Why Whitehall is Talking Tough on Foreign Takeovers

The Johnson government is worried about "hostile actors" buying stakes in UK companies to weaken national security. Here's what these new rules mean

James Gard 6 January, 2022 | 12:16PM
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What is the National Security & Investment Act?

New rules came into place on the first working day of 2022 that make it harder for overseas firms to buy UK companies in industries deemed to be of heightened security risk.

What Sectors Are Covered?

The list is a broad one and covers many aspects of the British economy. The government defines what companies belong in what category--and some are narrower than others ("civil nuclear" is more specific than “energy” or "communications" for example). 

In full they are: advanced materials, advanced robotics, AI, civil nuclear, communications, computing hardware, “critical suppliers to government”, cryptographic authentication, data infrastructure, defence, energy, military, quantum technologies, satellite and space technology, suppliers to emergency services, synthetic biology and transport.

How Does it Work?

A potential buyer of a firm in these industries will have to inform the UK government if it plans to make an acquisition. The state will then use an investment screen to impose conditions on a deal or reject it altogether. This is in addition to existing takeover and competition laws.

What if a Fund Manager Buys a Small Stake in a Company?

The Act covers a “controlling” interest in a company based on various thresholds--more than 25%, 50% or 75% of a company. Each move above one of these thresholds triggers a new “notifiable” interest that has to be declared and the deal has to be scrutinised again. Fund managers are unlikely to hold these kind of stakes in companies.

What About Previous or Current Deals?

Any deals made from November 2020 can be rejected under the new laws. Previous details can be dismantled if false information was given at the time. 

Why is This Happening Now?

The takeover frenzy in the UK stock market has seen a number of London-listed companies head into foreign ownership, often as a result of US private equity interest.

In recent decades governments of all stripes have been accused of allowing the UK's “crown jewels” to be sold off cheaply. Tech darling Arm Holdings was bought by SoftBank in 2016, for example.

Now Nvidia is buying Arm, ministers are getting involved in the process. Coincidentally, Arm's value has soared since leaving the LSE, which itself argues that UK investors and fund managers missed out on a chunk of growth in that time.

When China won a role in building the Hinkley Point nuclear power station more than a decade ago, the deal caused a rift between the Conservative and Liberal Democrat halves of the then-coalition government: one side argued the UK should retain a "golden share" as a failsafe, but this was rejected at the the time.

France’s EDF still is the lead on the project, so the UK government seems more relaxed about having an EU country in control of nuclear infrastructure--as opposed to China, which now looks like it could be bought out of the deal completely.

Today, telecommunications is the new battleground for states to squabble over. China’s mobile phone company Huawei, for example, is being blocked from using Britain's 5G networks from 2027, a security council issue in Whitehall that blew up in 2019 and resulted in the sacking of then-defence secretary Gavin Williamson.

What Does it Mean for Retail Investors?

There are already rules in place for sensitive sectors like defence, so investors in these companies know that takeovers are rarely straightforward and can take longer.

That said, these companies can be taken over at a chunky premium when the "right" buyer arrives. Meggitt (see below) has been bought at a roughly 60% premium to the pre-offer price after a number of companies got involved.

What's potentially interesting--and positive for the UK as a place to list companies--is how wide the sectors deemed to be affected by national security concerns actually are.

Sectors like artificial intelligence and robotics are seeing staggering growth rates, and "national champions" may emerge among British companies.

In theory, these companies should stay LSE-listed for longer. But investors may have to forfeit the short-term sugar rush of the foreign takeover bid if they want this to be the norm.

Are There Current Deals Affected by the Legislation?

Business secretary Kwasi Kwarteng has intervened in the takeover battle for aerospace and defence firm Meggitt (MGGT), seeking assurances on access to military technology in the future. Parker-Hannifin had been asked to make pledges to keep UK jobs, keeping the board British and continuing to supply the UK government. Morningstar analyst Joachim Kotze thinks the deal will go through and close at the end of 2022.

What About the Rest of the World?

Other countries have different--and in some cases much stricter--approaches to takeovers “in the national interest”. As a highly militarised nation, the United States takes a much tougher line than the UK, particularly in the all-important area of defence, and has rules prioritising US-made goods dating back to the Second World War.

Trump’s trade war with China, meanwhile, has been extended in the Biden era, and has legislated against many Chinese companies in certain sectors deemed to be in the national interest. China has retaliated.

As such, the UK government's latest move could be seen as Britain catching up with the rest of the developed world, where protectionist measures are now the default after a more laissez faire period of globalisation.

It also signals a tougher approach taken by a governing Conservative party with a significant majority in Parliament since 2019, and wishing to flex its muscles now that Brexit--and EU competition law--is out of the way.

The rhetoric suggests that the UK isn’t just worried about UK companies being bought cheaply, it is concerned about deliberate manipulation by rogue states. “In recent years, hostile actors have sought to undermine British interests by acquiring sensitive companies and their assets,” Kwarteng tweeted this week. 

At the end of 2021, business minister Lord Callanan, wrote about the risk of "ever more ingenious threats to our national security".

"I understand that the majority of investors are only seeking to grow their businesses and contribute to the UK economy by investing here, but it is an unavoidable truth that a handful want to do us harm," he wrote.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard

James Gard  is senior editor for Morningstar.co.uk


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