The Protectionist Threat to Cross-Border M&A

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Certain governments in Europe appear to want to protect "crown jewels" and have instead sought to foster combinations between domestic companies that would create "national champions." Efforts to promote combinations among national competitors, even if not the best deal for shareholders or consumers, is justified by the perceived need to save jobs and control national resources.

The most recent high-profile nationalistic reaction to a foreign takeover occurred in none other than Britain. The U.K. has long championed free trade and minimal limits on cross-border acquisitions. Beyond that, it has long restricted U.K. companies' ability to take actions to thwart an unsolicited bid. The premise has always been that the highest bidder should prevail in an unfettered market for control. In the wake of Kraft's (KFT) recent acquisition of U.K. candymaker Cadbury, and subsequent plant closures and job losses in the U.K., that could be changing.

One of the most hotly debated issues during the recent British Parliamentary elections was the question of what to do about foreign acquisitions of U.K. companies. With high unemployment, a weak economy, and ballooning budget deficits, many candidates, spurred on by trade unions and economic nationalists, were proposing a "Cadbury's Law" to protect British business even though U.K. companies have traditionally been far more likely to acquire companies abroad than to be acquired by non-U.K. companies.

The U.S. Gets Antsy

Protectionist policy is by no means limited to Europe or intra-European deals. We need look no further than Washington, D.C., to find a policy that is less open to foreign acquisitions today than it was just a decade ago. Two high-profile potential acquisitions, China's CNOOC's (CEO) proposed acquisition of Unocal (UCL) and Dubai Ports' acquisition of the U.K.'s Peninsular & Oriental (operator of a number of U.S. ports) led to the adoption of the Foreign Investments & National Security Act of 2007. This law essentially allows the U.S. government to block non-U.S. acquisitions of U.S. infrastructure, technology, and energy assets that it determines could have a debilitating impact on national security.

While recent U.S. governments have been pro-trade and in favor of foreign investments in the U.S., that intellectual understanding unfortunately does not always translate into actions that promote cross-border M&A. The pressure to block cross-border deals, while often cloaked in national security concerns, can in fact be nothing more than protectionism. The line is usually quite thin and rarely bright. The most recent example is the Obama Administration's decision to block, on national security grounds, a Chinese company from acquiring mining concern FirstGold. While the government's decision to halt the FirstGold acquisition may have been appropriate from a national security standpoint, it unfortunately sends a less than welcoming signal to overseas investors.

The past two years have been rough ones for the U.S. and the global economy. Even with a sustained recovery, we will experience high levels of unemployment and potentially weak economic growth for some time to come. Hopefully, governments around the globe will understand the lessons of the Great Depression and promote, rather than discourage, foreign direct investment. The benefits of cross-border M&A deals are clear. So too are the dangers from efforts to thwart them.

Aquila is a partner in the Mergers & Acquisitions Group of Sullivan & Cromwell LLP.

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