Cobham shows UK M&A is open for business. Mostly.

How open or protectionist is the new Government going to be towards foreign takeovers of UK companies? We received a hint before Christmas when, at 10pm on 20^th December, the Secretary of State for business, Andrea Leadsom, cleared the takeover of the aerospace group Cobham by US private equity house Advent, subject to certain conditions.

The answer, apparently, is that the UK market will be open like the arrival gates at Heathrow. Open, as long as you go through the process, which might occasionally be more complicated and time consuming than expected.

The signs are that the Government will not tighten the rules further, as Theresa May intended. The rules were already tightened last year, when the threshold for an intervention on grounds of national security, media plurality, and financial stability was lowered from £70m to £1m turnover, and the definition of national security widened to include more dual use, civilian technology.

The Cobham approval received very little media coverage or analysis. But the takeover of Cobham is instructive because it shows the Government has an internal conflict. On the one hand, it wishes to encourage inward investment in the UK, on the other it wishes to protect certain politically critical assets, especially those with activities in the new Conservative constituencies in the Midlands and the North.

A merry dance

The case of Cobham was reported as simply “approved”. But on closer inspection it was much more complicated. A ballyhoo had been got up in the press, including from the original founding family and a five-month process then ensued (my summary below):

• On 25^th July 2019, the Cobham board agreed to a £4bn takeover by an Advent entity.
• On 16^th September, a general meeting of Cobham shareholders effectively accepted the offer with a 93% vote in favour.
• On 17^th September 2019, Mrs Leadsom issued an “intervention notice” under Section 67 (2) of the Enterprise Act, ordering the Competition and Markets Authority to conduct a Phase 1 inquiry.
• On 29^th October the CMA reported back, indicating it was a “relevant merger situation”.
• On 5^th November, in a written statement, Mrs Leadsom said the issues required further consideration.
• On 11^th November, Mrs Leadsom indicated that she could refer the situation to the CMA for what is known as a “Phase 2 Inquiry,” in which the CMA itself could impose conditions on both Advent and Cobham.
• However, instead she said she was minded to accept undertakings from the companies and put these out to consultation, to be completed on 17^th
• On 20^th December, the merger was approved subject to a series of fantastically complicated commitments, relating to a UK headquarters, jobs, national security and technology, outlined in a legally enforceable Deed of Covenant. There were numerous announcements in which the lawyers and civil servants had evidently been hard at work. Much of it was blacked out. It was late at night. The to-and-fro and lobbying behind the scenes would have been extensive.
• Simultaneously, the boards of Cobham and the Advent Bidco made “post-offer undertakings” under Rule 19.5 of the Takeover Code. These, introduced in 2014, supplemented the commitments made in the Deed. These are also, supposedly, enforceable in the courts.

An open and dynamic market economy

What are we to conclude? First of all, as I said, the Government is torn about what to do in merger situations, but its overall inclination will be to agree, subject to certain commitments in relation to national security and jobs.

Second, much of this is driven by press and political reaction. The “save Cobham” campaign never really caught fire, in my view, and the Cobham family had itself sold down its stake below 2%, giving it limited standing in the debate. Critically, the Daily Mail has a new editor, Geordie Greg, who is less inclined to go over the top on such issues (at least in comparison to his predecessor, Paul Dacre) and anyway Boris Johnson is less inclined to listen than Mrs May.

In fact, the new Prime Minister, when asked about Cobham, said on the following morning: “I think it’s very important that we should have an open and dynamic market economy.

“A lot of checks have been gone through to make sure that in that particular case all the security issues that might be raised can be satisfied and the UK will continue to be a very, very creative and dynamic contributor to that section of industry and all others.”

You would not have heard Mrs May speak in those terms.

Third, despite Ministers’ inclination to approve such takeovers, we should also expect more Phase 1 investigations and conditions attached. This means the takeover process for some assets, especially in the technology and security sectors, might prove more complicated and fussy from a legal perspective.

Finally, what about the plans published in July 2018, which would have given the Secretary of State even more powers to intervene directly, bypassing the CMA, especially in relation to infrastructure and technology assets? I have yet to be told in black and white, but my strong impression is these have been quietly shelved as ancien regime.

If the Government does not get investment moving in the UK, it will fall rapidly into unpopularity, and excessively politicising mergers and acquisitions would not help. Ministers know this.