Ian Clark, Professor of Employment Relations at the School, discusses a controversial contemporary acquisition bid through the concepts of financialisation, ownership and employee relations.
Astra Zeneca is the UK’s second largest pharmaceuticals firm: it sells £7 billion worth of drugs every year and contributes 2.3% to total UK exports. The firm employs 51,000 workers globally with 7,000 in the UK dispersed over eight sites. If Pfizer acquires Astra Zeneca the deal will be the largest foreign takeover of a UK firm and will dwarf recent deals which saw Alliance Boots and Cadbury change not only owners but nationality. Under takeover panel rules Pfizer has until May 26th to secure the deal.
The case empirically supports the research agenda I recently laid out for the School’s Centre for Sustainable Work and Employment Futures (CSWEF). Here I reprise some of that argument, through the example of Pfizer, under the headings of financialization, ownership categories and associated contexts for stakeholders. Before getting to that, take a note of the following firms – many of which I doubt you will have heard of – we will get back to them: VPC AB, Blackrock Investment, Wellington Management, Investor AB, Invesco Asset Management, Legal and General, State Street Global Advisors, Capital Research and Management, Aberdeen Asset, Norges Bank Investment Management
Financialization refers to the growing importance of the financial sector, sources of investment and finance in the financial sector, the uses to which financial sector institutions put these funds in non-financial firms such as Pfizer and Astra Zeneca and the associated imperative of securing profits to return monies to investors and shareholders. One effect of financialization is that firms such as Pfizer and Kraft and newer investor-owners such as KKR who bought Alliance Boots often fund acquisitions via some form of leverage.
A second effect is that financialization brings with it new types of ownership, associated approaches to corporate governance and attitudes towards existing implicit contracts with established stakeholders such as employees, customers, suppliers and taxation authorities. Ownership attitudes towards corporate governance and implicit contracts are likely to be informed by the imperative of returning money to investors and creditors.
Because Pfizer’s bid is unsolicited, only Pfizer insiders know how it will be financed. What we do know is that it cannot be an ‘all cash’ deal because to re-domicile in the UK and secure taxation savings relative to the USA – a major plank of Pfizer’s strategy – Astra Zeneca shareholders must own 20% of the shares in the new combined group. So tax and patent box arbitrage represent key motivational factors for Pfizer as taxes on profits and patents are lower in the UK than the USA. The flipside to arbitrage is consolidation; all that Pfizer has offered by way of commitment to Astra Zeneca’s workforce is that 20% of the new combined group research and development staff will be based at Cambridge for up to five years. In real numbers this commitment covers only 2,000 jobs.
Tax gaming and tax domicile flipping from the US to the UK and potential consolidation are the key deal drivers. They represent a clear statement of short-termism and other than potential tie ups with five UK Universities eschew any longer term commitment to research and development in what is currently one of the UK’s strategic industrial sectors.
Established approaches in comparative political economy and comparative employment relations have developed theoretical, institutional and empirical tools to evaluate and predict the behaviour of multinational firms under various headings. Country of origin effects suggests that parent firms seek to export business and HR strategies which are embedded in a parent business system to their subsidiary operations. Conversely, host country effects suggest that multinationals downplay ethnocentrism and accommodate host country diversity to develop a pattern of local responsiveness rather than global standardization in business and associated HR strategies. Finally in some cases firms are embedded in sector effects where the rules of the game in a particular sector are strong enough to overcome country of origin effects.
Out of these categories comes the notion of Amerincaness, Britishness, Germanness and Japanesness, etc. which yield some predictive if stereotypical certainty about how firms of different nationality react in a host country or a particular sector. One limitation of these approaches is the concentration on firms by nationality at the expense of ownership characteristics. Part of CSWEF’s research agenda examines the increasingly empirical presence of heterogeneous firms by ownership category. In the UK, this is manifest in two recent developments which appear to confound the country of origin and its associated effects.
Firstly, the emergence of the ‘British-based foreign owned multinational’ for example, Mini, Jaguar Land Rover, and Bentley which operate distinctively and differently to subsidiaries of multinational firms. Secondly, the presence of British-based firms owned by international consortium investors such as British Airports Authority and Thames Water, these firms are different to Mini Jaguar Land Rover, Bentley and Rolls-Royce because they are not subject to majority ownership by one group but alternatively large numbers of investors behind a lead overseas investor.
For example, BAA is technically a Spanish firm whereas Thames Water is controlled by a European subsidiary of an Australian investment group. Previously British but now British-based firms were often tied into dependency effects of domestic institutional regulation or to put this more simply the routine of the British economy and associated aspects of regulation. New global investors however, often feel less constrained by these dependency effects, Witness the efforts of Kraft to sell or wind up the Cadbury final salary scheme or Alliance Boots termination of the guarantee that the production of all Boots own products were free of child or forced labour and the attempts made by the firm to breach implicit if legally enforceable terms and conditions agreements with in-store Pharmacists.
If Pfizer does acquire Astra Zeneca it is unclear what type of firm the combined group will be but it is likely to take the following form – a new UK domiciled holding company which is headquartered in New York and listed on the New York stock exchange. Under this ownership arrangement Astra Zeneca’s non-dollar profits will not be subject to US taxation but to the UK’s lower rates and there will be little or no taxation on profits generated in none UK jurisdictions when and if they are repatriated. In addition to this, the new combined group will be able to further cut tax liability by intra firm intellectual property dealing. Therein intra firm on-shore groups – product or national divisions or subsidiaries are charged to use a brand, patent licence or product which is owned and domiciled off-shore.
This brings us to a question asked by Martin Wolf in the Financial Times – namely ‘what are firms for?’ the maximization of profits and share prices and the minimization of taxation liability or the long-term future of the firm?. In the case of the UK the answer is currently crystal clear because the industrial policy of the current ConDem government like that of the previous Labour government is really a taxation strategy to secure foreign direct investment. Therein low tax, free and open trade secures low wage low productivity in free and open trade which exposes managers and workers to the full blast of globalization where sustainable growth means insecurity and drive-downs.
There are at least six stakeholders with an interest in the outcome of the Pfizer Astra Zeneca acquisition: the American and British tax authorities, small scale US investors, politicians, the UK Science community, the EU and the workers at both firms. In contrast to these stakeholders each firm has an ownership group. If the deal goes ahead Pfizer will pay less tax than it currently does in the US therefore the UK’s tax policy helps a firm avoid tax where it takes up a convoluted hybrid form of part US, part UK part British-based foreign owned firm. Fifty other American firms have taken the same route and currently another eighteen are considering use of the UK domiciled holding company listed in the USA prompting American politicians to propose legislation to block US firms from shifting their legal address overseas to avoid US taxation liability.
For small scale American investors the proposed deal is not such good news if they hold their shares in taxable accounts because they will have to pay 20% capital gains tax. For American and British politicians the potential deal is proving both a personal and a political headache. In the US politicians in both Maryland and Delaware where Pfizer has operating units fear job losses if the deal goes through and Pfizer inserts Astra Zeneca into one of its three divisions one of which it is likely to divest. This prospect is in addition to the feared stateside loss of research jobs to accommodate Pfizer’s five year commitment to retain 2000 jobs in the UK.
For British politicians the stakes are even more complex. Business Secretary Vince Cable now appears at odds with his own long-term credentials laid out in the department of Business’s call for evidence on ‘a long-term focus for corporate Britain –a review into corporate governance and economic short-termism’. For Ed Miliband, Baroness Vadera, a long term labour party donor is an Astra Zeneca director. More unluckily, for David Cameron the Tory party election strategist Mark Textor and business partner of Lynton Crosby has advised Pfizer and Gabby Bertin, press secretary at Downing street was paid £25,000 by Pfizer whilst employed at the Atlantic Bridge Charity run by Conservative MP Liam Fox. On behalf of the UK science community the Wellcome Trust, the UK’s biggest medical research funder outlined major concerns with the deal in a letter to the Chancellor of the Exchequer. In addition to this thirty of the UK’s leading scientists wrote an open letter in the Daily Telegraph urging the government to protect Astra Zeneca.
The stake held by the European Union is more complex but none the less compelling. Under UK legislation in the Enterprise Act the business secretary can intervene in any takeover where there is a public interest threat to national security, media plurality or financial stability of either firm in a particular case. It is unlikely that the acquisition of Astra Zeneca would constitute an exceptional case where the EU allows national governments to act. This is the so because EU competitiveness rules focus on the impact of proposed deals on competition not jobs. On behalf of UK workers the GMB union has described undertakings from US multinational firms as worthless adding that both in the US and elsewhere Pfizer has a dubious record on consolidation post acquisition. Whilst the union supports Astra Zeneca’s current re-location to Cambridge it is clear that the proposed deal will create sustained job insecurity.
In the US there is now a sustained job loss backlash led by politicians and trade unions. Many observers have pointed out that Pfizer recently closed its own UK research and development facility resulting in the loss of 1500 jobs. More critically these observers add that Pfizer and Astra Zeneca are the two biggest market makers for drugs in China and that Pfizer are involved in a huge joint venture in China. In summary the prospects for American, British and Swedish workers where Astra Zeneca has some operations look bleak in the context of a five year commitment to a maximum of 2000 British research and development jobs.
What about ownership? Remember the ten institutions cited in the introduction? They are the ten biggest investors in Astra Zeneca, owning about 38% of the firm. This means that more or less 38% of shares in the company are British owned, a further 10% of shares are owned by Swedish investors with American investors holding a current minimum of 20% of shares. Sound familiar? At Cadbury, over 40% of shares were owned by American investors with no connection to the Quaker heritage of the firm. Demand by hedge funds for Cadbury shares drove the share price up encouraging shareholders to sell out. Some of Astra Zeneca’s top ten have come out in favour of the deal while others have failed to do so as yet.
This returns us to the research and scholarly agenda. Financialization is the key contemporary business driver. Combined with newer and more heterogeneous ownership categories which this case demonstrates, globally focussed actors operate beyond embedded institutional contexts and easily override liberal regulatory frameworks and associated implicit contracts. Ownership identities, attitudes towards finance and corporate governance have the potential to re-shape these categories in new ‘combined form firms’ and have the potential to re-shape long standing relations between managers and workers. Moreover, finance and ownership forms are capable of detaching and de-nationalizing a firm from its country of origin, that is, internationalizing its focus and status leaving nationality as a mere historical association. Ownership is as important as country of origin and the two categories are not the same. Nationality is less important where key ownership groups on behalf of shareholders and investors determine the future of firms.