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Foreign owners? Who’d have ’em? Read on…

Terry portrait with tieOnly hours after one of Britain’s biggest British technology companies was sold to a Japanese buyer, Prime Minister Theresa May and her new Chancellor Philip Hammond hailed the deal as a boost for Brexit – and prompted an immediate outcry from those who saw it as another nail in the coffin of British industry.

Mrs May’s reaction to Softbank’s £24.3 billion acquisition of microchip designer and manufacturer ARM Holdings is curious, not least as an EU Remainer, but more significantly because last week she pledged to protect Britain from foreign takeover bids for strategic assets.

This apparent doubletake is easily explained. The new Cabinet may be a carefully contrived balance of Remainers and Brexiteers, but it has no choice other than to follow the Brexit path. The uncertainty this has created means the government has to use every opportunity to convince world markets that Britain is stable and open for business. One dragon it needs to slay is that withdrawing from the EU will lead to a culture of protectionism.

There is a subtle, but important difference between protectionism and protection. The more extreme policy of the former would effectively deter overseas investors buying almost anything, given the fear of a government-endorsed public backlash and an inevitable referral to the competition authorities who would be so overwhelmed with cases that decisions would be delayed, and probably killed off. This is not the way to encourage an inflow of capital.

Protecting assets, especially those we like to call “strategically important”, is a different matter. Some believe Britain has gone too far already, for instance selling our energy industry and not benefiting from any tangible reduction in bills or improvement in service. In addition we have lost overall control of strategy and investment, now at the mercy of the French, Chinese and others.

Hitachi trains

ScotRail is run by the Dutch and will operate trains built by Japanese firm Hitachi in County Durham

The truth is that few industries are “free” of overseas interest and this is hardly a modern phenomenon. It extends to car manufacturing (Honda, Toyota, etc), railway rolling stock (Hitachi, Bombardier), hotel chains (Hilton), food and drink (SAB Miller, Heineken) and media (News International, Newsquest).

Even so, the issue of foreign ownership is a sensitive one that was exacerbated by the £11.5 billion takeover of Cadbury’s by Kraft Foods in 2010. The sale of an “iconic” British brand was deeply felt and was made worse when Kraft failed to fulfil a promise made that it would not close the historic Somerdale factory near Bristol. A week after the takeover had been finalised, Kraft announced that it would be unable to keep the factory open.

That episode sparked a review of how takeovers are conducted in the UK. Theresa May is now hinting at another.

There is a danger of this whole business drifting into economic xenophobia.

While Mrs May deserves to be heard, there is a danger of this whole business drifting into economic xenophobia. What any inquiry into the issue must simply consider is to what extent new owners – domestic or foreign – are likely to improve or destroy value in the companies they acquire. History is littered with reckless and ill-conceived takeovers, and they are not exclusively the result of foreign companies buying up British assets (Note: RBS’s acquisition of the Dutch firm ABN Amro).

Furthermore, while the owners may have the ultimate hold on the purse strings and on strategy, in many cases they do not manage the business.

I recall in the mid-1980s speaking to the management at the new Nissan factory in Sunderland who seemed somewhat puzzled by questions over its “foreign” ownership. “It is a British company that just happens to have its major shareholder in Japan,” I was told by managing director Ian Gibson, later Sir Ian. That has stuck with me and it remains true to many “ownership” cases.

Nissan followed a long tradition of foreign-owned but British-run companies from Ford and General Motors (Vauxhall) to Hoover and Heinz.  For many people, these firms are regarded as “one of ours”, even though they never were British. Significantly, they rely on their owners to raise funds and invest in expansion which would almost certainly never have existed without them.

Optos

Japanese firm Nikon pledged to invest after acquiring Dunfermline-based Optos

On a smaller scale, firms such as Dunfermline-based eye care specialist Optos (now owned by Nikon), and Borders drugs developer ProStrakan (bought by Kyowa Kirin, also of Japan) are now growing as a direct result of their overseas owners.

ARM is already one of Britain’s biggest and most successful technology companies and this is a key factor in the degree of outrage over its sale. Now that one of the firm’s founders has also expressed his regret at the acquisition, the backlash will likely intensify.

The offer suggests it was too good to refuse

Yet Softbank is promising to double jobs and invest in the company. Given that the ARM board is recommending the offer it suggests that it sees it as too good to refuse and its pledge of investment to be on a scale that it could not raise on its own.

Nor is it particularly “British”. The company may be listed in the UK and have its headquarters in Cambridge, but it earns less than 1% of its revenues from the domestic economy. Its microchips are installed in devices which are distributed to a global audience, and so ARM makes dollars, yen and euros rather than pounds.

Was it acquired “on the cheap” on the back of the fall in the value of sterling? This is now doing the rounds, but in fact the company actually cost more in Japanese yen on Monday than it would have on the day of the EU referendum vote.

Therefore what some analysts – and the more astute politicians – are taking from this deal is that, like ProStrakan, Optos, and many other takeover targets it is another vote of confidence in British technology.

As such, the new owner will want to invest in it, grow it and generally take care of it. And that must be a good thing.

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