Posted on October 25, 2007 by David Laidlaw
European governments have a history of trying to protect companies they believe are vital to their economy. They use special privileges, such as the right to rule on strategic decisions despite a less than majority ownership, to prevent takeovers and other actions they deem harmful. One can see how this practice would come into place. Company X employs the majority of a town and is being taken over by Company Y which wants to move the plant. The government blocks the takeover, Company X stays, the town remains employed and re-elects the politicians.
However, Company X is no longer operating efficiently. It now has a bloated payroll driving up its costs. Or its products are outdated resulting in poor sales. So while the employees and local governments are saved in the short term, the shareholders suffer as the company is generating less free cash, driving down the stock price.
The farthest reaching problem with this system is the harm to the end consumer. Protective actions often result in, for example, fewer choices, higher prices and/or inferior products.
The European Commission is cracking down on these arrangements as it seeks to promote the free flow of capital. On Tuesday October 23rd the European Union’s highest court struck down a law that shielded Volkswagen from a takeover from Porsche. The court ruled the government was not allowed to have “golden shares” giving it special influence over Volkswagen.
This problem extends beyond Volkswagen and Germany—Portugal holds interests in two energy companies, Poland gives special rights to 15 companies and Romania has interests in its biggest oil and gas firm.
One of the reasons we do not invest directly in Europe is because of the anti-competitive practices illustrated here. If the European Commission continues to foster competition and lessen government control on private companies, are enthusiasm for European companies will increase. In the long run, these actions will also help consumers as their spending options improve, even if some governments and entrenched companies feel short term pain.