The Dutch perceive that the ‘barbarians’ are standing at the gates: their Crown Jewels Unilever and AkzoNobel, frontrunners in global sustainability, are at risk of being taken over by foreign multinationals. The Minister of Economic Affairs Henk Kamp, came up with an answer for the Dutch government: a mandatory respite for the target in case of an attempt at a hostile acquisition. This can be helpful where it stimulates careful decision making. However, it does not solve the core problem: a takeover can be attractive to a group of shareholders and yet damaging for society as a whole. Hence, what is (also) needed is a societal takeover test.
The proposed respite does not protect against patient buyers waiting their chances, short term oriented shareholders of the target or business executives who are themselves happy to sell their company.
Mega takeovers can have huge societal costs as a result of amongst others rising prices, job losses and a loss of sustainable production. The problem is that shareholders who now often have the final say but do not bear these costs; it is society that bears this burden. If the idea of the free market is to deliver welfare to society, then it must be corrected if it fails in doing so. In a well-functioning economy, there is no place for takeovers that at the end of the day result in a damaged society. This principle is already recognized in the competition law that protects consumers and it is time to widen the scope to all stakeholders. Time is here of the essence, now that we face on top of everything, the looming consequences of climate change.
The solution to the problem of potentially harmful takeovers, is the introduction of a mandatory societal test: takeovers should only take place if they do not create harm to society. Whilst in the past it was a challenge to obtain a reliable test, we now have the tools and means to conduct a Societal Cost Benefit Analysis (SCBA) of a takeover. In this approach, all the effects of a takeover for stakeholders are assessed and, wherever possible, expressed in euros, to be validated by stakeholders. Such an analysis enables us to trade off the advantages and disadvantages as objectively as technically possible. This test can take place under the supervision of the Enterprise Division of the competent court (Ondernemingskamer in the Netherlands) or an independent acquisition commission as a societal equivalent to the British take-over panel.
For the case of AkzoNobel-PPG, we produced a first estimate of the costs and benefits of the takeover for shareholders, employees, consumers and the climate. The effects for shareholders are highly uncertain, but overall large take-overs do not work out well for this group. Employees and consumers can experience severe deceptions: job losses and price increases.
The environment can potentially suffer considerable damage as well. AkzoNobel is known to give special consideration to sustainability. If AkzoNobel’s performance on sustainability should fall to the level of PPG, the societal costs of CO2 emissions – amongst which flooding, food scarcity and deceases due to climate change – could increase in monetary terms up to 7 billion euros.
The four effects together are expected to cost society 6 billion euros. This preliminary analysis contains substantial uncertainty: these four effects could cost society as much as 30 billion euro and could even be slightly positive (5 billion euro in the most optimistic scenario). The total effect of the takeover could be much greater as we left out many issues such as pollution, resource use and the net fiscal consequences.
In the case of AkzoNobel and PPG, a mandatory societal test may come too late given the through-put time of new legislation. However, the investors and business executives involved currently in the potential takeover all have the responsibility to consider the societal costs and benefits. The board of AkzoNobel should not agree to a possible takeover if the societal costs are large or unknown. Furthermore, the Dutch Enterprise division of the court could possibly stimulate for the SCBA to become part of the conversation.
As a community, we should no longer accept billions of losses, to serve only a few financial players. Society should have the final say, and a societal test for takeovers is long overdue.
Dr. Adrian de Groot Ruiz is Executive Director of True Price and Prof. dr. Dirk Schoenmaker is Professor Finance at the Rotterdam School of Management and Senior Fellow at Bruegel.
The original article was published in de Volkskrant (In Dutch) on May 24 (page 24).