The Prudential, the insurance giant, has just announced it plans to buy AIG’s (the failed US insurer’s) Asian unit. This bold move is good news for Britain.
Over recent years practically the entire UK chemical, steel, investment-banking and utility industries have been sold out to foreign buyers. So it’s great to see a British company going some way to redress the balance.
Let’s hope that this marks the turning point of the great UK plc sell off…
What does foreign ownership of UK companies mean?
You could say whoever the owner of a company is, it doesn’t make a difference to the underlying business itself.
A foreign owner doesn’t want to wreck it’s acquisition anymore than a British owner would. And for customers, I guess it doesn’t really matter too much if your trains are mismanaged by the French, or the English. Who cares if your electricity bill comes from Electricité de France, or your water bills from a German company.
Well, maybe we should care. On the continent they do. The French have identified 11 industries that are protected from foreign takeover. They even fought the takeover of a yoghurt maker! While in the UK we sell off our nuclear energy producer to who other than…yes, you’ve guessed it, the French!
The problem with foreign ownership is that it brings foreign politics with it. It’s bad enough that our politicians meddle in business affairs. But when you open the door to foreign ownership, you have the potential for even more political interference. And it’s not British voters that these guys aim to please.
This isn’t jingoism; it’s a very real concern. A couple of weeks ago, French oil refineries owned by Total were shut down by striking workers. It was a row over the closure of a refinery in Dunkirk. President Sarkozy summoned Total bosses and pushed for an end to the dispute. He got his deal and safeguarded French jobs – good for them.
But Total still has to cut capacity and is now reported to be looking at shutting down its British, Lindsey refinery. What’s politically expedient for the French will likely result in job losses in the UK.
What about the UK's pensions?
Aside from the politics there’s another, perhaps even more important issue that should concern us.
For every takeover of a quoted British company, that’s one less company on the stock market to invest in. It’s one less dividend heading to your pension fund.
Shares are effectively the entitlement to the profits from our industries. A Barclays research note describes them as ‘tokens of wealth transfer’. They say that shares allow us to transfer wealth between generations. Those retiring sell stock to fund their retirement, while savers buy stocks to fund their future retirement.
But if vast swathes of our companies are removed from the exchange, then how can the savers get their slice of UK plc?
It’s a bit like selling off the family silver. Once it’s gone and scattered about, it’s very difficult to get it back again. Instead of solid businesses that generate dividends for UK savers, you end up with a great big wad of cash – and we all know what spendthrifts can do with that! So for future pensions, it’s vital that this cash is invested wisely.
So what happens to the proceeds from foreign takeovers?
The idealists will tell you that there are no concerns here. They will tell you that we sell some silver here, but we use the proceeds to buy some gold over there. Well, yes this can happen. The Prudential’s investment in Asia is evidence of this. But the Prudential’s actions are very much the exception rather than the rule.
According to the Wall Street Journal, it’s much more difficult for British firms to buy abroad than it is for others to buy here.
But there’s a simpler explanation as to why the funds are more likely to stay at home…
If you are a fund manager and you receive money from a takeover, the chances are that you will re-invest it straight back into the stock market. You are paid to outperform the ftse, so that’s where the money goes – straight back in. You don’t have the option to start investing it in foreign markets.
As the money goes back into stocks all it does is inflate stock prices. There’s no new investment into new businesses. Nothing has replaced the hole left by the business that was sold.
This is why investors should get behind the Prudential and welcome the expansion of UK plc abroad. We should congratulate them for giving our savers somewhere useful to put their hard earned savings. The Prudential is raising about £14bn to fund this acquisition. Hopefully this will go some way towards plugging the hole from the numerous companies that have left British ownership over recent years.
Shareholders now have the opportunity to subscribe for new shares to fund the acquisition. I for one hope that shareholders and particularly fund managers take up their full quota.
Remember, the issue has been fully underwritten… there’s plenty of interest from sovereign wealth funds in China and Singapore who are reportedly lining up to mop up any entitlements not claimed.
Good investing,
Bengt Saelensminde
For The Right Side
P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.
