C. Gopinath

Cross-border takeovers

National security is one of those very evocative themes that makes you want to take out the flag and wave it. It also becomes a useful garb for undertaking actions that could not otherwise be justified as being rational. Take, for example, the actions of the current Republican administration in the US.

For a party that believes in financial propriety, it runs a budget deficit that is one of the biggest in recent times. It has been against `big government,' but has added thousands of airport baggage screeners to its payroll. All this is on the pretext of national security and the party faithful have cheered. But the national security argument came back to bite the administration on one of its own decisions.

DP World's experience

Recently, DP World, a UAE government-owned company faced the wrath of US politicians when it bought P&O, a British firm that, among others, managed the operations of six ports in the US.

All seemed to be well till a small firm in Florida, Eller & Co, that worked for P&O and did not now want to have to deal with the new owners DP World, set the cat among the pigeons. It is reported to have hired an attorney in Washington to lobby against the deal.

National security interests

The lobbyist raised the issue of national security. In no time, you had Democrats and Republicans screaming from their pulpits, and threatening legal measures to prevent the sale. How could our ports be controlled by a foreign company, they thundered, especially one based in Dubai also the place of origin of two of the 9/11 terrorists. The administration's feeble voice that Dubai is not only a close ally of the US but is also the base for the US Navy was drowned in all the nationalistic rhetoric. Finally, in frustration, and to save the government the embarrassment, DP World has offered to find a buyer for its US operations. And, you guessed it, Eller & Co is a contender.

In all the dust that was kicked up, it turns out that several other foreign companies have operated various ports around the country, all of which are now under scrutiny.

Security can be defined anyway you want. In August 2005, CNOOC, the Chinese oil company, wanted to buy Unocal, but dropped its bid when members of Congress (the US parliament) began to huff and puff about a Chinese company buying a major US oil and gas company.

How could core energy assets be in foreign hands, they argued. In January 2005, national security concerns were again raised when IBM sold its personal computer business to a Chinese company, Lenovo, but after inquiries, the deal was ultimately cleared.

Europe has not been far behind in using the security rationale. France has identified 11 sectors that range from data security (understandable) to casinos where it would not tolerate foreign ownership of companies. And surprisingly, that seems to include even other countries within the EU. For example, the French government has managed to prevent an Italian company from taking over the energy company, Suez. Spain has blocked takeovers of its energy company too.

And everyone has been reading the objections to Mittal Steel's attempt to acquire Arcelor, based in Luxenbourg. Both are EU companies.

The security argument has even travelled east. Mr Thaksin Shinawatra, the Thai Prime Minister, is in trouble for many reasons, one of which is that his family sold its telecom company to a Singaporean buyer while nationalists believe it should be locally owned. Remember the old `infant industry' argument? Well, if you had a budding industry that could not stand up to competition from more sophisticated players, you could protect your firms from through tariffs and/or subsidies. This is partly the logic that is incorporated in WTO's practice of allowing developing countries a longer time frame to comply with tariff reduction clauses in agreements.

The awakening

Developed countries find it difficult to use this argument, for obvious reasons. Their industries are in no way infants. But, in times of need, the argument can be dusted off and aired. Like in when the US, in March 2002, announced tariffs on steel hardly an infant industry there. Developed countries are slowly beginning to discover that globalisation is not all that it is cracked up to be. For years they put pressure on the rest of the world to open up their economies and cut subsidies. Now that the rest of the world has turned around and called their bluff, the developed countries are trying to find excuses for being unable to cut their own agricultural subsidies. The US managed to hang on to its Multi-Fibre Agreement quotas for years.

When the multinationals of the developed world found it difficult to enter and acquire companies elsewhere, they lectured the rest of the world about protectionism and held World Bank/IMF loans hostage, subject to opening of markets. Now, they realise it is not such a good idea to let companies from elsewhere acquire their companies.

The story is now being repeated when it comes to cross-border acquisitions.

Ha-Joon Chang, an economist, makes a powerful argument in his book, Kicking Away the Ladder, that the developed countries of today liberally used tariff protections during the period that they were growing. Thus, their pressure through the IMF and the WTO to prevent that benefit to the developing countries of today is hypocritical. But perhaps globalisation is coming a full circle. It is too soon to give up national interests. Security concerns are a convenient tool to use to stem the desires of the trade theorists who want all barriers removed. Maybe national security will even figure on the agenda of the next meeting to resolve the stumbling Doha round.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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