He argued that it would really force the institutional shareholders to get
off the fence and think through their attitudes to debt and gearing levels.
It’s high time they did. At the moment, predators can borrow all the money
they need to buy a business and pay down the debt out of the acquired companies
The technique, first used by private equity funds, has now been adopted
wholesale by foreign predators – Telefonica for O2, Nippon Glass for Pilkington
and probably Ferrovial for BAA, being among the most recent.
But when existing managements try to use the same weapons, they get no
backing from the institutions. For example, when Pilkington sought to raise
funds so it could acquire smaller company Nippon, rather than be acquired, its
board was told the shareholders would rather have the money.
This raises an interesting point. Corporate governance has recently aimed to
make management accountable to its owners, in order to address the agency
But what it ignores is that institutional fund managers are agents, too.
Because they are agents, the risk is that their behaviour will reflect their
private interest rather than their public duty.
In other words, they will accept a takeover because it boosts the value of
their fund in the short term and means they get a thumping quarterly bonus. So
it is all very well letting the market decide who owns Britain, but we should
make sure first that the market is not dysfunctional.
Anthony Hilton is the financial editor of the Evening Standard
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