The proposed $4.7 billion takeover of Smithfield Foods by China’s Shuanghui International Holdings raises important questions for US policy makers regarding foreign takeovers:
- Should food and agriculture be regarded as a strategic industry for which some level of ownership control matters?
- Is this a takeover by an independent foreign business or by a company controlled by a foreign state?
- In this industry as in others, why is the US losing in the global market for corporate control?
1. Strategic Industries:
Which industries, if any, are strategic to US interests and worth protecting? Washington can block deals if they are regarded as a threat to national security. For example, many components of the defence industry are kept in US hands to protect secrets and ensure US control of US defence. Washington has also discouraged foreign acquisitions of ports and energy assets.
So what about food and agriculture? Surely, to say that food and agriculture is a strategic industry is stating the obvious. Food, shelter and security are at the bottom of Maslow’s hierarchy of needs, i.e. the most basic. Blessed as we are, we may take it for granted, but for those countries that lack self-sufficiency in food or suffer from unreliable or unsafe agricultural supply chains, food shortages are the source of great misery, division and civil conflict.
In particular, food safety is a growing concern. The standards for food safety in the US and other western countries are more difficult to meet than those elsewhere. In addition, the industry is currently making significant investments in food tracing technologies, as consumers seek greater transparency of sources, and regulators and industry need to trace problems to source for crisis management and in order to better ensure accountability for safe practices and safe products.
The acquisition of Smithfield Foods in and of itself is no threat to America. US regulations will still apply and US management will stay in place (for now). As company president Larry Pope said: “Nothing’s going to change.”[1] However, policy makers need to decide where and how to draw the line. Smithfield Foods is the world’s largest pork producer, with 46,000 employees in 25 states[2]. How many Smithfields will it take before the US is overly dependent on food and agriculture decisions made by foreign controlled enterprises?
Note that regulation alone does not ensure food safety. In fact, as any food-processing expert will tell you, the culture of safety within the corporation is more important than regulations. Post audits of crises here and elsewhere have borne this out. So it is not enough to say that Smithfield Foods will be subject to the same regulations if the safety culture of the organization could ultimately be homogenized with China’s.
2. State Owned/Controlled Enterprises (SOEs):
Is Shuanghui an independent business enterprise as it appears to be or is it unduly controlled by a foreign government? One reason to ask is that state owned or state controlled enterprises (SOEs) can have unfair competitive advantages, especially in the M&A markets, such as lower cost of capital, direct or indirect policy support at home (e.g. protection from takeovers), and active government promotion abroad. Another reason is that it just doesn’t sit well to have critical resources in energy, mining and agriculture controlled by foreign governments. In times of peace and plenty it may not matter, but in times of conflict or shortages it could matter a great deal.
Many countries now draw this distinction in review of foreign takeovers and apply different rules to SOEs. Most recently Canada announced new policies for SOEs and as Prime Minister Harper put it, “Canadians have not spent years reducing the ownership of sectors of the economy by our own governments, only to see them bought and controlled by foreign governments instead.”[3]
So while the US needs to be “open for business”, perhaps it should be more open to real businesses than to SOEs, especially in strategic sectors such as food and agriculture. Like many Chinese companies, the degree to which Shuanghui International Holdings is state controlled is a matter for study, and policy makers will need to look beyond simply ownership positions and board seats to understand CEO Wan Long’s political involvement and to determine the true nature of the enterprise and its importance to China.
3. The Market for Corporate Control:
While the US was once at the forefront of global business development and growth, it is now losing in the global market for corporate control. In the previous decade, the US was the world’s largest net seller of corporate assets[4], selling control of over $300 billion more in corporate assets than it acquired. The US is followed by the UK and Canada as the countries selling more than buying, as industries restructure on a global basis.
Policy is a factor. The buyers are increasingly from developing economies, but the countries of continental Europe were the biggest net buyers in the last decade, acquiring in the US and globally. Notably, continental Europe and the M&A active developing countries each have less bidder friendly policies than the US. Differences in securities law, foreign investment policy and governance practices make it more difficult to acquire in France, Germany, or Italy, for example, than in the US, UK or Canada.[5] In some of the largest developing economies, such as India, China and Brazil, many industries are protected and acquisitions without a local partner range from difficult to impossible. So all other things being equal, these policies support a continuing trend of net losses in corporate ownership for the more open US, UK and Canadian economies.
Policy makers and corporate leaders should reflect on this trend. Notwithstanding the benefits of foreign investment to the US economy, the position of US companies on the global stage is also valuable. The corporate headquarters positions and supporting professional services, (e.g. investment banking, corporate law, accounting and audit, consulting), are among the highest paying jobs in America and support the core of most American cities. These are real headquarters, not regional division offices or titular edifices.
Shareholders are also often losing out when companies sell into a global consolidation. The price premiums paid to shareholders in a takeover pale in comparison to the shareholder value created by successful global growth. Directors take note – the long-term interests of shareholders are often traded off for the short thrill of a one-time takeover premium.
US competitiveness in international M&A is highly relevant to the fortunes of all strategic industries, including the food industry. Is the imbalance in takeover policies leaving American companies more vulnerable to takeover than their international competitors? Are corporate leaders, especially in the food industry, too content with the American market? The global food industry is ripe with opportunity – are companies like Smithfield selling when they should be buying?
[1] Chinese takeover questioned, by Doug Palmer for Reuters, as published in the National Post, July 11, 2013.
[2] Ibid
[3] The Globe and Mail, Published Sunday, Dec. 09 2012, 10:47 PM EST.
[4] See Losing (Ownership) Control, Smith, Harvard Business Review, June 2009; data was later updated to include the entire decade.
[5] See Chapter 9 of The Art of M&A Strategy, Smith & Lajoux, McGraw-Hill, New York, December 2011
Photo: hdwallpapersimages.com
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About the Author: Ken Smith is a corporate director and strategy consultant. He was a founding member of the M&A Leadership Council's Advisory Board and is the co-author of The Art of M&A Strategy, with Alexandra Lajoux, McGraw-Hill, New York, December 2011. See www.DundeeStrategy.com for a more complete biography. He can be reached at [email protected] or follow him on Twitter @smithkennethw.