Globalisation received another serious wounding on Monday as US President, Donald Trump signed into law a ‘bill’ that will vastly increase US government powers to block takeovers of US companies by foreign owned entities.
The US has previously acted to halt Chinese investment in US oil and energy companies but in the name of increased scrutiny, the bottom line from the new law is that taking over a US company just got that little bit harder.
Backed by both Republicans and Democrats the new US law which, in the name of protecting national security and national interests, greatly expands the type of M&A deal that was already subject to review by the Committee on Foreign Investments (CFIUS). Importantly, my understanding is that the new law will also increase US powers to review not only overseas deals but also proposed joint ventures.
Clearly aimed at preventing takeovers of US companies by China, the US move which will impact on all countries seeking to do M&A deals in the US is another example of the US battening down the hatches to prevent critical technology and infrastructure falling into foreign hands.
I am not sure what US investment banks think about the law but as far as I am aware there has been little if any lobbying against it. However, it is worth noting that the new law has the potential to reduce the number of merger and acquisition (M&A) deals that occur in the US meaning that it could have a material impact on Wall Street firms as well.
While some might well say that, particularly with the number of foreign takeovers of US companies having already fallen over the past two years in anticipation of the new law, this is no more than shutting the gate after the horse has bolted. Well, that would be far from the truth as there are still a great many large and powerful US entities, particularly those in fields of technology, energy, services and manufacturing, that could still be regarded as being vulnerable to takeover by Chinese and other countries.
The largest buyers of US debt, I suspect that the Chinese will now look to invest in the US in other ways if they can.
This brings to mind already expressed concerns over the possibility of allowing China to potentially invest in nuclear power plant developments in the UK or other energy, communications and transport related infrastructure projects. The UK Government has already expressed deep seated concerns over allowing China to fund or buy its way into critical infrastructure projects and to that end has, somewhat belatedly, now initiated a new form of national security test for foreign takeovers.
Our larger defence companies apart, suffice to say that Britain has for far too long lacked sufficient powers to block foreign takeovers. Many of what we used to call Utility suppliers – electricity, gas, water and communications – are already foreign owned.
Suffice to say here that as far as I am aware Britain is probably the only OECD country that would, as we currently stand, allow a country such as China to buy into, fund or actually own critical infrastructure projects in oil, energy, transport and communications, including of course, other planned nuclear power development projects.
True, China has also been very adept persuading foreign companies to invest in development of new higher value industries in China and has been particularly clever persuading them to agree technology transfer agreements which in turn have been adapted to create what then most often becomes Chinese owned Intellectual Property (IP).
One small example of this that springs to mind and that shows how clever the Chinese are in respect of acquiring IP for virtually nothing, came six years ago and that had its roots in an original investment made by Geely Corporation into the London taxi maker, Manganese Bronze back in 2006. Within five years of the original investment being made by Geely, the vast majority of parts for taxi cabs being produced in Coventry were being supplied direct from China.
Then, whether by actual design or not, disaster struck following a sudden spate of fires in new taxis, the result of failed Chinese produced components. This led to production being halted at Coventry until the problem was resolved. Made worse by Manganese having failed to make a profit for several years, the halt in production proved to be the last straw for Manganese Bronze Holdings management, bankers and investors, and the company was forced into administration in 2012. Geely, which of course already owned 20% of Manganese Bronze Holdings, wasted little time in buying the remainder of the shares from the administrator. The rest is, as they say, history and although it is true that there has been investment in Coventry and also that the new electric TX taxi is being ‘assembled’ there from imported Chinese parts, it is China that now owns the IP.
To answer your natural question here as to whose fault that was, not the UK government either or indeed, the company management imperfect though they sometimes had been, but I would blame the system of previous ownership structure that prevented consideration of long term investment.
(Note: some readers may be interested the final paragraph in relation to Manganese Bronze history – see end of this piece).
So what is the Government doing to ensure that we protect ourselves from unwanted foreign takeovers or indeed, as in the most likely scenario that followed the successful hostile takeover of GKN by Melrose earlier this year, breaking it up?
The answer is a little but not that much. In proposed new legislation the government says that it expects to review 50 foreign takeovers a year on the grounds of national security compared to just one that it examined on these grounds over the past two years. When and if the legislation occurs the proposal is that the current £70 million annual revenue threshold before an attempted takeover of a company could be stopped would be abolished.
But while the planned new arrangement would allow scrutiny, provide some element of protection in relation to national security concerns and give a degree more protection to small and medium sized enterprises, they do little more to alleviate concern that more UK manufacturing and service based IP can’t easily be transferred abroad. Neither do they do anything to interfere with the free market or stop a foreign company closing UK subsidiaries that they might happen to own here.
The US is certainly not alone in protecting what it may wish to define as corporate based national interests, Germany, Australia, Japan, most Gulf Region countries and even China have laws in place designed to protect what they define as being companies or activities that are deemed to be in the national interest and to that end are required to be protected from foreign takeovers and France does it best to halt any foreign takeover.
There is of course a line to be drawn in respect of what is and what is not in the national interest. Ideally, there needs to be a level playing field for all as, to a greater or lesser extent, there is in respect of defence companies being protected on the grounds of national interest by most countries.
But, as we leave the EU we in Britain need to shore up our defences and ensure that we protect not just our national infrastructure from being acquired by foreign concerns but also consider IP ownership, employment, exports and the value that each bring to the national economy as also being important national interest factors.
(Note: – Older hands will remember that the history of Manganese Bronze and from which the name of the sintered components arm [Manganese Bronze] was taken for the holding company, had been inextricably tied up in past ownership of what remained of the Birmingham Small Arms company [BSA]. During the 1950’s under the chairmanship of the late Lord Docker, BSA had also owned Daimler Cars [now part of Jaguar Land Rover]. I live in hope that the fascinating board room minutes from that period and that contained so many references to the high personal expenditure of Lady Docker and her ‘gold-plated’ Daimler car and Lord Docker’s defending of these and which, having seen them myself, I know had survived under the tenure of then CEO of Manganese Bronze of Jamie [now Lord] Borwick until 2001, are in safe hands.)
CHW (London – 13th August 2018)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785