Takeovers are bad for health

Huw Richards reports from the annual conference of the Royal Economic Society in Swansea on take-overs, pay and satisfaction.

Nothing excites the City of London or the financial media more than a big takeover. Battles like the Guinness-Distillers contretemps of the late 1980s and the activities of predators like Lord Hanson have gone into legend. And takeovers are commoner than ever.

Andy Dickerson, lecturer in economics at the University of Kent, says: "Almost 10 per cent of the value of the London Stock Exchange - around Pounds 66 billion - changed hands in 1995 and the indications are that 1996 could be another record year. Takeover activity is far greater in the United Kingdom than in any other market, well ahead even of the United States. By comparison, the figures for Germany and Japan are minuscule."

Dr Dickerson, working with Kent colleague Heather Gibson, and Euclid Tsakalatos of Athens University, presented research at Swansea based on seeking the answer to two questions: Why are there so many takeovers in Britain? Is it a good thing that this happens?

They examined data for 2,941 Stock Exchange-quoted companies with a minimum of ten years' consecutive figures for each and found that more than one in five have made at least one acquisition in the period 1948-77. While their findings are historic rather than current, they note that their period included two major waves of takeovers and suggest that the current much higher rate of activity may accentuate the outcomes they observed.

Their findings show that companies which made acquisitions did less well than non-acquirers. There were initial short-term benefits but overall, the acquirers showed a 14 per cent shortfall in performance, compared to the rest of the sample. Dr Dickerson says: "Companies will do better for their shareholders in the long run if they grow by investing in themselves rather than in takeovers. There was a clear advantage in the performance of companies who chose investment-led growth."

Whether that message will be heeded in the City or in Whitehall is another matter. He is wary of offering policy prescriptions, noting that the takeover is deeply rooted in British financial culture and institutions: "There are whole sectors of the City devoted solely to this market in corporate control."