Should companies care?
It would be possible for companies to raise money without a thriving UK stock market. They could borrow from a bank, as many already do. And, if they need to raise equity they could do so on an overseas stock exchange, or from private equity.
Moreover, many of the large international companies listed in London have no binding need to call the UK home. They could just as easily be listed elsewhere. This may be part of the problem.
The UK market may be partly a victim of its own past success in attracting overseas companies to list in London. With weaker UK roots and closer operational ties to countries outside of the UK, they are more likely to appeal to companies in those countries, and multinational buyers.
This is particularly the case for the energy and materials companies which London successfully attracted in the 2000s. 30% of the companies to delist were in one of these two industry groups, much higher than the 22% of companies those sectors made up.
But away from these large companies, a dig down the capitalisation scale unearths a deep well of more domestically-oriented small and mid-cap companies. They may be familiar (ish) names to people in the UK but many would find it harder to raise money overseas, where they would be more unknown quantities. They would have much more to lose if the UK market lost its status (with knock-on impacts on entrepreneurship etc).
Should investors care?
If you can earn a healthy return boost when a company in your portfolio is taken over then what’s the problem?
And, in a world of global investing, does it matter if a company lists on the US stock market rather than the UK, as the UK’s most successful technology company, ARM Holdings, looks set to do? It would be no less accessible, for institutions and UK individual investors alike. It might have mattered in the past but not today.
The strongest argument why investors might be doing themselves a disservice is if, in accepting a takeover bid at a premium to today’s share price, they may be missing out on even higher gains in future.
This is contentious. Previous research we have carried out found that a majority of takeovers involve a transfer of value from buying to selling shareholders. Almost 60% acquirors of US public companies went on to underperform their industry group in the one to three years after a takeover. It’s not possible to do a counter-factual and assess what would have happened if they hadn’t made the acquisition. Or whether the acquired company would have been more successful had it stayed independent.
But it’s certainly not immediately obvious that investors would make more money if they said no to more takeover bids. They might – but it would depend on the individual company, situation, and time frame. Each needs to be assessed on its own merits.
What are the lessons?
In the near term, UK equity investors should welcome renewed M&A interest in UK-listed companies. It could help narrow the valuation discount which has dogged the market in recent years.
Longer term the bigger losers from a drip, drip, drip of UK listed companies to overseas buyers are not likely to be investors, but the UK economy at large, something that policymakers and politicians should not lose focus of.
*Companies within the MSCI UK investible Markets Index at end 2011
