In response to recent attempts to take over AkzoNobel and Unilever, Dutch authorities now want to take measures to improve the protection of Dutch listed companies against unwelcome bidders. Professor Arnoud Boot is sceptical about these plans: ‘Too much protection disrupts innovation and economic growth.’ According to Boot, investing in academic excellence is much more effective.
The Dutch business sector is in an uproar. AkzoNobel, once a jewel in the crown of the Dutch stock market, faced an unwelcome takeover attempt by an American competitor. Even food giant Unilever turned out to be vulnerable, after an unsolicited bid earlier this year. Business lobby organisation VNO-NCW considers that preserving headquarters of multinationals within their national borders is crucial for the economy and therefore pushes for increased protection of Dutch companies. The government supports this call and is to propose regulation that will make it more difficult for foreign parties to buy Dutch companies.
University of Amsterdam Professor Arnoud Boot does not care much for these defensive positions. ‘What makes a country successful in these times of globalisation? The real anchor is the development of top education institutions’, Boot says. ‘The government should focus on this. This is indeed a matter of public interest, while protecting companies is not.’
According to Boot, who is professor of Corporate Finance and Financial Markets at the Amsterdam Business School (ABS), the presence of top education institutions generates a high level of economic activity: ‘These institutions will be the starting point for networks and centres of knowledge. Foreign students can be ambassadors for the Netherlands after their return home. Companies will follow automatically.’ According to Boot, it is no coincidence that Amsterdam, with its two major universities, is more successful than The Hague, which has no top education institutions. ‘There is an increasing tendency towards geographical clustering around centres of knowledge, in spite of the rise of information technology.’
Boot does not deny that large companies can also generate additional economic activity: ‘It is likely that the headquarters of a company and its research departments will be in close proximity to each other. Of course, headquarters can draw in other activities, such as financial services.’ Indeed, relocating headquarters can have negative consequences for employees who remain behind: ‘Directors will more easily dismiss foreign workers than those from the country where the headquarters are located.’
This does not necessarily imply, however, that a country must be poor if it has not attracted any company’s headquarters. ‘Too much protection of multinationals can hamper economic growth and innovation. And do we really have to protect Dutch companies that have 95% of their activities abroad? And above all, should a country be held hostage to the interests of these multinationals? The lobby of vested interests is always stronger than that of new businesses and sectors.’
Boot argues that governments are easily drawn to subsidising big companies through tax advantages or infrastructural works. Philips is an example of a company that wielded enormous influence in Europe in the last decades of the last century. ‘Philips had a huge influence on the imports of products from outside the European Union and was able to keep the door closed to competitive electronic products from Japan. In the end, this just leads to higher prices and products of less quality.’
In the 1990s Philips’ empire began to crumble. It sold many of its subsidiaries. According to Boot, this created scope for innovation again. Eindhoven is now a strong magnet for innovations and its university and a range of technology companies work closely together. Among these are many former subsidiaries of Philips. One of the best known is ASML, a company that makes computer chip manufacturing machines..
Boot’s work has a strong focus on the relationship between financial markets and the conduct of companies. He notes that the behaviour of directors of listed companies is increasingly driven by short-term targets and intended to satisfy their shareholders. ‘The share ownership of listed companies is widely dispersed and investors have become more volatile. That makes it more difficult for directors to tell their story, especially if performance is lagging behind. Still, directors should stick to their story and tell it.’
Unfortunately, companies are often directed as if they are to be sold in pieces today: ‘Creating long-term value by investing in research or pursuing synergy between business units falls into the background.’ Boot describes this development, among other things, in his book De Ontwortelde Onderneming, published in 2009, and as the principal author of Samenleving en Financiële Sector in Evenwicht, a report published by the WRR (Scientific Council for Government Policy) in 2016.
At this point, private equity, according to Boot, is often a better choice than a stock market listing. Private equity investors – despite the suggestion that they are ‘locusts’ – are deeply engaged, are willing to buy, with just a few others, a whole company and intend to hold their investment for a longer period of time, usually five to seven years. Boot expects this duration to increase in the future.
Boot thinks listed companies will increasingly use this model in the future. ‘Private equity is an enormous source of investment capital. New intermediary models develop in which private equity investors take a stake in listed companies. A well-known investor like Warren Buffett is spreading his investments between companies in which he has full control and listed companies in which he has a minority stake.’
As long as listed companies have to work with widely dispersed and volatile shareholders, Boot agrees that some degree of protection may be desirable: ‘Companies should not be sold like hot cakes. Protection can keep directors of listed companies from making unpredictable moves when they are attacked by an unwelcome bidder. This protection gives directors time to tell their own story.’ However, as it is, listed companies have a lot of instruments to keep potential buyers at a distance, Boot argues. ‘The good thing about the protection walls that already exist is that they can be tested by the shareholders. However, the government’s latest proposal says that listed companies can get protection for one year without being asked account for their actions. This is not a good proposal, because protection should never be absolute’, Boot says.
Protection walls or not, Boot believes directors should be able to weather some storms. ‘After all, they are listed on the stock market and in turn they make acquisitions themselves. AkzoNobel, which has reversed its strategy in response to the bid and has announced the sale of one of its huge subsidiaries, does not seem able to withstand the pressure of an unwelcome bid.’
More information? Email: A.W.A.Boot@uva.nl