Until recently, most CEOs and the biggest employers’ association in the Netherlands were opposed to protecting Dutch companies against foreign takeovers. But this has now totally changed. What’s happening? And where to go from here? Journalist Hella Hueck and economist Robert Went present their analysis in 12 questions and answers.
1. What’s all the fuss over corporate takeovers?
It feels like Groundhog Day. Every few years, the Dutch public debate is gripped by concern over ‘the great Dutch sellout’, that is to say: foreign investors, looking to buy or break up notable Dutch companies.
In 2006, demands by activist shareholders to split up industrial conglomerate Stork were met with public outcry. In 2007, Hema, the iconic Dutch chain of department stores, suddenly turned British. Ten years later, foreign investors are targeting Unilever and AkzoNobel, the ‘crown jewels’ of the Dutch economy. And now, rumours are doing the rounds that Philips may befall the same fate.
According to economics professor Hans Schenk, who has spent thirty years studying the subject, we are at the start of a new wave of mergers and acquisitions:. ‘The first one we were able to measure took place at the end of the nineteenth century. The start of the sixth wave came at the end of the late 1990s, which ended in the dotcom crash. And now, we’re in the seventh wave.’ During each of these waves, Schenk says, the number of corporate takeovers increases tenfold in comparison to the periods preceding them.
The corporate world has some serious concerns about Donald Trump and his America First-policy
Alright, so these waves of mergers have happened before. However, employers’ association VNO-NCW and several CEOs of large companies argue, the rules of the game are different this time. The association and CEOs have drastically changed their tune and are now pressing for more protection against takeovers.
They are doing this for two main reasons: firstly, interest rates are currently being kept artificially low due to the European Central Bank’s monetary policy. This means that borrowing money has become incredibly cheap. And secondly, the corporate world has some serious concerns about United States president Donald Trump and his protectionist America First policy. According to VNO-NCW and the CEO’s, these two developments have eliminated the level playing field.
Former top executives, such as Jan Hommen (Philips, ING) and Sjoerd Vollebregt (former CEO of Stork), have proposed a one-year ‘consideration period’ for listed companies receiving a (hostile) takeover offer. Even Minister of Economic Affairs Henk Kamp has expressed support for such a protective measure — in stark contrast to the free-market position taken by his own party, the VVD. These truly are exceptional times.
2. So shareholders and CEOs are getting in a tiff about takeovers. Surely, this doesn’t impact me?
It’s true that the discussion mainly focuses on shareholders and shareholder value. But let’s not forget that everyone who pays into a pension fund owns shares as well, as shares make up part of the investments of these funds.
"What happens to the jobs at the firms involved? And what about their suppliers?"
And it’s not just the companies merging, acquiring or being acquired that face risks. There are many more stakeholders whose interests are on the line. What happens to the jobs at the firms involved, for example? And what about their suppliers? What are the consequences for innovation, research and development of new products? What happens to corporate social responsibility and environmental production standards? And what are the implications for consumers and the regions in which these businesses operate?
Ever since the 2008 financial crisis demonstrated the limits of the free market with devastating effect, these wider societal impacts have received more attention. Taxpayers were made to bail out ‘their banks’; years of austerity ensued.
Many citizens and policymakers, as well as an increasing number of politicians, have experienced a wider sense of unease since before the crisis. They are faced by the feeling that globalisation and the EU have eroded our control and ownership over the economy. There is much discontent about the role of multinationals: they only care about short-term profits and do not seem concerned with long-term costs. They behave like hotel guests, rather than members of the community in the countries in which they are based.
Eight years ago, professor Arnoud Boot, a member of the Dutch Scientific Council for Government Policy, asked himself: ‘Is the corporation becoming an instrument of the financial markets — with, in its most extreme manifestation, companies being swapped like Pokémon trading cards?’.
These concerns matter; they should be taken seriously
The same year, journalist Menno Tamminga noted in his book ‘De Uitverkoop van Nederland’ [The Netherlands for Sale] that the Netherlands has an extremely difficult time ‘determining and looking after its interests’. As we’ve said before: Groundhog Day.
The last few decades have taught us a great deal about the negative effects of mergers and acquisitions. These concerns matter; we feel they should be taken seriously and should not be confused with — or dismissed as — vulgar, nationalist sentimentalism.
3. Which is more likely to fail — a merger, or your marriage?
In the Netherlands, 40 out of every 100 marriages end in divorce. But the likelihood of a corporate merger breaking down is even greater: according to over a hundred studies conducted across Europe, the United States and Japan, between 65 and 85 percent of all acquisitions fails, often destroying shareholder value in the process.
Professor Schenk: ‘These conclusions have often simply been denied. People say: these economists in their ivory towers, using their abstract models — what do they know about mergers? But if the research keeps producing the same results, the model becomes more and more convincing. And so, after thirty years of research, these insights are now finally starting to get through to minister Kamp.’
'I keep being amazed at how much capital is wasted by companies entering into ill-considered takeovers.'
Only a handful of CEOs in the world shares his attitude. They have become much more cautious about joining the acquisitions rat race. Jonas Prising of Manpower is one of the executives refusing to get swept up in the merger craze: ‘I’ve been involved in the employment agency sector for almost twenty years and have witnessed several consolidation-waves. I keep being amazed at how much capital is wasted by companies entering into ill-considered takeovers.’
4. Haven’t these fears been overplayed? AkzoNobel is barely Dutch anymore.
True, AkzoNobel is a multinational doing business all over the world. If we look at its turnover, or the number of employees, we see that the part that is Dutch only amounts to around 10 percent of the total. Its headquarters are still in Amsterdam, however, and figures from Statistics Netherlands (CBS) show that foreign-owned businesses are more likely to offshore activities to other countries than Dutch-owned corporations.
Out of all large firms that are based in the Netherlands but owned by a parent company from the elsewhere in the European Union, 25 percent moved some or all of its activities abroad between 2009 and 2011. Among firms held by owners outside of the EU, the corresponding figure is 26 percent. Compare this to Dutch-owned companies, where the rate only lies at 8 percent, and the argument becomes clear: when it comes to preserving Dutch jobs, it is much better if large companies remain in Dutch hands.
Although Statistics Netherlands will not release updated figures until the end of this year, the researchers say that the phenomenon is a structural one. They do not expect that new numbers will show a different trend.
There is a second point to make here: when a company like AkzoNobel is bought by another firm and parts of production are moved or reorganised, this will bear consequences for its suppliers. Nowadays, many activities that used to be done in-house — catering, security and cleaning, to name a few — are increasingly being outsourced. In addition, large firms often need lawyers, accountants and IT specialists. These jobs, too, tend to be contracted out.
About 13 percent of the total value added of the Dutch economy is created by industrial sectors due to the industry itself. But if you also include external suppliers to the equation, this rises to 20 percent. The national economic importance of firms such as AkzoNobel and Unilever is thus much bigger than just the companies themselves.
Thirdly, it is questionable whether the proposed mergers and acquisitions will add any growth to the Dutch economy at all. In an interview, expert Hans Schenk told us that 75 percent of mergers don’t create any added value. On the contrary: it tends to be destroyed. In this way, especially large, listed companies can have a big impact on the economy. Schenk does the math:
‘During the latest merger wave, the US and Europe spent a combined 12,000 billion dollars on acquisitions. Let’s assume that half of this turned out to be a bad investment — which is probably a low estimate. That means we’re talking about a loss of 6,000 billion dollars. That’s such an enormous amount that it could represent a 1 percent reduction in GDP. That could potentially be just enough to bring about a recession.’
Whether it’s a Dutch firm making the acquisition or a Dutch firm being acquired, what value does a merger really add?
If a loss has to be written off, someone in the real economy has to absorb that loss, says Schenk: ‘The bank, for instance. That might have an effect on the provision of mortgages. Or the company which made an acquisition at much too high a price has to reorganise and let go of employees.’
5. But don’t Dutch companies also take over many foreign businesses?
Yes they do, and this argument is often made: ‘we’re guilty of exactly the same thing! How do you suppose AkzoNobel has grown into such a big conglomerate?’
But this is beside the point. The question is: whether it’s a Dutch firm making the acquisition, or a Dutch firm being acquired, what value does a merger really add? Often, the answer is ‘too little’. Here are a few examples:
KPN buys the German E-Plus for 20 billion euros. In 2002, KPN writes off 13.7 billion because the German company turns out to be worth a lot less.
In 2013, E-Plus is sold to Telefonica. KPN writes off another 3.7 billion. KPN has therefore overpaid a total 17.4 billion euros.
Numico decides to expand from baby food into vitamin supplements and buys three American companies for 4.5 billion. A few years later, they have written off 1.6 billion off the value of these firms.
We will have to search for the type of protection that best suits the Netherlands
AkzoNobel pays 11.8 billion for the British firm ICI. After two years, the company writes down 3.7 billion.
6. So we should stop engaging in mergers and acquisitions altogether? Get real!
In this discussion, we see many strongly opposed opinions. On the one hand, there are a lot of voices demanding more protection. On the other, there are those who argue that protecting listed companies is unnecessary, or even counterproductive, and that it will damage our economy.
But, as Arnoud Boot wrote in the newspaper het Financieele Dagblad: ‘Those who see investors only as vultures are misguided. And those who view corporate management as Mother Theresa are also off their heads. But it is just as foolish to deny that a world of speculative capital and financialization exists altogether.’
So, what to do?
Unfortunately, we can’t offer a ready-made answer. There is no generally accepted theory or practice prescribing an adequate level of protection from takeovers. We will have to search for the type of protection that best suits the Netherlands — and that is why it is a good idea for us to have this discussion.
Minister Kamp has proposed one solution, which the policy community is currently busy debating. Out of the clashing of visions about the future of our economy, more ideas will emerge: giving employees more say when it comes to decisions over takeovers, for example.
"The search to safeguard Dutch interests touches on a bigger question: what kind of economy do we want to have?"
Hans Schenk, too, is keen to have a wider discussion. ‘If you know that there is a big chance of failure, it doesn’t matter very much whether a takeover bid is hostile or not. I’m not talking about all of these small businesses. Those don’t have much of an impact on the economy if things turn out badly. But the large ones do. I’d put the threshold at takeovers from about 500 million euros.’
According to Schenk, such takeovers would have to be considered by an independent commission looking out for the public interest. He says: ‘The board of directors should explain to this commission how the merger will achieve the envisioned economies of scale, and whether this is really plausible. If these promises have not been achieved within five years, the merger has to be undone. I feel that such a public assessment, together with a mandatory consideration period, would be a big improvement. This way, you eliminate all speculation from the market.’
The measure proposed by Schenk has already been implemented in Germany: there, acquisitions costing more than 400 million euros are examined by the authorities. In addition, the governments of Italy, France and Germany would all like the European Commission to consider how strategic technology companies can be better protected.
7. So we should talk about the future of our economy?
Yes, exactly! The search for a way to safeguard Dutch interests touches on a much bigger question: what kind of economy do we want to have in the future? This kind of questions is rarely asked; it is time we put them back on the agenda.
Since Brexit and Trump, we have seen a constant stream of articles analysing the discontent and unrest over our economic and social situation; neoliberalism has been pronounced dead countless times. But where other countries are deliberating their economic futures, or have traditionally had a more active role for government in this area, the Netherlands is falling behind. As several newspapers have recently pointed out, large countries such as France and Germany already have industrial policies in place.
And even in the UK, the land of Margaret Thatcher, the government is developing a new industrial policy
Thus, the NRC writes, it seems that the era of the Netherlands obediently following the rules when it comes to protecting its domestic industry is coming to an end: ‘For years, the government’s attitude was to leave everything to the free market. But now, the Netherlands is moving in the direction of other EU member states like France and Italy. These countries do much more to unashamedly protect their economic interests.’
8. But those countries are very protectionist and don’t see a lot of economic growth. A government like that, interfering with everything — certainly, that’s not what we want?
The issue is much broader than that. Whatever you may think of the man and his ideas, Donald Trump wants a more interventionist government too. And even in the UK, the land of Margaret Thatcher, the conservative government is now developing a new industrial policy: the government has published a lengthy green paper with a foreword by the Prime Minister. In it, she writes that a ‘modern industrial strategy’ is needed. May wants ‘a new approach to government, not just stepping back and leaving business to get on with the job, but stepping up to a new, active role.’
To figure out the precise meaning of this goal, a public consultation has been held. An independent Industrial Strategy Commission has been established for the same purpose. The commission has recently published its initial report, with a final report to follow in October.
There is such a thing as putting too much trust in the market
9. OMG: we’re going back to the future! Surely, nothing good can come of industrial policy?
Perhaps we shouldn’t overuse the words ‘industrial policy’. If you do dare to mention the term when in conversation with economists, at least be prepared for disdainful looks and disparaging comments. Governments can never hope to be better than the market in picking the successes of the future, they’d argue, so you’re risking throwing taxpayer money after losers rather than winners.
It’s true that in the past, hundreds of millions have been lost to doomed businesses and dying industries. But many have concluded that governments should stay away from active interference in the structure of the economy entirely. Wrongheadedly, we might add: there is such a thing as going too far in trusting that the market will automatically sort out all our problems.
Well-known Italian economist Mariana Mazzucato, who has also met with Minister Kamp, has tried to influence the debate by showing how just about all the technology in the iPhone is based on government-funded research. Economist Ha-Joon Chang points to yet other instances of government-sponsored success: ‘Another example of supporting world class companies was the Korean government's early support of Samsung electronics. Why do the Japanese excel at manufacturing cars? Why does Latin America excel at coffee?’
"There’s no way around it: the government has to develop a vision for the future of the country and the economy"
Mazzucato is one of many arguing for a more active role for government in tackling big social challenges, like greening the economy and adjusting to an ageing society. EU commissioner Carlos Moedas, whose job entails overseeing research, science and innovation in Europe, nowadays often refers to her approvingly: ‘As Mariana Mazzucato says: Innovation-led growth is not just about fixing a market failure but also about setting direction and creating new markets. If you just tackle the market failure you can head into the wrong direction.’
10. So we need a vision? Prime Minister Rutte, who is not a big fan of big visions about the future, will be thrilled about that…
There’s no way around it. The government has to develop a vision for the future of the country and the economy. This was the topic of a conversation we had with Diane Coyle, a sympathetic leading British economist who is a member of the above-mentioned Industrial Strategy Commission. Industrial policy is really the wrong term, she says: we need to consider not just the future of industry, but that of the economy as a whole.
And perhaps her most important point: it’s not about a list of measures designed to support particular firms or sectors with subsidies. Money is needed, sure, but the government can often play a role simply by bringing parties together.
Again, this requires a vision. What we need to be focusing on, is economic restructuring and an agenda we can use to improve our flagging of productivity growth. Because unfortunately innovations such as the iPhone have not led to an explosion in productivity. Increasing productivity is no easy feat – all rich countries are struggling with it.
There really isn’t much of a choice
Another compelling argument of Coyle’s is that there really isn’t much of a choice. Even if you think or claim that your country doesn’t do industrial policy: de facto, it is. Every government makes choices: to regulate certain things and leave others alone; to invest in certain ideas and not in others.
This is how we ended up with overgrown financial sector that plunged us into recession in 2008. Not having an explicit vision also results in decisions being made, but they tend to be ad hoc and more susceptible to lobbying. It’s better to make explicit and active decisions which can be controlled.
The Dutch employers’ association VNO-NCW is good at developing big plans: NL Next Level, their campaign for a broad-ranging investment strategy for the Netherlands, is but one example. These reports are presented with great fanfare and get plenty of press coverage. But what they also deserve, is a serious debate and competition from alternative plans and strategies brought forward by other stakeholders. That way, politicians and citizens would be able to weigh up alternatives and decide what direction to take in an informed way.
Of course, even under a modern industrial policy mistakes will be made from time to time — as happens all the time in the private sector. This is no cause for panic, or for immediately asking Urgent Questions in parliament. The key is to evaluate such instances carefully. To do this, it’s important to set specific goals and develop robust evaluation criteria. Only then can we learn from mistakes and turn these into the successes of the future.
11. Could you make this a little more concrete? What should a modern industrial strategy consist of?
We’ll be able to read more about this in the soon to be published final report of the British Industrial Strategy Commission. It published it first report in July and will soon publish its final report. However, Diane Coyle already sketched out a few main principles when we met her.
Having an open economy is crucial, so foreign companies are able to open factories here
For starters, the notion that ‘the government’ and ‘the market’ are two totally separate domains is outdated. The government can and should take responsibilities that are too risky for the private sector; a private company will, for instance, be less likely to invest in theoretical science because it is very difficult to assess whether these investments will ever pay off. The government can also play an important role in controlling risk, because it is able to borrow money much more cheaply than firms in the private sector.
One thing you definitely shouldn’t do, says Coyle, is ‘protecting the established order (incumbents) of the domestic market. Governments are often inclined to do this, and so are the kinds of firms that have a strong lobbying position at central government. But established industries are not usually where innovation comes from.’
Coyle mentions the automotive industry as an example: ‘This is an important sector with a lot of jobs, contributing a lot to exports and productivity. Across the entire value chain, new companies are emerging, developing new technologies like electric vehicles and batteries. Therefore, having an open economy is crucial, so foreign companies are able to open factories here.’
‘Multinational companies tend to be much more productive. Nissan and Toyota have contributed a lot to our country. The car industry in the United Kingdom predominantly consists of foreign firms, but it is one of our most productive sectors.’
You also have to decide what kind of foreign investment you want to attract. Job creation shouldn’t be the only consideration in this, says Coyle — the question whether the investment will aid productivity growth is just as important.
"How do you take account of these kinds of uncertain effects in your calculation?"
12. So how do we judge what to do — and what not to do?
This isn’t easy. Cost-benefit analyses are often an inappropriate tool for making these decisions, Coyle says. The reason is that such analyses focus on small, incremental changes, rather than large-scale shifts. The goal of big investment projects may be to effect behavioural change.
Suppose you want to build a high-speed railway from Groningen to Amsterdam. How would you go about calculating the benefits of such a project? If it works, it will have a huge impact. Perhaps it will spur further development of the road or rail network in lagging regions, because these will attract more people and therefore see increased economic activity. How do you take account of these kinds of uncertain effects in your calculation?
Moreover, there is a winner takes all-dynamic embedded in the way decisions are currently being made. Funds are limited, so what do you do: build a new railway in London, or build it in a region that has fallen behind? Rail investment will often deliver greater returns in London: people there earn more, so tickets can be sold for a higher price, which means you will earn back your investment much more quickly than when laying new train tracks in the north of England. If you’re not careful, soon nothing will happen in regions outside of London.
'The short answer is that the government has to invest more'
This brings us to the question of regional development and inequality: ‘In the 80s, a lot of people who had steady jobs and decent salaries lost their employment due to deindustrialisation’, says Coyle. ‘Policy did nothing to help these people get into different lines of work. Factory and mine closures were concentrated in certain areas of the UK. This meant the children of former workers in these areas also struggled to find work, the homes and neighbourhoods fell into decline, and there was no coming back from that. The causes were globalisation and automation, but we could have done much more to compensate for their adverse effects if the right policies had been in place.’
‘Regional cities require a certain critical mass and level of amenities to ensure young people want to stay there and firms want to set up shop. Whatever you do you need good infrastructure, people with the right education –and that doesn’t necessarily mean the highest qualifications – and decent amenities like a hospital and a theatre. And perhaps an airport with direct flights to China.’
‘Exactly what is needed differs from case to case, and we are still looking for the right path. But the short answer is that the government has to invest more.’
These are thought-provoking ideas, and we look forward to the commission’s final report and further discussion in the UK. Are you feeling optimistic about the future of your country, we ask Diane Coyle at the end of our conversation? Her answer: ’No, things are currently looking very bleak because of Brexit. But this is precisely why we need to work at this much harder.’
Whew… that was a long story. How about we conclude with a fitting piece of music?
Hella Hueck (@hellahueck) is a free-lance journalist working, among others, for the Dutch broadcasting companies RTLZ and WNL. Robert Went (@went1955) is an economist working for the Dutch Scientific Council for Government Policy (WRR). Together, they write a series of longreads on the economy of the future. This is their eighth episode, and the first one that is also available in English. Many thanks to Sanne Velthuis, who offered to make this translation!