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UK’s ABI blasts M&A fees, calls for long-term investing debate with SWFs and US pension funds

Association warns UK government though on protectionism.

The Association of British Insurers (ABI) has called for the UK government to instigate an ‘open-minded’ debate on the issue of long-termism in institutional investment and to reach out to sovereign wealth funds and US pension plans to build up “a critical mass” of committed long-term holders of UK companies. In a letter to Lord Mandelson, UK Secretary of State for Business, the ABI – which alongside UK pension funds is estimated to own about 25% of UK equities – weighed into a debate kicked off earlier this month by Mandelson on the long-term value of mergers and acquisition (M&A) deals, prompted by the recent Kraft takeover of Cadbury. Notably, the ABI backed calls by Mandelson for corporate chiefs to look at more than just price as a deciding factor in any deal. Peter Montagnon, director of investment affairs at the ABI, said: “We agree that getting a high price in a takeover may not be the perfect proxy for the fiduciary duty of directors to consider the best outcome for the company in the long term.” He said company boards should not feel obliged to recommend a bid as long as they can argue their position and remain accountable to shareholders. High levels of bankers’ fees and skewed incentives to complete a deal should also be examined, said Montagon. He said fees – believed to be about $400m in total for the Kraft/Cadbury deal – could be harming the availability of independent M&A advice and were often a “deadweight cost” on shareholders that swallowed a large part of any savings derived from a merger.The ABI said its members would also be sympathetic to shorter ‘put-up or shut-up’ deadlines for predators to lodge takeover bids. The insurer body was responding to a speech earlier this month by Lord Mandelson, UK Secretary of State for Business, which called for a new city Takeover Code. Among Mandelson’s main proposals were an increase of the voting threshold for takeovers from 50% to 66%. On this so-called “super-majority” point, however, the ABI said the government should avoid protectionism and maintain open markets: “Given the turnover in shares around takeovers, this could mean that decisions about the future of the company would be made by a very small proportion of the share capital.” Following criticism that long-term shareholders had been quick to sell in the Cadbury takeover, Mandelson had suggested that asset managers should also disclose the terms of their investment mandate – including pay – to encourage longer-term investment thinking. Again, the ABI said this could give rise to excess regulation: “Given that most fund managers are responsible for a large number of mandates, such disclosure could be extremely complicated, expensive and risk breaching commercial confidentiality.” In a broadside at the regulatory effect on long-term investing, the ABI questioned whether the solvency regime for insurers, pensions accountancy regime and rules on dividend taxation had combined to weaken incentives for long-term ownership of equities. It said a regulatory focus on providing liquid markets may also have fostered too much of a short-term trading culture.