Buying up Britain

FEATURE: The sale of Cadbury to Kraft made many think overseas ownership of UK firms has gone too far. But plenty of businesses based here are thriving thanks to foreign investment. What are the myths and realities of our takeover culture?

by Jeremy Hazlehurst
Last Updated: 09 Oct 2013

In their 1980s classic Shopping, the Pet Shop Boys bemoaned Mrs Thatcher's privatisations: 'We're buying and selling your history,' sang Neil Tennant, 'everything's for sale.' He was right. Privatisation started with the National Freight Corporation and, through the 1980s, British Gas and British Telecom were flogged too, followed by British Airways, British Rail and British Steel. It was a signal that the UK was open for business, and we've never looked back. Soon our big companies were also being auctioned to the highest bidders, and that meant that it was often foreigners doing the s-h-o-p-p-i-n-g. ICI, Rolls-Royce and P&O were among the crown jewels that went into overseas hands. The list goes on and on. Now more than 40% of the UK's listed firms are foreign owned.

This worries quite a lot of people. Some Union flag-wavers feel that we should be a buying nation, not a selling one, and that these deals are indicative of decline, or at least that the entire country is in hock to a slightly disreputable, spivvy City culture. In 2008, Private Eye summed it up with the headline: 'UK Sold to France: A Good Deal For Britain, Says Brown'.

Others have different concerns. Alex Brummer, City editor of the Daily Mail, recently wrote a book called Britain for Sale, in which he worries that when foreign firms buy British ones they take jobs out of Britain, pay less tax and are less accountable. But is any of this true? Is it really a bad thing if our businesses are owned by the Germans or Chinese? When there is a risk that a British firm will become overseas property should we have a national whip-round, like we do when foreigners eye up our Titians?

Opponents of foreign ownership like to point to the case of Cadbury, which was bought by Kraft in 2010. It's fair to say that this was a messy deal, not least for Kraft. Before it took over the 175-year-old, Quaker-founded chocolate business in 2010, Kraft's image was of a manufacturer of yellow gunk often seen melting shinily on burgers at non-league football grounds. Overnight, it mutated in the popular consciousness into a sociopathic corporate skinhead with dollar signs in its unblinking eyes and home-made tattoos of Milton Friedman on its knuckles, stomping angrily on a Creme Egg.

Chocolate-lovers were up in arms about their beloved bars becoming American. Kraft's thick-skinned bosses - especially their hard-to-love CEO Irene Rosenfeld - threw their weight around and short-term speculators poured in looking for a quick buck. At one point, hedge funds and other hangers-on owned over 30% of Cadbury shares, leading Peter Mandelson, the then business minister, to marvel that the company's fate was 'decided by people who had not owned the company a few weeks before, and had no intention of owning it a few weeks later'.

After the deal was done, Rosenfeld went back on a promise not to close the Somerdale plant in Bristol, with the loss of 400 jobs, airily refused to attend a parliamentary select committee ('It's not the best use of my personal time,' she reportedly said), sacked another 200 staff and then coolly picked up a $22m pay cheque. Kraft decided to move Cadbury's corporate HQ to Switzerland, thus taking tax money out of UK coffers. To complete this PR pile-up, it has since emerged that Kraft is changing its name in the UK to Mondelez, a bamboozling musak-word dreamed up by some branding Frankenstein. (It also happens to be Russian slang for oral sex.) The name Cadbury will still be on the products, however, because a Mondolez Milk Tray doesn't sound very appetising. Business schools are surely writing case studies about this fiasco as we speak.

But what makes a company British? Take ICI, for many years the bluest of British blue ships. By the time of its break-up in the mid-2000s, 87% of staff were outside the UK, a third of sales were in North America and a quarter in Asia; 80% of profits came from outside the UK. So was Cadbury or ICI actually British at all? Selfridges, the Oxford Street department store whose purchase by the Canadian Weston family is decried by flag-wavers, was actually founded by an American. There was much soul-searching when the contract for the new Crossrail trains went to Germany's Siemens instead of the 'British' Derby-based engineering firm Bombardier. But Bombardier is Canadian-owned. There is nothing more British than Tetley Tea. Which is owned by Indian conglomerate Tata. When you call Tetley, the phone is answered with the words 'Tata Global Beverages'. And what about the firms that move their headquarters to Ireland for the lower corporation tax rate, then moved back a year later. Did they stop being British for a while?

Another question is whether overseas ownership is bad at all. 'If it wasn't for foreign investment, we'd have half the number of people employed in manufacturing that we do,' says Simon Collinson, professor of international business and innovation at Henley Business School. Foreign money has a 'multiplier effect' - for every job in manufacturing, five more are created in the supply chain and the local economy, Collinson adds. In non-manufacturing jobs the multiple is 'probably only one to three'. Imagine what this means for Felixstowe, where Hong Kong owner Li Ka-Shing is investing £1bn and creating 1,500 new jobs. According to UKTI, inward investment in 2011/12 created 52,741 jobs and secured 59,918 more.

A number of the arguments against overseas ownership are myths. It is not a uniquely British phenomenon. In France, 40% of the equity in CAC 40 companies is in foreign hands. In Canada, more than 50% of firms are foreign-owned. A recent Economist Intelligence Unit report notes that although the UK has the most inward investment of all G7 countries, Belgium, Ireland, Sweden and the Netherlands have more relative to their size. And this is not one-way traffic. Vodafone's acquisition of Germany's Mannesmann was that country's biggest ever hostile takeover, and Vodafone owns networks in 30 countries. Tesco owns retailers across eastern Europe, Asia and the US. FTSE 100 advertising firm WPP has already made 26 overseas acquisitions in 2012, from Slovakia to Vietnam. Other countries rarely block deals. France famously blocked Pepsi's purchase of yoghurt-maker Danone on national security grounds, and is often mocked for it. Jobs do not always fly overseas. There may be cases where manufacturing is moved abroad, as in the case of Nanjing's purchase of MG Rover in 2005, but the R&D stayed here. But that's because we are better at R&D than manufacturing.

According to a recent Ernst & Young report on inward investment, the UK is the most attractive country in the world for R&D. It's peculiar, but we seem to deride the brain-work we are good at, and want to bash metal. We're like a chess grandmaster who wants to be a WWF wrestler.

The accepted business wisdom is that foreign ownership is Good For Britain. 'We are a non-protectionist country,' says Roger Carr, who was chairman of Cadbury during the takeover and now has the same role at Centrica, adding: 'We are a trading nation, we believe in being open for business, and that means that we are vulnerable to people buying our companies.'

Michael Boyd, managing director of UKTI, agrees: 'I think it would have a serious and detrimental effect if there was prejudice in that way.' And Sir Martin Sorrell, CEO of WPP, tells those who think there should be barriers to 'be careful what you wish for. The last thing we would want is to be prevented by foreign governments from making acquisitions in Brazil, Russia, India or China.'

That's all very well, but if it is so great for a country, why are we stuck in an economic bog? Weirdly, despite widespread enthusiasm for inward investment, the many academic studies investigating its efficacy have proved inconclusive. A recent Economist Intelligence Unit report on the UK notes that although we have $1.1trn of inward investment here, amounting to a quarter of the entire EU's total, the undoubted positive effect is 'sometimes exaggerated'. Two million people are employed by inward investors, it notes, adding that Nissan and Toyota plants are among the most productive in the country. However, 'evidence for positive spillover effects are more mixed' and 'if they occur at all' are 'geographically concentrated.' Laza Kekic, EIU's regional director for Europe, says that he is 'agnostic' about the benefits of inward investment.

In some cases, even the most red-blooded of capitalists have concerns. WPP's Sorrell admits that he is 'a little bit worried when we get into the idea of selling things off to maximise shareholder value in the short term rather than looking at the long term. Britain will be made great again by building long-term businesses.'

Simon Collinson of Henley Business School sympathises. 'It is quite unusual to be so ruled by private equity groups and the capital markets,' he says. 'It happens in the UK because the City has so much power over corporates and short-term profit is so important to the City.'

It's possible to argue that keeping businesses British could actually be good for Britain, in an oblique way. One of our problems is that we have so many listed businesses, which makes our economy sensitive to short-term market volatility. Private businesses tend to stockpile money, and look to the long term because there are no outside shareholders to please. If entrepreneurs kept their businesses private, that could strengthen our economy. Anglo-American entrepreneurs often see businesses as things to be built and sold, unlike their Continental counterparts; it's more common for the latter to see a business as a potential revenue stream for their children. But if British owners could be persuaded to take a more European, family business-oriented approach, the British economy would become more diversified and more robust. More British means stronger, perhaps.

 

'The UK market is limited in size and sooner or later businesses want to grow internationally,' says Daniel Domberger.

But there's another argument: that we can actually be proud of British businesses that are sold overseas. In the context of ICI, P&O and Cadbury, overseas ownership plays into the narrative of a Britain in decline. But it needn't be seen that way. The biggest sectors for inwards investment last year, says UKTI, were software, advanced engineering and life sciences, followed by finance. The most emblematic deals done in recent years were not the Cadbury or Pilkington ones, but the sale of computing company Autonomy to Hewlett Packard for $10.2bn, and Simcyp, a Sheffield-based pharmokinetic firm - it makes software that follows a drug's progress through the body - to US firm Certara.

Daniel Domberger of Livingstone, the M&A specialist which worked on the Simcyp deal, says: 'We are very, very good at certain things and in the UK the market is limited in size and sooner or later these businesses want to start growing internationally. They get an international reputation, but they go as far as they can under the founder's ownership.' To expand further, these businesses need the money and networks that overseas owners can bring them. The expertise is in this country, so the jobs don't vanish overseas. We seem to be ashamed when people buy our businesses, but we should be proud that they want to.

We should understand our place in the world, and we should look forward, not backwards. We have - in global terms - an incredibly well-educated workforce, and we lead the world in many high-tech areas. Not every foreign owner is a Kraft. Some want to work sympathetically with us, pay taxes and do the right thing. The fact is that the world is awash with emerging economy money looking for a home. Do we really want Brazil, China and India to take their billions to Poland, France or Germany? No. We want to be able to say to them: 'You've got rich on the back of massive industrialisation and the exploitation of natural resources, so come and invest your money in a skilled, highly educated workforce in a pro-business environment.'

Or, as the Pet Shop Boys might have put it: 'You've got the brawn, we've got the brains, let's make lots of money'.

 

 

CARS, TELECOMS, UTILITIES - AND WEETABIX

 

Among British firms that are foreign owned are Lotus, MG Rover, Jaguar Land Rover, Vauxhall, Pilkington Glass, Boots, Asda, Tetley Tea, Corus, lottery operator Camelot, confectioner Terry's, and telecoms giant O2.

Two-thirds of the UK's electricity is generated by overseas firms. Australian, Dutch, Hong Kong-based, Malaysian and French companies own our water outfits. In July, Hong Kong-based billionaire Li Ka-Shing bought UK gas company Wales and West Utilities. He already owns utilities in Canada, Australia and the UK, including Northumbrian Water Group.

BAA is Spanish-owned. P&O Ports, the British Airports Authority, Associated British Ports, Tilbury docks and Felixstowe port are all foreign-owned, as are London landmarks The Dorchester, The Savoy, Selfridges and Harvey Nichols. Barclays Bank was, arguably, only saved in 2008 by an injection of Qatari money.

Our railways funnel money to owners in France and Germany, while High Speed 1 is owned by a pair of Canadian pension funds. HS2 is also likely to have foreign owners. Manchester United, Manchester City, Aston Villa and Birmingham City are foreign owned. Occasionally, some odd deals get thrown up too, such as the recent sale of Goals Soccer Centres to the Canadian Teachers pension fund, a deal estimated at £77m.

Notoriously, when Kraft was bidding for Cadbury, some of the money for the deal was put up by state-owned RBS. That a bank owned by the British people was helping a US firm to aggressively take over a much-loved British business did not go down well.

Perhaps even odder is the fact that Deutsche Bahn, owned by the German state, bought train operator Arriva in 2010. Thus part of the railways privatised by the British government was effectively renationalised by the German government.

Some of the biggest activity is, not surprisingly, by the Chinese. They are said to have $3.2trn to invest overseas. That Weetabix recently became Chinese is a sign of the times.

China is also moving into British utilities. Its state-owned oil company CNOOC is poised to take over Canadian business Nexen for $15.1bn dollars, which would give it control of the biggest-producing North Sea oil field, Buzzard, among others. Another state-owned Chinese firm, Sinopec, is taking a 49% stake in the North Sea oil business of another Canadian firm, Talisman. China, therefore, will own 8% of oil and gas production in the North Sea.

Can we expect to see more Chinese acquisitions? Vincent Huang, a Hong Kong-based partner in private equity firm Pantheon, says that as the Chinese economy has slowed the government has encouraged firms to acquire overseas. What Chinese companies want, he says, are 'knowhow, patents and brands', but Italy is the go-to place for luxury brands and Japan and Germany have more manufacturing nous.

'I don't think the UK is high on the priority list,' he adds. Good news?

 

 


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