Review the sell-off of great British companies

The dominant logic of the last 30 years is that mergers are good for the companies involved, the economy and consumers. Thus the mega-takeover by Kraft of Cadbury for £11.6bn (€13.3bn, $18.9bn) must be good news. But such simplistic assumptions are questionable. Recent academic work shows mega-mergers, which make up 43 per cent of all money spent on acquisitions, destroy value. In the US between 1980 and 2007 mega-mergers lost, in aggregate, $413.5bn. When a hostile bid was involved, overpayment led to a 14.9 per cent loss of value.

The odds of Irene Rosenfeld, Kraft’s chief executive, joining Jerry Levin, head of Time Warner, and eventually apologising for the Cadbury deal – as he has of his disastrous takeover of AOL – are high. Kraft is paying £2bn more than planned and up to £4bn more in debt. So why do it? The answer from the study cited above is managerial hubris and weak corporate governance.

Britain has never taken the issue of ownership seriously enough under governments of every political hue. The story is that we are open for business including foreign hostile takeovers, whatever the cost to the national interest. As evinced by English football, our watchdogs are poodles, blind to the well-being of our great businesses, the wider community they serve and deaf to the intentions of new owners.

This liberal openness is a great asset, but it must be proportionate. Ownership matters. Cadbury represented a successful and more value-driven approach to capitalism that is now lost. Kraft is another gigantic corporation hacking out its quarterly earnings growth through relentless standardisation, reducing consumer choice – look at the range of cheese in any US supermarket.

Nor is that all. Value will have to be created somehow. After such acrimony Kraft will enter Cadbury like an occupying army intent on doing what it must to deleverage fast – the clash of values, people and strategy that is so destructive after hostile bids. The interest on the debt used to buy Cadbury will be set against profits in the UK or in whatever jurisdiction or manner Kraft decides to declare its new profit stream for tax efficiency. Another part of our tax base has disappeared, and the UK taxpayer will have partly paid for the privilege.

The UK confectionery market is now dominated by multinationals, making it harder for smaller rivals. There is little redress for them, as weaknesses in our competition regime have ruthlessly exposed. The Office of Fair Trading has been rebuffed over bank charges where it had a clear case; the Competition Commission lost on a technicality over the disposals it wanted from airports operator BAA; and the European Union moves slowly and only in extremis. The entire regime is a fly-blown charter for gigantism, oligopoly and seekers of economic rent. In short the deal is bad for Cadbury, competition, consumers, the tax base and future entrepreneurs. There are just two winners: bank advisers now £250m richer and Ms Rosenfeld – at least until the bid goes wrong

In fairness, Lord Mandelson, business secretary, recognised some of this, hence his intervention; but without action or reform it is empty rhetoric. It is time for a wholesale review of corporate governance, shareholder responsibilities during takeovers, tax treatment of debt interest, the incentive structures in asset management and competition rules. The takeover code allows the hostile bidder to undermine a company’s shareholder base; the competition rules are ill-interpreted and toothless without a public interest test for mergers and buy-outs; the tax system needs to be more neutral between debt and equity; and institutional shareholders need incentives to engage with management.

Takeovers are a crucial part of capitalism, but the current regime is a charter for a great sell-off of British assets. The rules of the game are tilted to favour hostile takeovers. Too many great UK companies have disappeared – Pilkington, Corus, BOC, BAA – and the calculus of long-run damage is too little assessed in public policy. The fate of Liverpool and Manchester United football clubs after leveraged takeovers is a terrifying warning of the risks. We call on both main political parties to even up the odds – and only then let capitalism do its work.

Will Hutton is executive vice-chair of the Work Foundation and chair of the ownership commission. Phillip Blond is director of ResPublica

This article first appeared in the Financial Times on the 21st of January 2010.