Thursday, November 27, 2003

The EU's Takeover Plan - Washington Times Op-Ed

Now here's an issue that is of far-reaching importance, but isn't likely ever to appear on the front-page of any major newspaper, let alone on the popular blogs. I hardly ever read the Washington Times, much less take anything written in it at face value, but this opinion piece on the European Takeover Directive is one I am in total agreement with. The changes being proposed threaten to drain the legislation of all meaning.

In crafting a common law on regulating takeover bids, Europe is once again proving the hazards of building policies that sweep a continent. The balancing of so many interests in Europe may cause the lowest common denominator to prevail on takeover policy. An unholy combination of political horse-trading and protectionist sentiments have created within the European Union (EU) wide support for a flawed consensus on takeovers, which would, if approved, make it more difficult for U.S. companies to make bids for European corporations. Tomorrow, at an EU ministers' meeting in Brussels, key governments are expected to back the new takeover directive.
The United States has cautioned Europe that such a new takeover law would create a "fortress Europe" and could cause Europe to run afoul of World Trade Organization (WT0) provisions and international guidelines. Certainly, Europe would be bunkering down with its planned directive on takeovers, obstructing hostile bids, and, as a consequence, foreign capital that tends to flow where laws allow shareholder value to be optimized. Such a scenario would be bad not only for U.S. companies, but for European ones as well.
Crafting a continent-wide policy on takeovers was originally intended to make merger and acquisition activity more brisk in Europe. But the German government worried that such an outcome would lead to an onslaught of hostile takeovers on German companies —concerns that were echoed by Nordic countries. Though the efforts of Germany and others to protect their corporations from takeover bids were opposed by other European countries, such as Britain, Germany was successful in winning their agreement by making concessions in other areas.
Frits Bolkestein, the European Union's single market commissioner, has criticized the takeover proposal, backing U.S. claims that it would take Europe in the wrong direction. "This [compromise] proposal would take the heart out of the directive," he said. "It could tempt member states to allow barriers to takeovers that do not currently exist."
If Mr. Bolkestein remains firm in his opposition, then it would take a unanimous EU vote to override his position. The pressure on EU states to go along to get along with this provision has been intense. The European Commission has been trying for 14 years to form a European takeover law. Italy wants to see a deal struck before its rotating presidency ends this year and would apparently accept a procedural consensus — which is what the compromise appears to be.

Some context would be useful here. The real motivation behind German opposition to the takeover directive is the fear of the management of German companies like Volkswagen and BASF that agressive bids like that in 2000 between Vodafone and Telecom Italia1 for Mannesmann, would become commonplace, endangering the comfortable status quo in which families like the Piech clan were able to control the destinies of these giants despite holding relatively minute portions of the companies' stock.

The same rationale holds true for the Scandinavian countries, and in particular, for Sweden. To be concrete, the Wallenberg family, via the Investor AB vehicle, has been able to maintain an impressive degree of control over several of that country's top firms, including Saab, ABB, Ericsson, Electrolux and AstraZeneca, despite holding a marginal percentage of the shares in Investor AB itself. The Wallenbergs have been able to accomplish this feat because of the discriminatory manner in which voting rights have been apportioned to Investor stockholders, exploiting a provision of Swedish law that enables a firm to have two classes of shares that are otherwise identical, other than that Class A shareholders in Investor AB enjoy 10 more votes per share than do class B shareholders. The following snippet from a 1996 Time magazine article illustrates what is going on:

The firms operate largely independently and have their own stock listings, but most are Wallenberg-controlled behind the scenes, in line with the family motto, "Esse non vidare," which to the Wallenbergs means that it's better to be than to be seen. Three family trusts own 40% of the votes of Investor, which often has only a minority stake in the companies. The key to the empire's power is its clutch of so-called A shares, which usually have 10 times the voting rights of the regular B shares. In Electrolux, for instance, Investor has only 1.3% of the equity but 45% of the votes. Many of the companies' chairmen sit on Investor's board, often informally consulting one another on sailing or ski trips. The Wallenbergs' credo is active ownership and long-term investment. "We're not a conglomerate; we're a mixture of Warren Buffett's Berkshire Hathaway and a Japanese keiretsu," says Claes Dahlback, Investor's long-serving president. Famed U.S. investor Buffett became a billionaire through his strategic stakes in a variety of firms, while the companies in a keiretsu industrial grouping share a common corporate culture.
This sort of racket would go by the wayside if the Takeover Directive were ever to be adopted in its' original guise, and the Wallenbergs have lobbied intensely to head off just such a possibility.

Now, why is all this important, you may ask? The Takeover Directive is of of the highest importance because if it were adopted, it would help create a robust market for corporate control in Europe, and that would mean, first and foremost, the death of "stakeholder capitalism", as managers would now be forced to cater to shareholder value above all else. This is just the sort of stimulus that is needed if European firms are to make the often wrenching changes required if they are to regain their role as engines of wealth creation (rather than mere wealth preservation), and the state most in need of this sort of change is the one putting up the fiercest resistance - Germany.

(1) A deal in which I personally had a role, albeit a minor one, to play.