Strange Echoes

Indicating that, if you listen hard enough, you can still just about hear something that used to be called Toryism, Iain Martin writes:

A defining feature of the decades leading up to the financial crisis was the mania in Britain for banking takeovers and consolidation.

The charming mantra in high finance was "kill or be killed", sometimes phrased as "eat or be eaten". In a frenzy of acquisition and supposed mercy-killing, banks duly gobbled each other up.

In 1960 there were 16 UK clearing banks, with balance sheets (their total assets) equivalent to 32 per cent of UK GDP.

By 2010 there were five and their balance sheets totalled a sum equivalent to 450 per cent of UK GDP.

Britain had far fewer banks and they were much larger relative to the rest of the economy.

It is quite clear what was in it for those doing the deals and for those advising them.

The executives running bigger banks liked the resulting bigger compensation and bigger takeovers meant bigger fees for the investment banking advisers.

For some CEOs the deals were also a way of distracting attention from the tricky reality that they and their teams did not have good ideas about how to develop the businesses they had been tasked with running.

It was much easier to buy a rival, take several years to integrate it, boast about being bigger and then look for the next target.

This was the Fred Goodwin model, which many investors and much of the City loved until it was too late. Only a handful of analysts were sceptical at the time.

In that pre-crash period, in what we were told was an increasingly "globalised" world, scale was regarded as an intrinsic good.

Big business and banking was going to get bigger as the world got smaller. Get with the programme.

The pressure around those deals became almost irresistible , with the media too often reporting a takeover as though it was a sporting contest.

Which team would triumph by scoring a last-minute goal? Which (almost always male) manager (CEO) had the biggest cojones?

The ABN-Amro takeover led by RBS in October 2007 is an exception.

There were actually plenty of respected City commentators screaming at RBS to stop and get out of the deal.

The crisis had already started when RBS went ahead and made itself the biggest bank in the world at precisely the wrong moment.

Opinion in banking is now divided as to whether any of the takeover mania – really, any of it – actually added shareholder value or was good for customers.

A senior banker said to me recently that he cannot think of a single piece of banking M&A that has really worked out for anyone other than those who did the deal.

Quite often the resulting giant businesses became too big to manage, in that even smart people paid a lot of money to run them did not understand what was really going inside their own empire.

The banks became so vast that when several failed they threatened the rest of the economy to such an extent that enormous taxpayer-funded rescues were required.

If you consider the clean-up costs, and the disgraceful products such as PPI which banks launched to enrich themselves and to keep ahead in the relentless race for profitability and scale, the British banking revolution ended up being a pretty expensive experiment.

I mention all this merely because there are strange echoes of the pre-crash banking mania in the ongoing spat over the attempted take-over of AstraZeneca by Pfizer.

The American-based pharmaceuticals giant wants to buy the UK-based firm for £60 billion. A deal looks likely.

Although the board members of AstraZeneca are resisting, it is hard to avoid the conclusion that they are waiting for the offer price to go up before saying: "Oh, go on then."

And yet, the proponents of this deal seem to be relying on many of the same hubristic arguments that were employed in banking before the crash.

This is a chance for the UK to be part of a global giant… it is a globalised market… can't stand still… do this or die… get with the programme.

Note how the Pfizer chief executive presented it as a simple binary choice when he flew in to London last week.

Any attempt to suggest that the UK should maintain a national champion, for reasons of scientific research and development, would be misguided, Ian Read said.

“The UK faces a choice. Do they focus on ensuring there is an educated workforce with the right incentives in place to attract investment, or do they pick winners and losers,” he told the Financial Times when he arrived in the UK to lobby ministers and investors last week.

Really? Is that the choice? Is it that uncomplicated? Is AstraZeneca as currently run a complete loser unless it is taken over?

Is asking questions about the wisdom of the deal, and acknowledging the concept of national interest that the globalisation elite wants to bury, really 1960s or 1970s-style intervention?

The Americans – still the leading capitalists – apply proper tests to takeovers by foreign firms.

Astonishingly, or perhaps not, ministers have somehow managed to get themselves on the wrong side of the argument on Pfizer. They are being outflanked by Ed Miliband.

The Labour leader has raised some sensible concerns about the deal. He asks if Pfizer's assurances about jobs and investment in the UK are watertight. Don't be daft, of course they are not.

In putting pressure on the government, Miliband will almost certainly go too far.

I suspect if he thought he could nationalise AstraZeneca and eliminate what he sees as nasty profit-making from the drugs industry, so that any proceeds are recycled by government-appointed boffins protected from competition, he would probably give such a disastrous intervention a go.

However, he is right to ask questions of the companies involved and of government ministers who have been far too credulous in recent days. I would add that this deal is also surely destined to reduce competition.

One of the lessons from the banking crisis is that when one of these deals comes along that the boss of a giant firm says must be done, or else we are all doomed beyond doubt, it is well worth saying: "Hold on a minute. We've got some questions you must answer."

Senior capitalists who cannot see this are, once again, doing the work of the resurgent anti-capitalists.

The biggest risk to capitalism is posed, unintentionally, by some of its own leaders and their supporters who argue that if a deal can be done then it must always be done, hang the consequences and you must be a communist if you are sceptical about the wisdom of institutional investors or ever consider the public interest.

A book by Luigi Zingales, an economist at the University of Chicago, remains the best work on this subject since the financial crisis.

In Capitalism for the People he explains that capitalism will not work, or be popular with the electorate, if it is widely perceived to be a racket run for a tiny globalised elite which does anti-competitive deals to make its interests ever bigger at the expense of the interests of the consumer and the citizen.