|Previous Section||Home Page|
Mr. Tim Smith : If the Labour party is now so opposed to conglomerates, why is it so unhappy about the proposal to unbundle BAT? The hon. Gentleman said earlier that we were not discussing the merits of mergers. At present the law is so constructed that the presumption is in their favour ; the Labour party proposes to create a presumption against them.
Mr. Cousins : BAT is a good example. We are not required to decide whether what is proposed for BAT by the misnamed Hoylake, or by the board of directors is right or wrong. Incidentally, at a recent annual meeting, one shareholder who, since his name has already been mentioned tonight, ought to get a small record in the history books--a man called Antonio von Marx--objected to that proposal. I cannot be sure whether Mr. Antonio von Marx is related to the other Marxes who have been referred to tonight, but at the most recent annual general meeting of BAT, a Mr. Marx was very unhappy about the proceedings. The point is not whether we, in our own personal judgments decide whether the proposed takeover of BAT--the unbundling version proposed by Hoylake, or the defensive version proposed by the board of directors--is right or wrong. Our concern is that matters of public
Column 1211interest are involved in that operation. In the final judgment, what weight should be put upon any or all the proposals involved in that exercise is quite another matter. We all have our own views about that and about each specific proposal.
Matters of public interest are raised in deciding whether the exercise should be launched in such a manner, and if it is, whether it is right that we should have no regulatory mechanism available whereby the particular proposals that are made, either offensively by Hoylake or defensively by the board of directors, are appropriate and in the long-term interests of the public and the country. In any specific case it may be right or wrong to dismantle conglomerates, but the two clauses proposed by my hon. Friend the Member for Norwich, South (Mr. Garrett) make no judgments as to what might be the outcome in particular cases. They require only that the public interest involved in bids such as the one for BAT should be tested in an appropriate regulatory arena. That is all they ask, and it is a modest, limited and sensible request.
Other Opposition Members--I suspect, at least one hon. Member present today --have reservations about takeover bids financed on the so-called junk bond basis. Yet the clauses do not require us necessarily to take the view that bids financed by junk bonds are wrong. The clauses ask only that the public interest aspects of those suggestions, and the counter suggestions from the board of directors conducting the defence against those operations are tested. Insurance is a very productive industry. If we are ever to get the balance of payments right, we should talk up the part played by industries such as insurance.
Just before the single market in 1992 and when the fate of our insurance industry is so important to the country, it is important that major insurance companies such as Eagle Star and Pearl should not be exposed to the risks to their operations that they face today.
We are not saying that it would be wrong to stop the proposed mergers, but it must be right to suggest that we require a regulatory mechanism that would test those bids against some consideration of public interest. That is the modest demand that the new clauses make, and surely no sensible person could refuse or refute it.
Mr. Redwood : It will come as no surprise to the hon. Member for Norwich, South (Mr. Garrett) that I find the new clauses difficult to accept. He claimed that the Government are implying that mergers are good because they may lead to economies of scale and keep management on their toes. That is not the burden of the Government's case. The Government's case is much simpler--it is that in most cases shareholders and bankers should decide about mergers, particularly shareholders, who have the votes and own the assets. As past Labour Governments have shown, Governments should not attempt to meddle and make decisions about how best to construct or reorganise industry. Governments in the past have left industry with
Column 1212little profit, little return on capital and little chance of employing more people and making the investment that we need. The hon. Member for Norwich, South mentioned the Tebbit doctrine and the competition criterion, which has been important to the Government's merger policy. He pointed out that we have kept the public-interest criterion, but we have made it clear that it rarely applies. Its most notable manifestation is where competition will be limited and market dominance will be created by a merger that may be against the public interest.
I rebut the idea that there has been no coherence to the Government's approach to merger policy. The Tebbit doctrine, the Blue Book and the statements made by my right hon. Friend the Secretary of State have provided a continuity of policy and have made it quite clear that the criterion is usually competition, but that public-interest matters may have to be judged by the Director General of Fair Trading or the Secretary of State.
The hon. Member for Norwich, South made much of the fact that some studies, including the Leisner study, which is about 10 years old, have suggested that half of all mergers, or more, might produce disappointing profits and returns on assets. Again, the Government's case is that shareholders should take that into account when making their decisions. There is no evidence that Governments would be better at making those decisions. If the Labour party's policies were implemented, the Government of the day might succeed in blocking half of the mergers. That would add to profitability and investment but let through the half that did not. Such intervention, based on the experiences of the 1970s, would be far from helpful for the industrial recovery that is now under way.
We were told that companies aim for size rather than
competitiveness. That is an unreasonable description of the way that companies behave. Large bids, particularly in the United Kingdom, show that size is not a bar to a bid being made or, in the United States, to a takeover being completed. Companies simply aiming for size and not taking into account the need for competitiveness, good performance and earnings and dividend progression, will not succeed in the way that the hon. Gentleman suggests. That is not a good argument against the Government's merger policy.
Companies can defend themselves against predatory attack, and many have done so successfully by showing a basis of achievement and often by stressing their belief in long-term investment, long-term projects and research and development, which all hon. Members wish to see as the hallmark of good industrial practice.
The hon. Members for Norwich, South and for Newcastle upon Tyne, Central (Mr. Cousins) expressed their displeasure at certain types of highly leveraged bids. I cannot comment on a particular case because I do not want to put my right hon. Friend the Secretary of State in any difficulty. He must retain his powers and be entirely independent in judging specific bids.
I should like to make one or two brief comments on the general question of leveraged bids. A break-up of a company through a merger does not necessarily lead to a loss of jobs or a worse performance, as the hon. Member for Newcastle upon Tyne, Central accepted. He was in some muddle about whether demerger was good or bad because he was in some muddle about whether conglomerates were always, or sometimes, bad. There are types of break-up that may create independence for
Column 1213subsidiaries which could help them by giving them greater morale, separate access to capital and so on, which they may have lacked under the conglomerate.
Mr. Redwood : I can think of companies where that would happen, but I do not want to go into that, for the reasons which I described earlier. I do not in any way want to prejudice any case that might come before my right hon. Friend the Secretary of State.
Mr. Redwood : I shall give the hon. Gentleman a good example in the past. The demerger of some companies from British Leyland, which was probably the worst conglomerate and was organised through a Government action, was extremely helpful. There are good cases of companies that have done much better in their demerged condition.
Mr. Redwood : Most of the decline in the market share of the Austin Rover Group occurred when it was a nationalised conglomerate, investing a large amount of money voted by the House. Much of that money went into investments in a model range that was not popular. The counter-argument can be shown by the way in which Jaguar's profitability and investment improved greatly after it was demerged from British Leyland.
Mr. Anthony Nelson (Chichester) : I very much agree with the sentiments behind my hon. Friend's address. I followed what he said about leveraged bids. I should like to put to him one scenario which is relevant when casting policy. Leveraged bids tend to be a function of bull markets. If a bull market ceases to be a bull market, as it did for a few days recently in the United States and this country, one sees what happens to leveraged bids. For example, in the case of United Air Lines, they fall by the wayside. Happily, in a sense the bids were not under way. In other words, although the debt might have been underwritten, the company had not been acquired.
The problem arises in a bear market when shares are falling steeply or successively and a leveraged bid has been made. The company making the leveraged bid finds itself owning the company that it acquired in the hope that it could sell off sections of it in part or in whole to redeem the debt. It finds that they do not begin to recover the debt. It therefore has to sell most, if not all, of the company at knockdown prices and perhaps even go into receivership. This is why such deals are often carried out through vehicle companies rather than subsidiaries of major companies. No Government can afford to ignore a future scenario in which that may happen for cyclical reasons. The Government, the employees and the industrial companies may be left in a position where the companies have to be sold off or shut down.
Does my hon. Friend feel--I am sure that he does--that in a changed market that might be a legitimate criterion for a reference and for assessment of whether such a merger was in the public interest?
My hon. Friend is right--there could be dangers in certain kinds of leveraged bids. I have no particular case in this country in mind, for reasons which I have outlined. I have made it clear that shareholders and bankers--the principal interest groups
concerned--should be very aware exactly how that debt will be serviced and repaid when considering any proposal which they may be financing or to which they may be responding. If the debt is to be repaid primarily out of asset sales, they might want to ask questions about the price at which assets would be sold, whether it was feasible to sell them and the timescale within which that would be achieved. They may well have to take market conditions into account as my hon. Friend said.
If the bidder and the banks that are backing the transaction intend to finance it out of increased profitability through merger benefits-- increased efficiency, performance and the like--I hope that shareholders and bankers will ask the right questions, such as, "What happens if the underlying market for the product declines, or if there is a slowdown in economic growth in the major world markets in which the company is operating." Usual questions of prudence should be asked. The people who make the judgments should have a good understanding of the relative risks that are being run.
If a company is highly leveraged in its operations, and added to that is high leveraging through its financing, the risk of corporate failure or of disaster is multiplied considerably. I hope that shareholders and bankers will take such considerations into account. The Government's case is that it cannot be the task of Government to make such decisions. Whether a bond is junkie must be determined by those who might buy or sell it. It is discovered whether the bond is junkie only some years later. If the paper is issued and it turns out that the transaction was very good, the company's profits go up, the debt is repaid, and it does not turn out to be junkie. If a wrong judgment is made and the company is saddled with too much debt, trading conditions deteriorate and things go wrong, the bond turns out to be junkie. That is the problem.
The Government cannot make hundreds of decisions about the junkiness or otherwise of financing. We have made it quite clear that our policy on these matters is to trust the judgment of shareholders, bankers and others, and refer only if leveraging is allied with some other characteristics which may operate against the public interest. That is a clear policy that has been laid down by successive Secretaries of State, and I think that it will serve us well. The Governor of the Bank of England has recently commented on financing systems in various sectors of the economy.
The requirement to make a reference, as suggested by the Labour party, would make a substantial difference to the way in which merger policy operates. At the moment, about 10 out of 300 mergers are referred. It is difficult to calculate how many might be caught under Labour's
Column 1215recommendations, but I think that at least four or five times as many would because they would represent quite a substantial shift. Labour's proposal reminds me of a return to the bad old days when businesses were run from Whitehall, and when it was assumed that three or four politicians sitting in certain Whitehall offices were able to make all these judgments about the future of British industry which enterprising business men were unable to make.
In the 1970s, when that belief was rife, industrial profitability fell to record low levels, there was a large number of redundancies from nationalised industries and Government policy seemed to be based on organising conglomerate mergers and public monopolies which did not serve the customer any better than the people who worked in them or the markets in which they operated.
It is better to trust business men to make business judgments. Politicians are here to defend the public interest. That is exactly what our largely competition-based reference policy produces. There is great coherence in the policy. It has been stated clearly on several occasions. My right hon. Friend the Secretary of State and the director general are always prepared to examine a case if a public interest issue arises. If one arises, the merger should be referred and investigated exhaustively.
I urge the House to reject the new clause.
Mr. John Garrett : I am not very hapy with the Minister's response. I have met him across the Dispatch Box several times now. We are beginning to size him up. He is really just a housetrained version of the right hon. Member for Chingford (Mr. Tebbit). Underneath that shy, fawn-like exterior is a marketeer, red in tooth and claw. Moreover, he is a follower of policies which, in spite of what he said at the end of his speech, have left us with an unbelievably high balance of payments deficit. Unemployment is officially registered at about 2 million, but is probably more than 3 million, and inflation is the highest in western Europe, so the Minister may come to regret his words.
We regard the reversal of the burden of proof in mergers as serious and central to our beliefs about the way in which mergers should be regulated. I invite my right hon. and hon. Friends, therefore, to join me in the Division Lobby in support of the new clause. Question put, That the clause be read a Second time :
The House divided : Ayes 29, Noes 122.
Division No. 357] [11.45 pm
Banks, Tony (Newham NW)
Barnes, Harry (Derbyshire NE)
Bennett, A. F. (D'nt'n & R'dish)
Bruce, Malcolm (Gordon)
Carlile, Alex (Mont'g)
Fields, Terry (L'pool B G'n)
Garrett, John (Norwich South)
Hughes, John (Coventry NE)
Jones, Martyn (Clwyd S W)
Michie, Bill (Sheffield Heeley)
Powell, Ray (Ogmore)
Quin, Ms Joyce
Ross, Ernie (Dundee W)
Steel, Rt Hon David
Column 1216Wallace, James
Wareing, Robert N.
Welsh, Michael (Doncaster N)
Tellers for the Ayes :
Mrs. Llin Golding and
Mr. Frank Haynes.
Arnold, Jacques (Gravesham)
Baker, Rt Hon K. (Mole Valley)
Baker, Nicholas (Dorset N)
Bennett, Nicholas (Pembroke)
Bowden, A (Brighton K'pto'n)
Brooke, Rt Hon Peter
Brown, Michael (Brigg & Cl't's)
Browne, John (Winchester)
Buck, Sir Antony
Carlisle, John, (Luton N)
Carlisle, Kenneth (Lincoln)
Channon, Rt Hon Paul
Clark, Dr Michael (Rochford)
Clark, Sir W. (Croydon S)
Clarke, Rt Hon K. (Rushcliffe)
Coombs, Anthony (Wyre F'rest)
Davis, David (Boothferry)
Fenner, Dame Peggy
Fishburn, John Dudley
Forsyth, Michael (Stirling)
Fox, Sir Marcus
Glyn, Dr Alan
Goodson-Wickes, Dr Charles
Greenway, John (Ryedale)
Griffiths, Peter (Portsmouth N)
Hamilton, Hon Archie (Epsom)
Hamilton, Neil (Tatton)
Hargreaves, Ken (Hyndburn)
Howarth, G. (Cannock & B'wd)
Hughes, Robert G. (Harrow W)
Hunt, Sir John (Ravensbourne)
Johnson Smith, Sir Geoffrey
Knight, Greg (Derby North)
Lester, Jim (Broxtowe)
McNair-Wilson, Sir Patrick
Martin, David (Portsmouth S)
Meyer, Sir Anthony
Mitchell, Sir David
Morris, M (N'hampton S)
Nicholson, Emma (Devon West)
Pattie, Rt Hon Sir Geoffrey
Peacock, Mrs Elizabeth
Porter, David (Waveney)
Powell, William (Corby)
Ridley, Rt Hon Nicholas
Shepherd, Richard (Aldridge)
Smith, Tim (Beaconsfield)
Soames, Hon Nicholas
Taylor, John M (Solihull)
Taylor, Teddy (S'end E)
Thompson, D. (Calder Valley)
Townsend, Cyril D. (B'heath)
Twinn, Dr Ian
Waddington, Rt Hon David
Wardle, Charles (Bexhill)
Tellers for the Noes :
Mr. Tom Sackville and
Mr. Michael Fallon.