The recent news of Pfizer’s (NYSE:PFE) prospective takeover of AstraZeneca (LSE:AZN) has had me contemplating what governments should do (if anything) about this. There have been wide calls in the media and by the public in the UK for the government to block any takeover as it would put British jobs at risk and it’s not in our national interest to sell our best assets to foreigners.
I have some sympathy with this stance, for instance when Kraft (NASDAQ:KRFT) took over UK chocolate giant Cadbury a few years ago it promised not to close the main British factory where the chocolate was manufactured. After only a year or two it had broken its promise and the factory was closed and moved overseas. The media and public are still bitter about this. It seems obvious in a free market that mergers lead to job losses and synergies, and when one side is bigger than the other it’s no surprise where the redundancies will take place.
But I am also a believer in the free market. If the government interferes with the markets and blocks takeovers and mergers with foreign businesses this will do damage to inwards investment in the country. Investors looking for a suitable country to invest in will be put off if they know beforehand they will only be able to ‘cash-out’ to buyers within that country instead of getting the best price globally.
There is also the argument that mergers and acquisitions are good for the economy, they make businesses more efficient, bring economies of scale and synergies. But there is a limit, as they naturally tend towards monopolies which is where governments need to step in. For example the domination of a few major banks in most countries is what led to governments being essentially forced to bail them (and taxpayer deposits) out.
Pfizer is a $200bn company, and AstraZeneca is a $100bn company – this is not a fragmented industry where the consumer benefits from companies like this merging and cutting costs. The pharmaceutical industry currently has a reasonable range of large players, and only 10 have sales of $10bn or higher. All are competing with one another. It is in the public interest to keep competition in this space high because not only does it bring the cost of drugs down, but it also drives the advancement of medicine and our health in general. Synergizing research & development does not necessarily lead to better drugs, it just improves profit margins.
But I am also drawn to the example of Tata Motors, the Indian company that took over Jaguar Land Rover in 2008. Of course it was owned by Ford at the time, but even if it had been in British hands it is hard to argue against the benefits it has brought to the British economy. Tata has injected a lot of capital into JLR and has been expanding rapidly. The UK is now one of the leading car manufacturers in the world with JLR right up there with the numbers employed in the UK.
US foreign investment policy
As I said previously, countries need to be careful when blocking takeovers not to hurt investment into the country. But it can be done – Canada often blocks takeovers not in the national interest and the US itself has been known to. Also no country allows foreign takeovers of its defense companies. This is an issue commonly referred to in the media, however few address one of the biggest factors affecting the current wave of M&A activity and that is US tax policy on foreign earnings.
It is a policy that is incredibly effective at keeping money out of the US and has some benefits for the US as a whole – yet I have no idea if that was its original intention or if it was merely a tax revenue raiser. It gets most of its criticism from the US media because of its costs to individual and corporate investors.
The foreign earnings of US companies can currently be held off-shore tax free. If they are repatriated they are subject to a 35% tax. Critics say this blocks inward investment into the US as it keeps money abroad, which is probably true, but for big companies like Pfizer not so much. Its money would likely just be paid out to shareholders.
It essentially forces companies like Pfizer with large cash piles to spend it abroad – buying up foreign assets and businesses. This isn’t so much “investing” in other countries so much as buying all their assets and leaving them with a pile of cash. There are benefits to your country owning assets in countries throughout the world. It gives your country’s companies a lot of power over the economies of others, and in a way incentivizes those countries to ensure yours does well too – their prosperity now depends in part on yours. You also have more revenue sources open to taxation.
China has long had a successful policy of loaning money to the US (i.e. buying treasury bonds) then using some of those treasury bonds to purchase fixed assets in the US. It now has earning assets throughout the world, and the US just has a pile of cash which it will soon burn through and come back for more. Long term it isn’t hard to see who comes out best from this.
These large cash piles held abroad by companies are the reason for so much M&A activity by US companies.
But there is a sting in the tail, because Pfizer in particular is now considering moving its “home” from the US to the UK – one of the main reasons for the attempted takeover of AZN. Whilst it won’t make much difference to tax revenues in either country, it does send a strong signal that multinationals are being put off by the high taxes in the US and are drawn to the sub-25% tax rates in Europe. Long term this could damage the US economy.
I do not believe in a pure free market, there are many ways in which markets fail and governments need to regulate and step in. I think big mergers such as these are examples of this. The consumer rarely sees benefits from mergers and takeovers of companies worth $100bn and over, and if it puts British jobs at risk then the UK government should look after its citizens.
But I think each case needs to be assessed individually, and clearly there will be cases where the company taking over intends to inject capital into the business and invest in growth. Unfortunately these are more the exception than the rule, and when companies are almost forced to find investments abroad like Pfizer is, they are probably most interested in the bottom line. This article gives a good description of the soaring cost of drugs and why fewer drugs companies will likely make the problem worse.
As a member of the public I have to side with the greater good over investors on this one; more drugs companies is a good thing, it means more innovation, competition and hopefully cures to more and more diseases and conditions.
Disclosure: Author has no positions in AZN, PFE or KRFT.