Following the extraordinary conduct of some British corporate managers, many of whom seem prideless and spineless at the same time, two more major British industrial companies, Tomkins and International Power, are about to fall under foreign control.  The comment by the chairman of Tomkins, David Newlands, that he and other “independent” directors had decided that the offer from Onex, a Canadian private equity firm, was “fair value” is only too typical of this conduct.  To its credit Standard Life, which has a 3% stake in Tomkins, has called for rejection of the offer from Onex.  Whether this is just because the price is not high enough or because Standard Life take the fundamental view that a company like Tomkins, at the heart of British engineering, should simply on long term strategic grounds not be sold into foreign ownership, is not known.  On the other hand Neil Woodford, the Invesco-Perpetual fund manager which also has a substantial stake in Tomkins, pronounced himself well-satisfied with the price offered by Onex.

With a market capitalisation of around £2.75 billion, Tomkins is one of only six companies in the range £2-£3 billions (numbers 89-103 in the list of top 200 FTSE companies) whose products are mainly dependent on mechanical engineering.  There are only four bigger British engineering based companies, Rolls Royce, BAe Systems, Rexam and Smiths, the latter regularly coming under threat of takeover.

When Tompkins goes, it will follow a veritable procession of key British industrial companies into foreign ownership including Chloride, the excellent battery and industrial power-pack manufacturer last month and Pilkingtons, the best and one of the largest glass-making companies in the world, sold to Asahi Glass, a Japanese company of one-third its size with the active support of its own chairman, Sir Nigel Rudd.

Continuing the takeover of the strategic heart of British industry, when GDF Suez acquires control of International Power it will not only acquire control of about a fifth of British electricity generating stations, it will also acquire nearly 40 other power plants in the USA, the Middle East and Asia.  It is these latter two areas which are probably of most interest to GDF Suez, as like the French company Alstom’s acquisition of GEC’s turbine business in the 1990s, it seeks to use the British inheritance of trading links in these fast growing areas of the world (dating back to the Empire) to enlarge French industrial markets.

The GDF takeover means that in Britain itself, two thirds of our electricity power generation is now in the hands of foreign companies – two French (EDF and GDF Suez) and two German companies (RWE and E.On).  As with Tomkins, the International Power takeover has the support of its largest investor, Invesco Perpetual.

These and all the other sales of great British companies come about because of a deadly combination of two factors:

(1)        The chairmen of the largest British companies are usually peripatetic, rarely knowing much about the technologies and markets on which the companies they lead depend.

Increasingly often now the most senior people are not even British (e.g. Carl Svanberg a Swedish electrical engineer originally, currently the largely invisible chairman of BP, and before him, Peter Sutherland, an Irish/EU politician.  Unilever is currently led by Paul Polman from the Netherlands and Astra Zeneca by an American.  However good these individuals may be, they cannot have a commitment to Britain and its people.

At the very least these appointments should raise deep question marks about the way British managers are promoted in mid-career and suggest to the principal shareholders that they shouldn’t just rely on professional head-hunters to come up with various names from outside the company, but talk to the senior managers in the company itself.

(2)        The main shareholders are principally insurance companies, pension fund managers and investment funds who mostly don’t have any material knowledge of the companies they invest in so that their only view of the value of a company is its share price.  This rarely reflects a company’s long-term potential, particularly if its products are scientific or engineering.

The net result of this knowledge and commitment vacuum at the top of British industry is that companies are treated as chips in the gambling house which is the City of London.  The future of their employees and the nation’s ability to pay its way in the world is of little account.  If it had not been for the government’s golden share after Rolls Royce was returned to the private sector in the 1970s, it too would undoubtedly have been sold to General Electric of America in the name of “maximising shareholder value”.  The development of the RB211 engine, and the commitment to supply which Rolls Royce had improvidently entered into with Lockheed of the USA, were the immediate causes of Rolls Royce’s fall into administration in 1972.  However, nearly 40 years later, RB211’s descendant, the Trent engine, is arguably the engine of choice for the world’s best airlines, certainly co-equal with General Electric’s.  A sale to GE in the 1970s or 80s would have seen the closure of the Derby works and a whole generation of engineers and technicians shut out of this huge technical and commercial development.

One day when it is too late the insurance companies and the government will wake up and see that there are no British companies left to invest in and British pensions will be entirely at the mercy of foreign-controlled businesses located in other countries.

Why is ownership and expertise at the top so important?

This is a question which is to be asked only in Britain.  Nobody in France, Germany, Japan, Holland or even in the USA would think of asking it, but you do in a Britain in thrall to a management philosophy which maintains that directors don’t need to know much about the things they are responsible for; indeed in some extreme versions of the view, it is positively advantageous not to know much in case you get “sucked into the detail” which apparently is a fate worse than death.

This mentality which, via the business schools now extends to the class of corporate managers as a whole, is essentially a City trader’s vision in which companies and commodities are simply to be bought and sold without creating anything along the way.  With no single investment bank in the City in British ownership and only three of the largest insurance companies with a significant international presence still in British hands (just), increasingly the City of London is providing an arena, like the All-England Tennis Club at Wimbledon, for others to compete and perform in, with British companies reduced to selling the financial equivalents of strawberries and cream.

The control and ownership of multinational industrial corporations is of vital importance because it decides two things which determine the present and future of any company:

(1)        the location of plant and thus the nationality of the permanent workforce^[1];

(2)        the people and facilities devoted to Research, Design and Development (RD&D).

When one company engages in a contested takeover of another, the bidding process usually forces up the target company’s share price beyond its current asset value.  The acquiring company then seeks to recoup its overbidding (and therefore profits dilution) by ruthless sacking of staff in the acquired firm, especially in its manufacturing plants, which will usually be closed down completely after an interval – as Kraft did at Terry’s in York and will certainly do again at Cadbury.  Both these acquisitions underline a central fact of multinational life: the only things which foreign companies really want are the brands (name) of the acquired company.  The world is awash with production capacity and, particularly in a recession, takeovers result in shutdowns and the transfers of brands abroad.  This is why every academic study of takeovers shows that around 90% lose^[2], not create value, and the loss of value is born by employees of the taken-over company.

Kraft for example, an American company with most of its sales in the slow-growing USA, saw Cadbury’s markets and brands in fast-growing Asian and South American economies as a shortcut to a world-wide presence.  Confectionery production is easy to transfer so we will undoubtedly see the opening of Kraft (Cadbury) factories in these territories in the next 5 years or so.

These are the reasons for the proposals (below) to amend the Monopolies and Mergers Commission Takeover Code – something which can be done now, without primary legislation, though new legislation will undoubtedly be needed in due course to stop the MMC from backsliding in its policing job.

Changes to the Takeover Code

The huge contraction in British industry over the last 30 years, which has no parallel in the rest of the Western world, plus the disastrous fee-obsessed credit boom we are only just recovering from, is testimony to the monumental failure of British capitalism as represented by the City of London to serve the interests of the British people and their industries.  Given the 30 years or so over which this failure has been clear to all with eyes to see, it is obvious that the City will never reform itself so new legislation must be put in place before all our industry goes^[3].

Whatever the talents of some individuals within it, and there are some, the City financial system is rotten and needs to be replaced.  The issue is how?  We can start with steps to protect what remains of our industries from foreign takeovers by amending the Takeover Code and giving it the force of law so that:

(1)        The foreign takeover of, as distinct from investment in, British companies designated as strategic businesses^[4] would not be approved.

(2)        Acquisitions which would take foreign control above 50% of the British market would not in principle be allowed.  (This would have prevented the Kraft takeover of Cadbury and GDF Suez’s takeover of International Power.)

(3)        All acquisitions above £100 million would be required to deposit with the Mergers and Monopolies Commission a statement detailing how the takeover will increase net UK added value and expand employment above the combined figures for the original companies in the UK.  Where the taking-over company fails to show increases in these figures in its UK operation after 4 years, it will be barred from further UK acquisitions above £100 million until it does achieve this target.

(4)        The transfer abroad of brands owned by a British company within 4 years of a takeover would be prohibited in the takeover documents agreed with the Takeover Panel.

[2] The 10% where there has been a gain include the admirable investments made by BMW in the former Mini and Rolls Royce businesses.

[3] Depending on the day of the week and time of the year, it is probable that the combined takeover cost of all 100 companies in the FTSE 100 is in the range £1,000-£1,500 billion.  This is well within the combined purses of the Chinese and Middle East Sovereign Wealth funds, all of whom are shopping for property and companies in Britain right now.

[4] A strategic business is defined here as a company with turnover exceeding £100 million to which one or more of the following applies: (i) it supplies more than 30% of its product to the UK’s military forces; (ii) its exports exceed 40% of the UK’s total exports in the relevant Standard Industrial Classification category; (iii) 50% of its turnover is protected by patents originated in the United Kingdom.

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