Tuesday, 13 April 2010

Two cheers for Labour's Cadbury law

The Labour party in the UK has announced a “Cadbury Law” as part of its election manifesto. This was motivated by the aftermath of the Kraft takeover of Cadbury. It has many good and some bad features and can potentially be a model for takeover law in many countries.

The broad proposals are as follows

- M&A transactions have to be approved by a two thirds majority and not just a simple majority.
- People (read hedge funds) who buy shares in the target after a bid is announced would be barred from voting
- A “national interest test” is being considered to prevent foreign takeovers in vital industries” – defence, utility, infrastructure being thought of as “vital”

In the red corner in fervent defense of these proposals are the Labour party, obviously, the Confederation of British Industry and Unite – the powerful Trade Union.

In the blue corner, opposed vehemently to this are the Conservative Party, obviously, and the Association of British Insurers. Silent, but presumably in this camp are all the hedge funds, speculators and assorted punters. Silent and sitting neutral are Britain’s Takeover panel (the body that oversees takeovers) and presumably the Liberal party.

I am vigorously in support of the first two proposals and strongly against the third. Hence the two, rather than three cheers.

Firstly I completely support the requirement for two third’s majority. That is a principle that is fundamental in many political democracies. Game changing issues require two third’s majority; simple issues can be passed with a simple majority. Something as fundamental as a takeover, that could potentially extinguish a company should not be taken lightly. It requires a broader support that a simple majority. The argument that such a provision will make takeovers difficult in the UK and that it would protect failing management is humbug. If the case is strong, it will achieve two third’s majority. If its weak, it doesn’t deserve to pass. No consistently failing management can achieve a blocking 34% support.

I defy any rational person to challenge the second proposal. This blogger has railed in the past against the practice of hedge funds buying up huge stakes in targets, clamouring for an increase in the bid and then forcing the target to accept the bid so that they can cash out profits – all under the threat of law suits if they did otherwise. These speculators deserve no sympathy and certainly not voting rights.

Unfortunately Labour has sullied its hand with the spurious “national interest” proposal. This is daft. There is no national interest in roads or power or for that matter BA. This proposal is just a throwback to the days of the public sector, where without competition, Britain’s dinosaurs were just awful. And we have the old problem of defining what is a British fund or a British bidder. This proposal deserves to be trashed into the dustbin.

Notice that an election manifesto contains such well thought out issues, which you may agree or disagree with, but indicates the level of maturity of Britain’s politics. Contrast this with India’s homegrown variety of elephant statues, free colour TV, loan write offs, free power, sacks of cash ….. Or with China’s complete absence of debate on any policy ….


ambulisamma said...

Agreed that manifesto has well thought items like these,but still this can also be a election action since the public interest test and the definition of points by takeover panel are considered post election,and this could be to attract those patriotic voters.
Believe they would be upto what they say "Future fair for all".

And how dare you consider indian election manifestos even,its sacrilege.

Ramesh said...

@ambulisamma - That's typical Labour philosophy ; so not just election stunt to have national interest as a criteria. They are New Labour, but still Labour !!

sandhya sriram said...

atleast in India there is a huge gap between the manifesto and what is actually executed. so that is a piece of junk

but i guess it isnt so in the developed nations and i think as you rightly said, quite commendable to have considered this as a part of their agenda.

three cheers to you or rather three thousand cheers to you for bringing up a new perspective to even a mundane piece of news like an election manifesto.

Deepa said...

Indian elections are simply a month long national event (I cant think of an English word meaning- Jalsaa). Loudspeakers, crowds, bhaashans (speeches), free liqour, free cash, and free trash! When I saw the Presidential debates in US on youtube, I was wondering, how many years or what kind of revolution would bring us to this stage! Although, I have to admit that I have just seen American campaigns, and now you've spoken about UK too. But even if I say we are better off than our other Asian brethrens, the fact is, its a wrong standard we are comparing ourselves to. China is not a democracy and the rest are still struggling to decide what they are.

About the last point, I think they should keep a tab on takeovers in Defense and Security related industries. Rest of the items in that list can surely get crossed out.

Ramesh said...

@sandhya - there is a huge gap everywhere. Elections is all about promising the moon in every country. But there is some sense of responsibility in the UK certainly; I believe more than in the US.

@Deepa - Yes, defence is understandable. Everything else must be fair play. I believe the US political system is just deteriorating rapidly. You only have to listen to Sarah Palin to realise that what depths they are plunging into.

Deepa said...

Well I don't want to judge them yet based on one Sarah Palin. She was a horrible blunder. You only have to hear her to believe what a joke she is. And we do have our dear Mr. Bush too. But debating and proving your points one on one in a quite and attentive is still a respectable way of campaigning. Thats the only way they found out that, Ms. Palin couldn't pronounce the world 'nuclear' correctly! :D

zeno said...

Free power???! yeah with more than fifty percent of it in power cuts!

RamMmm said...

@zeno-Free power? Did you hear that clearly? They would have said free power [cuts] and the word 'cuts' is cut. It is like Krishna blowing his conch at the right time to defeat Drona in Mahabharatha as Yudhishtra says Ashwathama [the elephant] is dead, which Drona thinks as Ashwathama, his son is dead.

@Ramesh-No issues on the first two. On the third point, other than defence, which seems obvious, infrastructure could have meant airfields, nuclear power stations et al which anyway some degree of tight control. Even if they do the test, obvious lowlies like roads and non-conventional power etc will pass muster. (I am yet to see a private large dam though for hydel power, they would be eco-jacked) Even in telecom, there is distrust, e.g. Huawei equipment not considered in certain bids due to their supposed hidden funding from China.

J said...

I know you love to hate the hedge funds but I dont agree with denying shareholders voting rights if the company they buy happens to be in merger talks. One, because these talks can take several months and two, many times the talks fall through but you don't that going in and so the voting restriction was wasted. But you may come back and say that only the actual merger vote will be restricted but there are other things that can be put up for vote that can affect the merger outcome even though they are not explicitly about the merger so what issues will these new shareholders be restricted from? Also this would ensure that nobody will want to buy the stock after the deal is announced driving down the liquidity and stock price of the target, which is not a desired outcome if you are a target in a merger. I have a harder time quibbling with 50% vote versus 67% since these are both arbitrary in some way in any case. To target hedge funds yo need to show clear harm to original shareholders in the long run and that has not been established. In fact there is evidence to the contrary and the explanation is that they are able to put together enough of a voice against underperforming managers. I am sorry if I sound like too much of a right winger - that is clearly not the intention but we need to have strong evidence before government can step in and change how firms do business. If there is some regulation required, I am all for it as in the financial sector.

I read somewhere that the whole idea of classifying utilities as "national interest" was to protect a UK energy firm Centrica from takeover interests by Russia's Gazprom. What an uproar that would cause in the UK!

Ramesh said...

@Deepa - The less said about Ms Palin, the better !

@zeno - Even the 50% free is an atrocious gimmick.

@RamMmm - Notice that "national interest" usually comes only when somebody is uncompetitive. Why should we as citizens subsidise uncompetitive entities, unless its in a direct national defense area. For airfields say, let it go to the most competitive bidder irrespective of nationality and do we really care ??

Ramesh said...

@J - Have to disagree on the voting rights issue. There is a clear conflict of interest for speculators who buy after a deal is announced and are only interested in maximising the short term gain. Sure, the bid period can be long and so what if the liquidity during that period is curtailed. Actually I don't think it would be any less liquid - nobody is stopping the speculators from speculating; its just that they cannot vote on this matter. I am nor sure of whether there is research that the actions of such hedge funds are detrimental to the original shareholders - But the original shareholders should have the right to decide, not the punters. Sounds left leaning, but I have seen the impact of these vultures all too often. How many people get hurt; how many institutions are destroyed by raiders purely focused on the immediate term. I am afraid I have zero sympathy for them. At heart I have some "pink" if not "red" !!

J said...

Okay let me take one more shot at this. You are assuming that all new shareholders are "speculators" and "punters" which is where I think we disagree. Further, when you talk about destroying institutions and hurting people, are we talking about the incumbent shareholders? If yes, and if there is evidence that shareholders are indeed hurt, I am all for regulation. But if it is because a 100 year old company ceases to exist, we cannot get sentimental about the institutions - they may have outlived their purpose. Most of the time the people most affected are management (limited sympathy) and maybe employees (a lot of sympathy). There could be rules on minimum severance pay for employees (NOT managers) when the firm is taken over and the new acquirer downsizes.

Vishal said...

Very valid points, Ramesh!

Tend to agree with Deepa that keeping a tab on few key industries might make sense but not all of them. I am in for your zero sympathy for hedge funds. Voting rights are just too much to offer them in such scenarios.

Ramesh said...

@J - Love this debate and can understand your views. Firstly why would a new shareholder come into a company that might seek to exist unless he's a ounter.n Especially since a public bid is likely to be higher than the prevailing share price before the bid. I submit the only guys who come in are speculators, because of the likelihood that the price is inched up.

The hurt bit is a wider rant. The original shareholders are most likely to benefit if its an all cash deal. But if its a part shares deal, they benefit by not being wildly overpaid. Like you, I would have little sympathy with senior management. But as you know even middle and junior management get killed. Employees are a big casualty as "synergies" are usually large. If its a leveraged buyout as it very often is, the entity is broken up, sold in bits, saddled with huge debt and crippled - see the fate of Manchester United. Customers are often jacked - despite all is said and done anti trust law is not really effective in many parts of the world. The law is all in favour of the target company shareholders - an open tender offer has to be made to everybody; all bids have to be publicly disclosed; etc etc. I know this is all unsubstantiated statements - research probably shows the opposite. Sentimentality should have no place in business. Unfortunately, in old age, nostalgia clouds the thinking !!

Ramesh said...

@Vishal - See J's alternate point of view which is compelling. Sometimes villains who look like villains may not be all that bad !

Anonymous said...

@J & Ramesh- I am just delighted by sitting on the fence and witnessing a superb debate!


A journey called Life said...

I totally love all the info that has been going back and forth..

PS: Deepa will sit along with u too :)

Btw Ramesh: whatz with the profile pic (gravatar as its called)??

ambulisamma said...

Not sure if you would accept it,visit my page for more info,and ur profile image is quiet amusing.

Ramesh said...

@ambulisamma - I am honoured. Leaving a big thank you on your page.

@AJCL / ambulisamma - Such is the blissful freedom I enjoy here that to change the profile photo I have to go to a neighbouring country !! I was in Hong Kong today and since you ladies have bestowed a honorific title on me, I considered it , but natural, to gravatar a photo of that immortal man after whom I have been nicknamed :)

ambulisamma said...

Hongkong is not other country though,if am to be politically correct(its SAR but still).
Jolliya oor suthareengala,ensoi...

J said...

Now you are resorting to intimidation tactics with your profile picture :) How can I dare to disagree with someone like the great TKT!

Ramesh said...

@ambulisamma - Technically yes, but the Net nanny has kindly spared the SAR.

@J - Ha Ha

ambulisamma said...

enjoy your freedom from net nanny to the fullest,believe you are still in HK.

gils said...

tkt profile pic gummus :D :D

gils said...

Goundar and senthil reads indigoite blog...after reading the post senthil asks goundar something.
goundamani slaps senthil...
"athenda enna paathu antha kelvi keta"
senthil gives one appavi look. After sometime goundar goes restless again and slaps senthil..."adai berikka mandaiya..intha posta ethana per padichirukanga...kiwi bloke..deepa..sandya..ambulimaama..rammm..ajcl..athivasi..J k l m n o...ipdi ithana per padikaraangala..avangaltalam kekama athenda enna pathu keta.."

gils who was silently watching all this..asks goundar..unable to resist the curiosity any further.

"apdi ennathanne ketaru"
TKT "ipdi shaky laws pathi post mela post podraray..apdiye shakeela pathi post poduvara nu enna paathu kekaran..baduvaa"

Ramesh said...

@Gilsu - OMG. ROFL. Gils is in total form. For those uninitiated in Tamil movies, gils' masterpieces refers to some well known slapstick comedians cracking a non vegetarian joke !!

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