Mergers and Acquisitions

– in the Scottish Parliament at on 10 January 2013.

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Photo of John Scott John Scott Conservative

The next item of business is a members’ business debate on motion S4M-04421, in the name of John Mason, on mergers and acquisitions. The debate will be concluded without any question being put.

Motion debated,

That the Parliament notes the on-going debate concerning a possible merger between BAE Systems in Glasgow and EADS; notes with interest the recent comments of the former Chancellor of the Exchequer, Alistair Darling MP, and some backbench Conservative MPs, who recognise that, in some cases, a merger or acquisition is not in the long-term interest of the consumer or country as a whole; recalls examples, such as the mergers between the Royal Bank of Scotland and ABN Amro, AOL and Time Warner, Lloyds TSB and the Bank of Scotland, and Scottish Power and Iberdrola, which it considers have been of doubtful benefit to customers, staff or the wider national interest, and believes that a review of merger and acquisition policies might be of widespread advantage.

Photo of John Mason John Mason Scottish National Party

As members will be aware, the original focus of the motion was on the potential merger of BAE Systems and EADS. It is probably a good thing that that merger will no longer happen. It was an interesting case because the United Kingdom Government had a veto on the merger and the German Government was strongly opposed to it. However, as the motion states, the wider aim is to look at mergers and acquisitions policy as a whole and to consider whether we are best served by that policy.

Investment is, of course, generally a good thing. It creates jobs and helps to grow the economy, whether we are investing in different parts of our own country or crossing borders into other countries. Whether or not Scotland is independent, we want to encourage foreign investment here and Scottish investment overseas. However, we do not want to repeat the mistakes of the past, when large grants were given to foreign firms without the same assistance being made available to local companies. In many cases, the foreign firms did not stay long and there was little benefit to the local economy.

Napoleon called England—perhaps he meant Britain—“a nation of shopkeepers”. Of course, there is nothing wrong with being a shopkeeper, but if what he meant is that everything is available for a price if that price is right, that is a less positive statement.

Over the years, we have seen railways, electricity and gas sold off to the private sector while other countries have kept those industries in the public sector. We have seen European companies, such as EDF Energy or German railways, take over some UK businesses. Is it fine if Scottish or British businesses are taken over by local or international competitors, or is there something wrong with the system, and do we need to improve it?

We can all think of many Scottish companies that have been taken over, including Scottish Power. My father worked for that company all his life. It seemed a very successful company that moved from the public to the private sector. However, it was sold off to Iberdrola of Spain. Of course, it was a quoted company and the shareholders agreed to the sale, so, in one sense, that was that. I accept that Iberdrola has made considerable investments in Scotland and beyond since then so, on the surface, that seems to be a good thing. However, was it really good for everybody? Was it good for Scottish consumers, the employees or the related businesses, which lost another Scottish headquarters—the restaurants, hotels, airlines and lawyers that lost business? Was it even good for the shareholders in the longer term?

Another, more recent example is the company that makes Irn-Bru—a successful company as far as most of us could see. It was situated in my constituency, although it moved out to Cumbernauld. Apparently, its legal HQ is to remain in Scotland but the operational HQ will be down south. The merger with Britvic is apparently to lead to 500 job losses, with Britvic being the larger partner and having some 63 per cent of the business.

Despite the fact that the company that makes Irn-Bru may nominally be a leader in that merger, the fear is that the larger partner always tends to dominate in such matters. I think that it was Henry VIII who pointed out that, when there was a marriage between the royal families of England and Scotland and the potential for a joint monarch, the larger would always dominate the smaller. In a sense, he foresaw James VI moving to London.

Those were my two examples until I watched television last night and saw the fascinating report on the whisky industry. I was particularly interested in the Guinness takeover of Distillers. The promise was made that the combined company’s HQ would be in Scotland but, as we know, that did not happen.

Much policy on mergers and acquisitions is now decided at a European Union level, so it is not totally within the control of even the United Kingdom Government. However, are France and Germany better at keeping their own companies under local control than we are? Are French and German shareholders more loyal? Do they take a longer-term view, with UK shareholders taking a short-term view? Do the German banks, for example, tend to be involved in a company more for the long term rather than just for the short term?

UK and EU policy seems to assume that all mergers and acquisitions are good except in the very few cases in which a monopoly might be created or the European defence industry might be damaged.

The Royal Bank of Scotland was the subject of a number of takeover bids before it grew as large as it did. Many of them were opposed in Scotland, but RBS takeovers were eventually allowed. Perhaps they should not have been. If a takeover is bad when the new company is based in London, it is probably equally bad if it is based in Edinburgh.

I am not saying that all mergers and takeovers are bad. Although I was not keen for British Caledonian Airways to be taken over by British Airways in 1988—once again killing off almost all BA’s competition in the UK—I accept that air travel is largely an international marketplace and that we should ensure that there is healthy competition primarily at that level.

I was interested to see in The Herald on Wednesday 2 January a forecast for mergers and acquisitions in 2013. Again, the assumption seemed to be that they are always a good thing and show growth in the economy, as they create business for certain lawyers and accountants.

The result of that free-for-all policy has been banks that are too big to fail and which we are now thinking of breaking up. We have four large accountancy firms in the world, so there is no real competition if audit goes out to tender and it is hard for medium-sized firms to break through. International companies make profits that they move around the world, and we are unclear where those profits were made.

I was interested in the Institute for Public Policy Research’s report in which it complains about lack of competition leading to artificially high banking costs. It says:

“The best way to increase competition … would be to break up the banks.”

If the banks are too big now, we should presumably be trying to prevent them from becoming bigger in future.

Present mergers and acquisitions policy in the UK and EU has not been a great success. Regardless of whether we are independent, there need to be improvements, particularly in Scotland. We must be able to start businesses, and we seem to be able to do that. However, once they grow, we need to be able to keep them based here—we need to keep headquarters here.

Photo of Hanzala Malik Hanzala Malik Labour

There is always a fear of job losses and an indirect impact on jobs in the supply chain when a large-scale merger is planned, but the proposed merger of BAE Systems and EADS needs to be looked at in a different context. The fact that it is not to be allowed means that the proposal had shortcomings.

I agree with the motion that we cannot assume that all mergers are good—or that they are all bad—and that we need to look carefully at the detail of each case. In this case, as in others, the merger would have impacted on more than just the companies involved. It would have impacted on suppliers—small companies—that engage with them. Sometimes that effect is not clear and the total number of job losses cannot be calculated. In the cases that are cited in the motion, such as the merger of RBS and ABN AMRO, the devil was in the detail. In a time of economic instability, lessons need to be learned about the weaknesses in the system of regulating mergers and acquisitions.

I believe that the House of Commons Defence Select Committee’s inquiry into the merger and its potential impact on Scottish jobs was important, but the big threat that was perceived to exist to jobs on the Clyde was the uncertainty caused by the lack of defence orders and the threat that Scotland might leave the United Kingdom. We need to protect our industry from those fears, so it is important that we ensure that Scottish firms, in particular, are encouraged to engage with one another rather than look elsewhere.

In addition, when mergers are considered, the Government has an important role to play. Historically, Governments have not played that role. We have allowed companies to make commercial decisions by themselves, but when a merger would impact on jobs and the growth of industry, I think that we have a role to play, primarily to provide assistance. When companies go overseas, all sorts of shortfalls are left in Scotland. I cite the example of the wind farm manufacturing industry that we no longer have in Scotland. Although we might be one of the leading countries in the world when it comes to renewable energy, we do not have a leading manufacturing position. In many cases, imports are being considered.

We need to export; without exports, we will not grow. The Scottish Government needs to have a policy that sets out what it is willing to accept as far as mergers are concerned. Although I agree in principle with the motion, I believe that we need to ensure that we support our industry more than we have done and that we do not simply rely on Scottish Enterprise and others. The Government must play a bigger role. We must support our industry. If we do not, we will not be able to support and maintain jobs. Therefore, I ask the Government to look at how it can make a positive contribution in that area.

Photo of Richard Lyle Richard Lyle Scottish National Party

I thank John Mason for securing the debate, and I welcome his comments and those of Hanzala Malik.

It is important that the debate is a positive one. It is often the case that a merger or acquisition is positive for the companies involved and the national interest, encourages growth in the economy and provides stability for the companies concerned.

That said, there have been some recent high-profile cases that have brought to light aspects of merger and acquisition policies that it might be in the public interest to look at. The case of RBS has been mentioned, but I want to talk about the merger between Lloyds TSB and the Bank of Scotland in 2008, which is particularly interesting. Although the merger took place in exceptional circumstances at the height of the economic crisis, it was allowed to go ahead. Questions were raised about the legality of the merger, which in normal circumstances would most likely have been blocked by a competition watchdog, as it created a huge firm with 22 million customers. The deal was pushed through only by the use of a national interest provision in competition law, which allowed the UK Government to override any objections that watchdogs raised.

The deal was completed and allowed the newly merged companies to survive the worst of the economic downturn. However, serious concern was expressed about whether the deal delivered the best for the customer, because it caused a lack of competition. John Mason mentioned the fact that banks have got bigger.

More recently, the high-profile proposed merger of BAE Systems and EADS highlighted the possible need to re-examine merger and acquisition policies. David Cameron was put under pressure by a number of his back benchers, who were concerned that that merger was not in the UK’s national or manufacturing interests. I am sure that members are aware that, as has been said, that deal fell through because the UK, French and German Governments could not reach a compromise to suit all three nations.

As I said, not all mergers and acquisitions are detrimental, despite the uncertainty that they bring to the workforce of the companies involved. The merger between Scottish Power and Spain’s second-largest electricity company, Iberdrola, has brought benefits to both companies and to the public whom they serve. That merger created the world’s largest wind power developer, which invests 25 per cent of its business in renewables. In turn, that has helped Scotland in its desire to lead the world on renewable energy. Scotland is also first in line for investment from the newly merged company, as it has 24 per cent of total investment. The company will invest nearly £4 billion in the next three years.

Despite that, it is important to review mergers and acquisitions policy, to ensure that the best outcomes are achieved for the national and public interests. I thank John Mason again for bringing the debate to the chamber.

The Deputy Presiding Officer:

I call Gavin Brown, to be followed by the minister—the cabinet secretary—for the closing speech.

Photo of Gavin Brown Gavin Brown Conservative

That was a nice promotion, Presiding Officer. The phrase “Cabinet Secretary Fergus Ewing” has a nice ring to it.

When I first saw the motion, I had two observations. The first was to ask whether John Mason is a man of extraordinary power and influence because, on 8 October 2012, he lodged the motion, which cast doubt on the potential merger between BAE Systems and EADS, and days later—on 10 October—the deal was aborted. Some say that Angela Merkel put the final nail in the coffin; some say that John Mason had the larger influence.

Aside from that, I am slightly unsure about exactly what Mr Mason wants to happen. He gave us a list of mergers and acquisitions with which he was uncomfortable and which he did not think had succeeded. My view on Scottish Power and Iberdrola differs slightly from his; on many levels, that merger has proven to be successful and enduring. He was absolutely right about the merger of AOL and Time Warner—a corporate disaster that was so bad that a demerger took place afterwards. There is now no AOL Time Warner.

I got the impression that Mr Mason’s starting point was that mergers and acquisitions are potentially negative, in the main, and that UK or Scottish companies are more likely to be taken over than to take over others. I looked at an Office for National Statistics bulletin on mergers and acquisitions, to get a flavour of what happens out there in the marketplace. The most recent publication came out at the start of December last year. In quarter 3—the most recent quarter for which we have figures—outward mergers and acquisitions, which involve UK companies taking over overseas companies, amounted to £7.8 billion, while inward mergers and acquisitions, which involve UK companies being taken over, amounted to £8.6 billion. Slightly more UK companies were taken over than were taking over. In quarter 3 of the previous year, the figure for UK companies that took over foreign companies was £6.8 billion, and the figure for UK companies that were taken over by foreign companies was £5.1 billion. Therefore, I am not convinced that everything is one direction; things seem to ebb and flow year on year.

On the bald numbers, there were 736 mergers or acquisitions over £1 million in 2010, and 896 mergers or acquisitions over £1 million in 2011. Most of those mergers and acquisitions happened without comment. There has been no fall-out and there have been no negative consequences. Merger and acquisition activity is a normal and critical part of a successful economy.

John Mason is right to point out that there are dangers and that not every merger or acquisition will have a successful result, but the system that we have is fairly robust for most of the time. We have the combination of the Office of Fair Trading and the Competition Commission. The secretary of state has limited—I stress the word “limited”—powers to intervene, of course. There is also the Panel on Takeovers and Mergers, which is now on the 10th edition of its takeover code. It has more than 300 pages and the express interest is in having orderly mergers and takeovers and in protecting offeree shareholders. Therefore, the position is not entirely negative. That said, regardless of the system that we have, there will, of course, be some mergers and acquisitions that simply do not work.

The Deputy Presiding Officer:

I call the minister, Fergus Ewing, to close the debate.

Photo of Fergus Ewing Fergus Ewing Scottish National Party

I am indebted to John Mason for bringing the topic before members.

In his speech, John Mason set out the potential benefits and potential risks that are attached to mergers and acquisitions. That balanced approach is correct.

Mergers and acquisitions are a reserved issue. As far as I know, they have not been frequently debated in the Parliament, if at all.

Obviously, I have analysed the relevant legal provision that exists, which stems from the Enterprise Act 2002, and the role of the Office of Fair Trading, which can investigate mergers that either meet the turnover test or the share of supply test. The turnover test is whether the target company has a UK turnover that exceeds £70 million. The share of supply test is met if the merging parties will supply together at least 25 per cent of goods or services of a particular description either in the UK as a whole or in a substantial part of it. I have much more information, but there is no point in my reading it out. However, I thought that it would be useful to start off from that standpoint of legal fact, as that is the legal backdrop against which the UK Government considers these matters. It should be pointed out that that led to the failed merger talks between BAE and EADS.

I believe that mergers and acquisitions can enable the injection of significant amounts of capital into businesses, and that they often do so. It is undoubtedly true that businesses that operate in various sectors require capital in order to succeed, and it is self-evident that companies that make profits are better than companies that make losses, not least because the latter tend not to have good survival prospects, so the stakes of customers and employees are at risk. Well-capitalised companies are therefore in the public interest. It is in the public interest that companies have the capital to make the investment that is necessary to remain competitive and succeed globally.

My experience of visiting companies in 20 months has been not insubstantial. I have visited a great many companies that have benefited from investment from furth of Scotland, and that is a good thing. The Scottish National Party has never proposed putting a tartan curtain around Scotland that would deter foreign investment. Just this morning, I opened the offices of UFW, which is a company that has established an ecohub and brought together small businesses to see a display of various types of renewable installations, which the public can also go and see. What a great thing. The company is not owned in Scotland but, on behalf the Scottish Government, I welcomed our friends from south of the border and the contribution that they are making.

On a larger scale, INEOS, Dana Petroleum and Talisman Energy have received substantial investment from China. I cannot speak for the companies, but my understanding is that often such investment provides a long-term perspective and means that they can take a longer-term view. In sectors such as oil and gas and in the refining business, the scale of the investment is enormous.

I have also had the pleasure of visiting companies such as FMC Technologies and Oceaneering at their headquarters in the United States of America. John Gremp, the chief executive officer of FMC Technologies, told me, “There are only three guys that ever come and see me—Singapore, the state of Louisiana and Scotland. I like Scotland.” He went on to add that he was not a wild fan of federal government, for reasons that one may deduce.

There is confidence in Scotland in many sectors of the economy where we have great strengths. That confidence comes from knowing that, in this country, we welcome investment. It is difficult to generalise about whether mergers and acquisitions are in themselves a good thing. They are, after all, simply mechanisms and structures. What is more important is that Scotland is the best place in the world to do business. I want that to be the case and I believe that in many cases Scotland is seen as pre-eminent. Yesterday evening, we had a reception for the oil and gas sector that was extremely well-attended and the general mood was one of optimism and a belief that Scotland is a good place to do business.

My friend Mr Malik made a number of points. For the record, I strongly disagree with a number of his contentions. We have wind turbine manufacturing companies with a presence in Scotland. Gaia-Wind Ltd in Glasgow manufactures turbines and I believe that Wind Towers in Argyllshire also manufactures turbines. In addition to that, we have attracted most of the large players in the world. I believe that Gamesa and Arriva have commitments to come to Scotland and that is welcome.

The presence of such companies has been hard fought for by Scottish Enterprise, Scottish Development International and Highlands and Islands Enterprise. Every single major inward investment is a result of a huge amount of work. It cannot be otherwise. We cannot expect any company to invest in Scotland just because we wish it; we have to show commitment and we have to provide the relevant support. In my experience, most companies are not looking for large cheques. They want to know that they are coming to a country where there is a supply of labour; a positive attitude to work; a supportive Government environment; and sufficient governmental support for training and for additional costs that may arise from taking particular premises from a multitude of areas.

We do our best to provide all that but, above all, companies like the can-do attitude and, if I may say so, the direct access that they have to me, the First Minister and the Cabinet Secretary for Finance, Employment and Sustainable Growth. We will move heaven and earth to attract major investment to Scotland; we do it every day. We provide that leadership across a whole range of sectors that are doing very well—oil and gas, renewables, finance and also the chemical industry, which I believe does not receive sufficient coverage. The tourism sector is doing so well that, as the First Minister said, Scotland has been singled out by CNN as being one of the best countries, if not the best country, to visit in the world. Such things do not happen by accident; they happen because of the people involved in the business.

Therefore, although I am grateful to Mr Mason for raising the topic of mergers and acquisitions, it seems to me that the more fundamental point that we should bear in mind—one that should be the leitmotif for our policy on enterprise—is that we must continue to strive and to look forward to tomorrow, rather than praising ourselves for what we may have had a part in achieving yesterday, to ensure that Scotland is the best place in the world in which to succeed in business.

12:59 Meeting suspended.

14:30 On resuming—