Article published exclusively on the Institut économique Molinari’s website.
As a large wave of takeovers has gained all of Europe, it awoke the old demons of protectionism in the form of economic patriotism. It is a matter of reinforcing the regulation or to see takeovers forbidden in order to preserve the nationality of companies and employment.
As a large wave of takeovers has gained all of Europe, it awoke the old demons of protectionism in the form of economic patriotism. It is a matter of reinforcing the regulation or to see takeovers forbidden in order to preserve the nationality of companies and employment. And yet, by applying the brakes to the reorganisation of companies, public authorities harm the purchasing power of consumers.
The importance of a company’s future production, its sales and its profits depend obviously on the effectiveness and the skill of its management. If the present profits and the anticipated future profits are below what they could be because of a defective management then the market will evaluate the value of the company’s shares below what it would be with an effective management. With the company’s shares in question being then evaluated as regards to its potential value, an opportunity exists for other firms and businesses to buy the company at a lower price. By replacing the management with a more effective team of managers, the buyer can realise a profit.
Takeovers make it possible to discipline managers who could otherwise continue to be unaware of sources of inefficiency in the company. It is thus because listed companies face a difficulty known as the principal-agent problem. The company owners must find the means of challenging managers to use the company’s resources in the most profitable way possible, knowing that because they are dispersed, it is often difficult for them to take organised actions.
One way of solving this problem is to make it so that managers possess a significant part of the company’s stocks so that a considerable share of their income comes from the company’s performances.
Shareholders also have other means of putting pressure on managers since the board of directors engages and dismisses managers. The risk is however that conflicts appear to control the board. In this game, the shareholders are less well placed than the managers who can use the company’s resources to do their lobbying work whereas the rebellious shareholders must use their own resources.
In wanting to reduce or eliminate this possibility where shareholders buy and sell their deeds and thus place pressure on the managers, public authorities make more difficult for entrepreneurs to shift resources from location and employments in which the public values them less to those in which the public values them more. While abstaining from intervention, the government leaves the decision of rewarding a company by profits or sanctioning it by losses to the consumers. In the latter case, the firm will not have any choice other than to reallocate its resources, due to its failure to have earlier known to stick to the preferences of the majority of individuals.
Takeovers make it possible to put an end to sources of loss, to increase the wealth of shareholders and thus to preserve employment which would otherwise have been lost if the company had been brought to bankruptcy for failing to satisfy its consumers. Takeovers are thus an alternative to bankruptcy which leads in a brutal way to a total reallocation of assets to better performing companies.
An industry’s prosperity cannot be decided by law, it has to be created. If one allows the owner’s deeds to be exchanged freely on the financial markets, they end up in the hands of those who think they are most capable of developing them. The reason why they are better placed than the public authorities to carry out this task is that they will have to undergo the financial consequences of their actions in the event of failure. The bureaucrats while escaping the sanction of loss and profit, cannot do other than carry out industrial projects by hazard and chance.
It is thus necessary to recognise the legitimacy of takeovers and to make sure that foreigners are free to make purchase offers. It is equally important that nationals are free to compete with them. The freer the financial market is and the more the shareholders’ right is respected, the more the industry’s prosperity depends on industrial projects being adequate to consumers’ requirements.
Cécile Philippe, Director, Molinari Economic Institute and fellow of the Centre for the New Europe
