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Saturday Feature
Nationalism undermines clout of European corporate sector
Philip Coggan

          Europe is going American. Late last month's announcement of a euro29bn bid from Eon, the German power group, for the Spanish utility Endesa, is the kind of deal that would be standard on Wall Street.
But in Europe, it raises concerns (and hopes) that the continent is being taken over by the "Anglo-Saxon model".
There are three possible reactions to the proposed deal. The first, immediately uttered by a Spanish government spokesman was nationalism. "We will do everything in our power to ensure that Spain's energy companies remain Spanish," he said.
The second response is to see this bid as an encouraging sign for Europe. Governments may have been slow to introduce economic reform but the corporate sector, particularly in Germany, is getting on with it.
Globalisation and shareholder pressure are forcing businesses to cut costs and earn a decent return on capital. The "creative destruction" unleashed will make Europe more productive and thus increase economic growth, to the benefit of the majority of European Union citizens.
The third response is to look at the academic evidence on acquisitions (most fail to deliver value) and suspect that the current merger mania is driven by executive grandstanding, the availability of cheap finance and the lack of alternative options for long-term growth.
It is tempting to dismiss the nationalist argument out of hand. At its most ridiculous, the French recently seemed to be suggesting that Danone, the foods group, was a "strategic interest". In the event of war, the French feared they might be denied access to yoghurt.
The other problem with the nationalist approach is that countries that employ it are prone to hypocrisy. The Spanish did not seem too concerned about cross-border takeovers when Santander took over Abbey National, or when Telefónica acquired 02, and it is hard to imagine Spanish mention of the importance of national control of strategic industries if and when Ferrovial, the construction group, bids for BAA.
Of course, there may be a fuss in the British press; already, there has been talk of a Spanish armada. But I think we can safely rule out the idea of Tony Blair, the prime minister, doing "everything in his power" to ensure BAA remains British.
This raises the question of whether the British have prospered by allowing some of their most important businesses to be taken over by foreigners. The classic example is the City, where investment banking is entirely a foreign-owned business and fund management is becoming so.
Yet the City remains as prosperous as ever, bringing in vast amounts of invisible earnings. The threatened move to Frankfurt never occurred; London has the critical mass to retain its status as one of the world's most important financial centres.
Could energy be a special case? One need only look at the recent dispute between Russia and Ukraine to see that it might be. If a company from a potential hostile country takes over your gas supply, there may be reason to worry. But this is hardly the case with Germany and Spain.
There does seem to be a problem with European energy policy in that Britain is unable to get access to all the gas it needs; for some reason, producers in other countries are not supplying gas at high prices, perhaps because they want to retain the ability to meet demand in their home markets.
This is just the sort of problem the European Commission is supposed to deal with and it has accordingly launched a probe; if it fails to take action, the nationalist case will have more validity.
By and large, Britain does not seem to have suffered from an open house approach to foreign investment. The "winner's curse" in auctions means the chances are that foreign buyers will overpay, to the benefit of British shareholders. To the extent that merged companies do achieve economies of scale and make businesses more efficient, the UK economy should benefit as well.
This should even be the case, in theory, if foreign countries do not reciprocate and let British companies buy their businesses. After all, that would save British buyers from overpaying for foreign assets and would prevent overseas countries from benefiting from efficiency gains.
What about the argument that most acquisitions appear to be mistakes? The promised "synergies" are rarely achieved and there can be clashes of culture within the merged groups. The main beneficiaries are the executives in the predator company (who get bigger salaries) and the investment banks who advise on the deal.
The problem is what happens in the absence of takeover activity. In markets where takeovers have been discouraged (Japan, pre-2000 Germany), managers can become complacent and can ignore measures such as return on capital, chasing low-margin sales or financing ill-conceived new projects.
Takeovers provide the corporate sector with their Admiral Byngs, the British naval commander shot by his own side, as Voltaire put it, "to encourage the others". The threat of a bid is a spur to better corporate governance.
Europe does not have the inventiveness of the US economy nor the low costs of Asia. Creating "national champions" in such a climate is a foolish diversion. It is time for Europe to take advantage of its continental scale and not allow petty nationalism to block the restructuring of its corporate sector.


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