Pfizer’s audacious bid to takeover AstraZeneca is dead for the moment. Had Pfizer succeeded, it would have been the largest takeover in UK corporate history. Whatever impact the deal would have had on the two companies involved, it would have also had profound implications for British science, exports and jobs in one of the most important sectors of our economy. As well as important private interests being at stake, there were also clear and distinct public interests in the deal.
Having been engaged with many of the principle actors in this drama – from the chief executives and boards of both companies to key figures from across British industry – I became convinced that this takeover was being pursued for the wrong reasons, that it would be bad for AstraZeneca, and that it would be bad for Britain.
I am pleased that the AstraZeneca board remained clear-headed in the face of intense pressure and that, in this case, it was the board that rebuffed the offer. I remain of the view that, for the most part, it should be the existing owners of a company – the shareholders and their agents – who should determine future ownership. Here the system appears to have ‘worked’.
However, there is more that can be done to support greater rationality in the conduct of takeovers. It is why Labour would introduce reforms to ensure that, once announced, takeovers do not generate their own unstoppable momentum – from carpet-baggers buying shares or from advisers who stand to gain from the deal – but are always decided in the long-term interests of the company.
It is why we will clarify the legal protection boards have to make decisions based on what they think is best for the long-term health of the company, not just on the value of the offer on the table.
The experience has also confirmed in my mind the need to review the legal framework governing takeovers so that legitimate public interests in exceptional transactions of this kind can be properly taken into account where they are not aligned with private interests.
Our world-class science base has taken many years, and much public and private investment, to develop. It is from this base that we can secure more of the well-paying jobs that generate broad-based prosperity and a stronger, better balanced economy. It is a national asset, a public good as critical to our economic future as our physical infrastructure. So a Labour government would not stand back and allow this source of long-term competitive advantage to be put at risk for narrow, short-term gains.
That is why we would change the law so that, should the need arise and as a clear signal to all, it is not left unprotected any longer by extending the grounds on which ministers can block a transaction in the public interest to cover exceptional deals which would have a material adverse impact on the UK’s science and R&D base. We would set up a standing body of scientists and business people to provide an independent assessment to Ministers and, if the advice were that the proposed deal would have a material adverse impact, a Labour government would block the transaction.
So this is the story of how and why we reached the view that the proposed takeover of AstraZeneca deal should be subject to such a public interest test on the grounds that it posed a real risk to our national economic interest. It is the story of how the government misjudged the situation, was seduced into becoming cheerleaders for a deal which ministers mistakenly viewed through a narrow, political lens as an endorsement of their tax policy. It is also about how Labour and others helped energise a broad coalition of voices from across politics, business and science to raise legitimate questions about the deal for the companies involved as well as for Britain.
Before the arrival of the current CEO, Pascal Soriot – a biologist – in 2012, AstraZeneca had been somewhat struggling. Patents on a number of existing drugs were set to lapse and the pipeline of new drugs did not look promising. But since then, the company’s fortunes have experienced a sea change. Soriot has focused on simplifying the organisation, and as the true potential of its drug pipeline has become apparent its stock has risen in value by 40 per cent in the last six months.
In November 2013 Pfizer’s chairman and chief executive Ian Read made an initial approach to AstraZeneca’s chairman Leif Johansson. Pfizer subsequently made a more formal approach on 5 January 2014, valuing the company at around £60bn. A week later the AstraZeneca board rejected the offer as “very significantly” undervaluing the company, offering too little cash (30 per cent), and being too risky in terms of execution.
Like many, first became aware of Pfizer’s courting of AstraZeneca when the original story reporting that approaches had been made appeared in the Sunday Times on 20 April, Easter Sunday. The significance of this potential transaction was not lost on me. The £60bn price tag would have made it among the largest transactions in UK corporate history.
On 26 April, Pfizer made a second approach, which was also rebuffed. With the deadline imposed by the City Code on Takeover & Mergers fast approaching, Pfizer made two further offers on the weekend of 17 May, eventually valuing the company at almost £70bn in what was a final offer. Again, these offers were rejected by the AstraZeneca board without reference to shareholders. Under the Code, Pfizer then had until 26 May to ‘put up or shut up’ with a firm offer.
The significance of the deal went far beyond the price tag. The potential transaction went to the heart of the debate about the quality of jobs in the UK and the need to reform our economy so it is better balanced and more sustainable in the long term.
We must build an economy that gives everyone a ladder up to get on and meet their dreams and aspirations. That is not the kind of economy we have right now. We are a country of great promise with an abundance of talent but our economy is simply not producing enough of the high paid, high skilled jobs to meet those aspirations, raise living standards, and make people’s dreams a reality. Of course, any job is better than no job but a good job that is secure and pays a wage you can live on is better still. There are only four other countries in the OECD with a higher share of low-paid jobs. To change this and to generate more, better-paying jobs we must grow our world-leading and innovative sectors, like pharmaceuticals.
When people ask me on the doorstep what we are hoping to do to help their children to go on and do better than the older generations in their family, I want to be able to point to companies like of AstraZeneca as the vehicle through which we can achieve this brighter future. As a company, it accounts for 3 per cent of our manufacturing exports, directly employs around 6,700 people, and supports many more thousands of jobs indirectly through an extensive supply chain. As a share of its overall revenue, in 2013 AstraZeneca spent almost 50 per cent more on research and development than Pfizer. It is companies like AstraZeneca which will provide the opportunity for our children – not only to go on and do well for themselves, but to make history playing a part in producing life saving drugs. So we need a business environment that nurtures more firms like AstraZeneca, not fewer.
When I heard of Pfizer’s approach on Easter Sunday, the fact it was a US company was a complete irrelevance. Having visited Jaguar Land Rover’s Gaydon plant and other foreign owned UK operations, I have seen for myself successful British companies thriving under foreign ownership. The question was whether the purchase – foreign or otherwise – of AstraZeneca would strengthen the company over the long-term. Would it help grow our world-leading pharmaceuticals industry and would it expand our research, science and skills base? If not, would it have such a material and adverse impact on our economy that it would necessitate government action to safeguard the national economic interest? These were the questions we sought answers on from scientists, business leaders, and Ministers alike.
Before coming to a view, I spoke to leading people in the sector and British business, including both firms involved with the deal, first Pfizer then AstraZeneca. Ed Miliband and I met Pfizer’s Ian Read after his appearance before the BIS select committee on 13 May and I met AstraZeneca’s Pascal Soriot the day after following his appearance at the Science and Technology select committee. Industry groups in the pharmaceutical sector were not able to express a public view, given the need to be neutral as regards their members. But privately many expressed concerns to me about what was proposed – nobody positively made the case for the deal to go ahead.
What perhaps surprised me most were those who would not usually argue for government involvement in the economy who were now vigorously making the case to me that the government should act to safeguard the national economic interest in this case. Others urging action included the leading businessman and former Science Minister, Lord Sainsbury, who went public with his concerns, as did the former CEO of Standard Chartered Bank, Lord (Mervyn) Davies. Lord Heseltine expressed his reservations too, along with the Chief Executive of Aberdeen Asset Management.
There has been an attempt by people in government to paint those raising objections as protectionists or advocates of a 1970s style socialism – but this had no credibility given the record of the individuals concerned who were raising the alarm. They are no more 1970s-style socialists than those advocating a laissez faire approach to the deal are anarchists. The Director General of the British Chambers of Commerce, John Longworth, put it well when he said: “we must remember that there’s a lot more to being an open economy than saying ‘yes’ to every takeover”.
Then there was Pfizer’s record of acquiring other companies, intellectually asset-stripping them, cutting R&D spending, and shutting down research facilities with large consequent job losses. This was the experience at Warner-Lambert and Wyeth in the US and at Pharmacia in Sweden since 2000. I know this because during the course of this story, I spoke on the phone with my SPD colleagues in Sweden who outlined to me the devastating impact Pfizer’s actions at Pharmacia had had. Despite paying in excess of $200bn for these acquisitions, the entire market valuation of Pfizer now stands at substantially less, suggesting significant value destruction or extraction. This did not inspire confidence, especially when taken together with Pfizer’s actions at its historic research facility in Sandwich, Kent – which developed Viagra – where jobs were cut in 2011.
So the worry in the science and business community in light of all this was for the long term future of the company and the sector. In spite of this, the initial response of the government looked to the short term. It seemed that the prospect of being able to boast of bringing one of the world’s largest companies on to the Exchequer’s books in the clouded their judgement on the longer-term consequences of the deal.
Sources close to George Osborne had said the bid was “a massive vote of confidence” in the UK and Grant Shapps said the takeover could be “a great Anglo-American tie-up”. Treasury Minister David Gauke said the deal showed how, “[t]he UK is now very much top of the list for foreign companies looking to increase their activity in the UK.”
In his eagerness to take ownership of the deal as an endorsement of government policy, the media were briefed that the Prime Minister had appointed Cabinet Secretary Jeremy Heywood and senior Treasury official John Kingman to “negotiate” with Pfizer. In doing so, it both undermined the AstraZeneca board who had so far rebuffed Pfizer and gave the impression that the government were driving the deal. Ed Miliband’s accusation that David Cameron was “cheerleading” for the takeover at PMQs on 7 and 14 May clearly hit home, and this impression was reinforced when AstraZeneca Chairman Leif Johansson was reported to have asked the government to take a more neutral stance.
In seemingly promoting the deal, the government found itself out of step with the business and science communities, and on the wrong side of the argument. Ministers also failed to appreciate the extent to which the desire to use tax inversion in the US was driving the deal – tax inversion being a loop hole in US law where a company can re-incorporate overseas in order to reduce the tax burden on income earned abroad. Ian Read – who started off in the accounts department at Pfizer – admitted in his evidence to the BIS select committee that one of the principal rationales for the deal was tax planning. Sir David Barnes, former CEO of AstraZeneca, put it well in an email he sent to myself and the Business Secretary when he said: “whilst all companies should manage their tax affairs efficiently, tax should not be the driving imperative for such a transaction. Whilst there is potential (substantial) tax advantage for Pfizer through tax inversion, that is a narrow basis on which to build an enduring and constructive business partnership”. I had made the same point I had in exchange I had on the deal with the Science Minister David Willetts on the Today Programme.
Pfizer asserted at the Select Committee hearing on 13 May that the US was unlikely to act to end the use of tax inversion. No sooner did they do so than numerous powerful US senators – Democrat and Republican – were demanding action to stop it the day after. Now, Michigan Democrat Senator Carl Levin has introduced a bill to place a moratorium on corporate inversions for two years while the US tax code is reformed.
The 26 May deadline has now passed and AstraZeneca has fought off the current threat from Pfizer. Under the rules, Pfizer will be prevented from making another attempt to buy AstraZeneca for at least another six months. But others may try before that, and the threat of similar takeovers in the pharmaceuticals sector and elsewhere in the future always remains.
Britain has benefited enormously from inward investment which – along with the money – has also brought new ideas and ways of working to our shores. We must remain resolutely open to business and as an attractive destination for investment – not as a global tax-avoidance wheeze, but because of the positive benefits we offer innovative companies.
And we must be hard-headed about this. We want to generate the jobs of the future and make the UK an investment destination for all the right reasons. To do this we must continue to invest in our science base, improve our skills base, and develop our innovation eco-system. But if we are making these investments, we must also ensure that the right legal framework exists that can preserve the benefits of these investments – not just for next company passing, but in perpetuity.