Thursday, February 23, 2006

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Freaking out about takeovers

It should be pointed out that the United States is not the only country currently wigging out about foreign direct investment. This seems to be the theme du jour across the globe. Some examples:

1) As much as Americans might not be thrilled with Google's new China presence, it appears that some Chinese aren't pleased either. Philip P. Pan reports for the Washington Post:
A state-run newspaper reported Tuesday that Google Inc. is under investigation for operating without a proper license in China and quoted an unnamed government official as saying the Internet giant needs to cooperate further with the authorities in blocking "harmful information" from its search results.

The report, in the Beijing News, was published the same day that another state newspaper ran a harshly worded editorial about Google. The paper accused the firm of sneaking into China like an "uninvited guest" and then making a fuss about being required to follow Chinese law and cooperate in censoring search results such as pornography.

The unusually bold attacks in the state media suggest that the Chinese government is unhappy with Google's efforts thus far to filter politically sensitive results from its popular search engine in China, and that its ability to do business in the country may be in jeopardy.

Google has since received is licence, but only after indicating that it was "'willing to receive guidance' from the authorities."

2) Bloomberg reports that the Spanish government is getting into trouble with the EU because of its resistance to a foreign takeover:

Europe's top regulators warned Spain against trying to block a $35 billion takeover of Endesa SA by Germany's E.ON AG as Spanish government leaders stiffened their opposition to foreign ownership of utilities.

The European Commission threatened legal action against Spain for seeking to keep its power and gas industry in national hands, a day after E.ON announced the 29.1 billion euro ($34.7 billion) bid, the biggest ever in the utility industry. Spanish Prime Minister Jose Luis Rodriguez Zapatero today repeated opposition to the bid, calling Endesa "strategic'' for the country.

3) Other EU countries are also having fits about hostile takeovers. Martin Arnold and Tobias Buck report in the Financial Times that France is getting quite creative in trying to fend off Mittal Steel's bid for Arcelor:
France is preparing to push European Union takeover rules to their limits again by giving companies the right to use so-called poison pill defences to rebuff hostile takeover bids - even if they come from companies unable to use similar strategies.

The new rules allow companies subjected to a hostile bid, or expecting a possible raid, to issue warrants convertible into shares at adiscounted price to existing shareholders, making any offer more expensive and encouraging friendly talks.

Thierry Breton, finance minister, told the Senate yesterday: "To think we can keep economic activities in France by opposing any change in their owner-ship would be a great mistake."

Instead, he said he aimed to "give French companies the ability to defend themselves on equal terms".

But by letting companies use poison pills to ward off bidders - such as UK companies - that do not have access to similar measures, the French government seems to be going against the spirit, if not the letter, of the recent European takeover directive.

4) The French and Spanish moves could trigger a cascade effect within the European Union to restrict hostile foreign takeovers, as this companion FT story by Tony Barber relates:
The threat of creeping protectionism across Europe deepened on Wednesday when Italy raised the prospect of toughening Italian takeover laws in retaliation against France’s efforts to deter foreign bidders from acquiring French companies.

Giulio Tremonti, finance minister, said Italy was among the most “market-oriented” countries in the European Union and disliked protectionism, but it could not ignore France’s firm line on hostile takeover bids.

In a move that has rattled the European Commission, the French government is proposing to let companies use “poison pill” defences to thwart hostile bidders.

“The Italian law on takeover bids is among the most open and was written before the European [takeover] directive, which was then changed in a more restrictive sense, as is happening in France,” Mr Tremonti said.

“I don’t think this is the right way, but it has to be taken account of, if reciprocity is to be guaranteed. The company under attack at the moment has more limited defences than the attacker,” he told reporters.

Mr Tremonti said it was not only France’s preparations to tighten its takeover rules but also current German laws that had stirred concern in Italy.

As much as trade deficits trigger protectionist backlashes, there's something about FDI that generates even more nationalism.

Why? My hunch would be that it is easier to freak out about concrete examples rather than abstract statistics, and the FDI situations are all about individual takeovers. Plus, despite pretty strong evidence to the contrary, there is still a belief that a foreign firm will act as a willing and enthusiastic agent of the home country government (though, to be fair, this suspicion might be a bit more justified when you're talking about a state-owned company).

A question to readers who oppose the port deal -- what do you think of the Euro-reactions? Are they overblown or thoroughly rational?

posted by Dan on 02.23.06 at 05:54 PM


Overblown, without a doubt. I can see why small countries that have had unpleasant experiences with foreign companies ( or are concerned about bribery of local officials) would be apprehensive. No reason for the European countries to be so concerned except for in rare cases where security is involved.

posted by: erg on 02.23.06 at 05:54 PM [permalink]

Wrote a long response on my blog:

posted by: MGG on 02.23.06 at 05:54 PM [permalink]

You forgot te Arcelor/Mittal Steel deal.

posted by: bartman on 02.23.06 at 05:54 PM [permalink]

I'm commenting even though I do NOT qualify, r.e., "A question to readers who oppose the port deal -- what do you think of the Euro-reactions?"

My thoughts posted here.

posted by: John B. Chilton on 02.23.06 at 05:54 PM [permalink]

It is not about FDI.

It is about security.

No one cares if overseas interests buy a steel mill in Ohio, heck, it usually improves the management.

It is about security.

posted by: save_the_rustbelt on 02.23.06 at 05:54 PM [permalink]

I think the issue of foreign ownership and its affect on national identity, culture, security interests, the long-term economic strength of the host country, etc. are issues that don't get discussed nearly enough as the world steams along on the globalization jugernaut.

The opposition to the port deal is undoubtably, in part, an expression of the fear of that. And I must say that fear would probably not be as great if some bright minds would spend more time looking ahead at where this train is taking us because right now it's a big unknown and big unknowns scare people.

posted by: DS on 02.23.06 at 05:54 PM [permalink]

question to readers who oppose the port deal -- what do you think of the Euro-reactions? Are they overblown or thoroughly rational?

Huh? America's ports are without question the most vulnerable part of the nation's security infrastructure. Port "security" is nonexistent. And Dubai is the central conduit for money flows by the criminal organizations that exercise huge influence across a failing state with the largest and most poorly-secured WMD arsenal on the planet, ie Russia. Russian mafiya + Dubai + US port security = risk. Again, why add to what are already enormous risks with our ports infrastructure?

As to your q, Dan, could you please explain what exactly an intra-European energy deal has to do with the US giving control of the most vulnerable links in its national security fence to the nation that launders the Russian mafiya's money? I don't see the link. (Then again, I'm not a xenophobe, and I'm totally in support of free trade and cross-border investment; I just happen to know a bit about Russian capital flows and the relationship between Russia and Dubai.)

posted by: thibaud on 02.23.06 at 05:54 PM [permalink]

On a case by case comparison it's really about two things concerning the port deal that aren't involved in the others.
A state-owned corporation and national security.
Pakistan has been a good ally in the fight against global terrorism says the administration. Doesn't mean we should hire a Pakistani state owned security firm to guard our borders or patrol our airports.

posted by: carsick on 02.23.06 at 05:54 PM [permalink]

"Pakistan has been a good ally in the fight against global terrorism says the administration. Doesn't mean we should hire a Pakistani state owned security firm to guard our borders or patrol our airports."

Yes, but suppose the Bush administration *did* choose to contract out our border defense to a pakistani firm. Wouldn't Drezner then claim that the we should support the deal, unless somebody came up with solid reasons that showed they'd do a bad job of it?

posted by: J Thomas on 02.23.06 at 05:54 PM [permalink]

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