The foreign takeover of Britain's businesses

For over a century, Britain has welcomed foreign buyers of its industries. The buyers are still coming. Should we keep the door open? James McKeigue reports.

What's happened?

London Metal Exchange (LME) shareholders are expected to approve a £1.4bn bid from the Chinese government-controlled Hong Kong Exchanges and Clearing (HKEx). The 135-year-old LME dominates global metals trading, where its prices act as the benchmark for all of the commonly traded non-ferrous metals. That makes it a useful asset for a country that consumes 42% of the world's metal.

However, some in Britain feel that it's not a fair takeover. The LME was denied access to the Chinese market three years ago, says Damian Reece in The Daily Telegraph. Meanwhile, large shareholdings in HKEx are vetted by the Chinese government, meaning no one could buy the exchange without their approval.

Could the British government act?

It could, but it won't. "Openness comes naturally to the British," says The Economist. "The British elite has backed free trade for more than a century, partly because for a long time Britain was a world-beater." But it was Margaret Thatcher's privatisations and deregulation in the 1980s that paved the way for a foreign takeover' of Britain.

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The Big Bang' in 1986 allowed foreign investment banks to buy financial institutions in the City of London. In the late 1990s and early 2000s, European and American firms took advantage of easy credit and lax regulations to buy British assets. Then came cash-rich companies and sovereign wealth funds from emerging markets. As a result, huge swathes of the country's power, water, transport and telecoms infrastructure are now foreign-owned.

Does this matter?

Sometimes. One of the drawbacks with a foreign takeover is that British intellectual property passes into foreign ownership. It may then be developed abroad, meaning Britain loses out on the resulting jobs and wealth. Foreign corporations own 39% of patents in the UK compared to 11.8% in America, 13.7% in the EU, or just 3.7% in Japan.

In difficult economic times it's often more palatable for a foreign owner to make job cuts abroad. The Dutch takeover of ICI resulted in several UK factories being shut down. Once key manufacturing capabilities are lost, they can be difficult to regain.

The government can also lose out as foreign-owned entities are harder to tax, says Alex Brummer in the Daily Mail. Using the example of Alliance Boots, the pharmacist that was bought by an Italian firm in 2007, he notes: "Before the takeover, Boots had paid £89m in British tax in its final year as a quoted company on the London stockmarket. Now that it pays its tax in Zug [Switzerland], that figure has shrunk to just £9m." Boots has now been sold on again to an American firm.

So it's all bad news then?

Critics forget that Britain's best firms are also active abroad. According to analysts Dealogic, the total value of British firms' purchases in the last 15 years outweighs those by foreigners here over the same period. Besides, international firms buying here bring new skills and equipment that improve Britain's productivity.

The British car industry has been revived under foreign ownership and car production is expected to hit a record high in 2015 when new plants come online. Cash-rich foreign firms also have more to invest than their credit-straightened British peers, says Anousha Sakoui in the FT. "If the UK wants investment into infrastructure, then the cash is going to have to come from somewhere. Keeping the UK open to M&A could give it an advantage." If foreigners are willing to overpay in some cases for washed-up British assets, why should the government stop them?

When British tech firm Autonomy was sold to Hewlett-Packard for £7bn last year, critics complained Britain was losing a rare IT star. One year on, most analysts agree that HP paid way too much for Autonomy, whose founder now has plenty cash to fund another British start-up.

So a free market is best overall?

Some industries need protecting, says Nobel Prize economist Paul Krugman, especially if they keep important skills here, or produce something that stimulates the rest of the economy. The trouble is that it's almost impossible for governments to know which ones to support. Among the success stories are companies such as Renault and Rolls-Royce. Both have needed significant state help to survive foreign competition and have re-emerged as world-beaters.

But governments often also back the wrong horse. Recently the Obama administration lent $500m to help a US solar firm, Solyndra, compete against subsidised Chinese competition. The firm declared bankruptcy soon afterwards. Free markets are not perfect, but they do the best job.

What do other countries do?

Britain's willingness to sanction deals means it's the second-biggest market in the world for M&As, although it's only the seventh-biggest economy. This is unusual, given other leading economies have created national champions in key strategic industries, many state-owned or controlled.

Even America, supposed home of free-market capitalism, has a Committee on Foreign Investment that's intervened to prevent Chinese purchases of energy and telecommunication firms. In Europe the biggest economic patriot is France. PepsiCo's 2005 bid for Danone was blocked because the firm was deemed strategic. "State industry bosses as well as those of publicly held or family controlled companies have been summoned to the Elyse to be given a drubbing whenever they suggest closing a factory or offshoring", says Paul Betts in the FT.

James McKeigue

James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.