Is the UK too open to overseas takeovers?
Data shows that the UK is more open to overseas takeovers than other major markets. John Stepek asks: should investors care?
Just a reminder to save the date for Saturday April 30th, when Merryn and I will be interviewing Russell Napier at the new Library of Mistakes venue in Edinburgh. I’ll put a booking link in tomorrow’s Money Morning.
A topic of perennial (and heated) discussion in markets is the idea that the UK is too open to takeovers.
Other countries appear to take a somewhat more protectionist view towards national champions. Whereas in the UK, if you've got the money and you want to buy the company, you can have it.
That's the perception anyway. And you know what? The hard data - as pulled together in a recent Schroders report – indicates that it's correct.
The real question is this – does it matter?
The UK really is more open to overseas takeovers than other markets
In the 10 years to the end of 2021, about a third of the UK's major listed companies have vanished, notes Duncan Lamont at asset manager Schroders. Of those, more than half went to overseas buyers.
That might sound like a lot of companies but overall, it's not particularly unusual. Lamont notes that the US saw a similar level of companies being taken over or otherwise disappearing from the market.
However, where the UK does stand out is in its open-door policy towards overseas buyers. In the US, most buyers of US listed companies were other US listed companies. In France only 30% of companies that delisted went overseas. Germany was even lower, at 25%.
But in the UK, the figure stood at 54%. And that's just by number. In terms of value, it's closer to 70%. The biggest buyers were US companies. And for all the recent hype about them, private equity companies remain relatively low on the predator list, scoring just 11% of de-listed stocks.
(This is all based on MSCI indices of major stocks in each country, by the way, which are similar-ish though not identical to the headline indices in each country).
So what drives the gap between the UK and everywhere else?
Lamont argues that it might partly be down to the UK's past success at "attracting overseas companies to list in London". Because these companies are already largely based outside of the UK, they are more likely to appeal to multinationals.
He notes that delistings in the energy and materials sector account for a larger proportion than their weighting in the overall index, which implies that there's something to this theory.
Equally, though, it might be partly driven by the fact that companies listed in the UK look cheap relative to similar companies listed elsewhere. This UK discount – driven to a great extent by the post-Brexit shunning of the UK – is persistent across sectors. And it might be presenting overseas investors with some appealing opportunities.
"Potential buyers are assessing that the valuation of some companies is being adversely affected by them being listed in London. And that their true, unimpaired value may be higher," as Lamont puts it.
If you can't beat 'em, join 'em
So back to the original question: does this matter?
One irritation that private investors often have (and one I sympathise with) is that a takeover sometimes happens at the worst possible time. You own a great little company, everything looks bright, you're looking forward to a long and profitable future together... and someone swoops in and gobbles it up.
There's no doubt that this is a real issue. I suspect you've all seen instances where a decent company is taken private by a founder frustrated by dealing with the City, say, or where a promising disruptive stock is snapped up by a bigger fish, then crushed or assimilated.
The existing shareholders (usually) get to sell out at a premium. But they miss out on their opportunity to share in the future value such companies create. That's frustrating.
However, as Lamont points out, at the aggregate level, takeovers tend to be better news for sellers than for buyers. Much as it's irritating to have a promising company snatched out from under you, we also all know that takeovers usually deliver fewer synergies than promised and are often the result of over-exuberance and empire-building delusions.
So overall, it's hard to argue that the UK's rather permissive attitude to takeovers is doing investors any harm.
Rather, says Lamont, the real potential long-term harm is to the UK economy, because at the end of the day, finance is still an important industry in Britain, and if the City becomes a less attractive place to raise money, then that has a knock-on impact on the tax take and the economy.
We can also discuss the longer-term problems of being seen as an economy which is fine for small businesses and start-ups, but which you have to leave if you want to develop at scale.
However, for investors, none of this is within your power to change. So overall, to my mind, this is one of those "if you can't beat 'em, join 'em" stories. It would be nice if Britain's potentially world-beating companies could remain on this side of the Atlantic (spiritually if not physically).
But if the UK attracts an irrational valuation discount, you have to expect investors in a free global market to take advantage of that. And you might as well take advantage of it too. That's the whole point of free markets – to price things efficiently.
Of course, there's no point in buying stocks simply because you think they might get taken over. You should be focusing on finding companies that are good, and that are cheap. But if you find a good, cheap company, you can be pretty sure that those two traits also make it a tempting takeover target for someone.
It's also just another good reason to put at least some of the equity portion of your portfolio into UK stocks, as we've been arguing you should do for quite some time now.