April 10, 2006,
In the aftermath of the failed Dubai Ports deal, Sen. Richard Shelby has introduced legislation that would reform the Committee on Foreign Investment (CFIUS). Shelby says an enhanced CFIUS and more congressional oversight will lead to greater transparency and accountability with regard to foreign acquisitions of U.S. companies. But the reform he advocates would in fact harm investors and the U.S. economy and arguably make us less secure.
During the takeover boom in the 1980s, companies that were takeover targets would sometimes introduce “poison pills” to make acquisitions more difficult. One such pill was the “flip-in,” which would allow existing shareholders to buy more shares at a discount, and would serve to dilute the position of the acquirer. “Flip-outs,” meanwhile, would allow stockholders to buy the acquirer’s shares at a discount after the merger. Both protected companies from buyers with designs on making them more efficient and profitable.
Legislation that would give more teeth to CFIUS would arguably achieve the same thing. With greater powers of oversight, it’s not hard to see how politicians could easily delay acquisitions of companies based either in their districts or states, using the premise of national security to do so. More, whether the business is steel, software, or oil, any company could theoretically craft an anti-takeover plan with our supposed national security in mind. Since takeovers are only profitable up to a certain point, the mere threat of a government-enforced delay would make all U.S. companies less attractive takeover targets, as delay would affect share prices.
Shelby’s desired “transparency” would make takeovers less profitable and less frequent. Whether companies are managed well or poorly, investors seek to buy what they deem to be undervalued shares “in secret,” right up to the point that their positions require SEC disclosure. Once a company is in play and greater transparency following CFIUS reform would make this known its value as a takeover target is reduced. Rather than compile a big position in a company for an acquisition that is uncertain, foreign buyers on the margin will logically look elsewhere.
Importantly, the above scenarios only tell part of the story. That all companies are essentially takeover targets is a powerful force that imposes discipline on corporate management. That an acquirer, regardless of geography, can put the existing management out of work means that those running companies today are more likely than not to maximize shareholder value through the economical use of company funds and employees. The “seen” in the M&A equation are the companies that improve and streamline their operations after they are purchased by self-interested companies and buyout firms. The “unseen” involves the numerous companies that achieve economy-enhancing efficiencies to avoid being acquired.
Returning to Sen. Shelby’s legislative efforts, the restrictions on foreign investment that he desires will serve to create borders in a rapidly integrating world economy that is happily removing them. Because of that, the creation of roadblocks to foreign investment with national security in mind is perhaps the ultimate oxymoron. Indeed, the free flow of goods and capital is perhaps the single best way to insure national security. Who would invade that which they own?
In the end it has to be remembered that dollars are fungible. What that says is that there is no such thing as foreign investment, but instead capital seeking the most appealing places to invest. If restrictions are imposed on foreign investment in U.S. entities, the U.S. will become a less attractive destination for capital. The result will be that dollar holders, regardless of nationality, will search for more attractive investment climates outside of our artificially imposed borders. Meanwhile, the employees of U.S.-based companies and their shareholders will be the victims of Washington’s politicization of economy-enhancing takeovers.
John Tamny is a writer in Washington, D.C. He can be contacted at firstname.lastname@example.org.