be able to bid for a comparable company in Switzerland? The City consen- sus is that it would have no chance. The bid for Rowntree will not be the last of its kind. It looks more like the first. Cadbury Schweppes, Courtaulds, Allied Breweries, Royal Insurance and British Petroleum (where Lord Young has now invoked the Commission) are all major British companies, leaders in their fields, which must now feel the hot breath of a foreign bidder or stake-builder. Indeed, a merger policy with competition as its yardstick will tend to favour cross- border bids, just as it has tended to favour conglomerate mergers — groupings of businesses which may lack rationale but, having little in common but their own- ership, are not in themselves anti- competitive.
The need is for new tests of the public interest in mergers. They must be as plainly and specifically defined as possible, so as to avoid arbitrary decisions from ministers, and to draw from the Monopo- lies and Mergers Commission plain, speci- fic and sensible answers. Reciprocity must be one. Beneficial ownership should be another. When a major company changes hands there is an evident public interest in establishing who the new beneficial owner is to be, and if a doubt exists (there have been significant cases), the Commission can resolve it. There will be occasions when the Commission should be asked to ask questions about the bidder's resources. It would establish whether he had the means to finance his bid, and whether his projected financing would imperil his target company. Plenty of companies have been bought with their own money, in spite of the Companies Acts, and some have been left as wrecks or husks.
A more difficult test of the public in- terest arises in an overseas bid for a British company which is a leader in its field — perhaps our best or only company of its kind. Secretaries of State have a statutory power to block such a bid for a company of strategic importance, but, since it was bequeathed to them by Anthony Wedg- wood Benn, it is not surprising that no one has tried it out. It is a nuclear deterrent, and a battlefield weapon is needed.
Other tests might follow — for instance, in a bid for a company which stands in a fiduciary relationship with its customers, as a life assurance company does, or a unit trust group. Competition, certainly, is a simple test, and the basic test, but competi- tion is not enough.
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