France's terrorism economics.

France's terrorism economics.

France's terrorism economics.

Moneybox
Commentary about business and finance.
March 23 2004 5:07 PM

Champion Losers

How France is using terrorism to excuse idiotic economic policies.

Who says France isn't doing its part in the war on terror? After all, Prime Minister Jean-Pierre Raffarin just struck a mighty blow against al-Qaida. He has deployed the rhetorical and financial heft of the French government to support a hostile takeover bid in the pharmaceutical industry.

In January, French drug company Sanofi-Synthelabo made an unwelcome $59 billion takeover bid for Aventis, the French pharmaceutical firm based in Strasbourg. Aventis responded in part by holding discussions with Novartis, the Switzerland-based drug giant, about a friendly merger. Today, Novartis CEO Daniel Vassella told the Wall Street Journal he would be interested in pursuing such a deal, which would create the world's second-largest drug company.

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Enter Raffarin, alarmed at the prospect of a Swiss invasion. Last week, he said a Sanofi-Aventis merger would be crucial to the French "national interest." He suggested that the nation's ability to access vaccines in the case of a bioterror attack would be hindered were Aventis to fall into foreign hands—you know, the dangerous, shifty hands of the Swiss. Meanwhile, a unit of the bank CDC-Ixis, which is majority-owned by the French government, has agreed to help back Sanofi's bid for Aventis.

Terror, of course, is a pretext. The French government is pushing an all-French deal for reasons of national pride. In January, Raffarin said, "It is very important in France, but also in Europe, to have the capacity to maintain several big national champions by sector."

The notion of "national champions" has become a peculiar theme of the new European economy. In Germany, corporate grandees are trying to head off a potential acquisition of Deutsche Bank by a foreigner. Last week, senior executives of companies such as Deutsche Telekom, SAP, and Siemens told Chancellor Gerhard Schröder they still needed a "national champion," as the Financial Times reported.

Nationalization may no longer be in vogue in the large economies of continental Europe. But a strong sense of nationalism still pervades these governments' attitudes toward capitalism. And it's ironic. The Eurozone has a single currency—the euro—and a single central bank largely because Germany and France wanted them. But when it comes to the private sector, the nations most invested in European economic integration are the ones most unsettled by its implications. The need for champions is as much about preserving an established order and existing privileges as it is about encouraging growth and bolstering national security.

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Whether it's banking or drugs, the need of large European nations to have "national champions" in order to promote domestic economic security is absurd. In banking, for example, German corporate honchos complain that Deutsche is the only domestic bank large enough to finance significant deals. But the German establishment—politicians, executives, labor leaders—doesn't want a German über-bank that will bestride the global capital markets like a colossus. Rather, it wants one that will function like an ATM for German companies—providing financing on accommodative terms and taking it easy on them when they founder.

Fifty years ago, the concept of creating a large German bank that would lend to German companies was both necessary and useful. There weren't many pools of capital available for a defeated, bankrupt nation that was widely reviled by its neighbors. Ditto for Japan. But since Japan and Germany quickly rose to become industrial powers in their own right, the persistence—and protection—of national champions has frequently been detrimental. In Japan, in particular, the pressure on banks to let bad loans to domestic borrowers go unpaid probably added several years to the nation's economic malaise.

The past several decades have shown that banks, regardless of their domicile, are willing—even eager—to lend money to eager borrowers in other nations. That's why U.S.-based Bank of America is waist-deep in Italy's Parmalat mess, and why Credit Suisse First Boston and Crédit Lyonnais wound up high on the list of Enron's creditors. Bank money, regardless of where it originates, seeks to find a home where it can earn a decent rate of interest.

Pharmaceuticals, which are essentially consumer products, are different than loans. And here, European countries have even less to fear. There have been remarkably few examples of drug companies—virtually all of which are multinational and polyglot—refusing to sell their products to governments or nations. With 60 million people and the second-largest market in Europe, France needn't fear that a Swiss takeover of Aventis will sharply reduce its ability to acquire vaccines. Swiss companies haven't exactly been known for their reluctance to do business with other countries—especially in times of war and global turmoil.

What the French and German governments are really doing here is erecting artificial obstacles to a deal. These barriers to foreign bidders drain the pool of potential buyers and hence suppress asset prices—ultimately making the target firms weaker and poorer.

The ability of foreign buyers to purchase world-class American assets and companies relatively easily is one of the factors that keeps our stock markets buoyant. There's another lesson Europeans might learn from Americans in this regard. Having an open market for control doesn't just put the best companies—the champions—in play, it makes it possible for the struggling firms—the last-place finishers—to find buyers, too. Frequently, foreign buyers prove willing to pay large, unwarranted premiums for also-rans because they want to acquire trophy properties in a giant market—think of Japanese investors buying Rockefeller Center at the market top, or Vivendi overpaying for Universal. If the U.S. government were obsessed with maintaining national champions and blocked such transactions, Chrysler would be struggling for its life instead of weighing down Daimler. France and Germany should remember that next time they consider blocking a foreign buyer. You may sacrifice control when you sell to a foreign company, but you also spread risk.