Greece should not follow French model of ‘national champions’

Should the Greek government encourage local companies to merge to create bigger firms, so-called national champions, or stay out of the mergers and acquisitions game and just create a level playing field where foreign and domestic companies can bid on equal terms? The answer to this question which has come to the forefront again lately should be clear. With the exception of a few specific sectors, such as defense, the government should not intervene in the favor of either side if it wants to maximize the economic and social benefits of its citizens in the long-run. French precedent The French government’s decision to facilitate the merger of Gaz de France and Suez in order to avert a likely takeover attempt of the latter by Italian utility Enel has made the headlines, pitting economic nationalism against economic liberalism in the EU. Of course, France may be the strongest supporter of this kind of action but is by no means the only one. Other EU countries are pushing for legislation that will make it tougher for foreign companies to acquire domestic ones or have expressed their desire to see large local companies, such as Spanish utility Endessa, remain in local hands. Although it has not being discussed thoroughly in public, the term national champion was coined for the first time in Greece a few years ago when a proposed merger between National Bank of Greece, the country’s largest commercial bank, and Alpha Bank, the country’s second largest bank by assets eventually fell through, leaving a bitter taste with market participants at the time and reportedly with the heads of the two banks who engineered it. Taking the view that Greece needed larger companies, then socialist Finance Minister Nikos Christodoulakis tried to encourage merger and acquisition activity by passing legislation providing tax benefits to merged entities. It is unclear at this time what the effect of those tax benefits on corporate action may have been. It is clear however that banks made use of this law intensively to lower their tax bill by absorbing some of their subsidiaries, mainly closed-end funds, that is, investment companies investing most of their cash in Greek stocks. This resulted in a significant drop in the number of closed-end funds in Greece but provided banks with precious liquidity which was, in turn, used to make more loans and boost their profits. Plan backfired A side effect of the government’s initiative to encourage M&A activity via tax breaks to have bigger domestic firms and preferably national champions was the significant shrinkage of the domestic institutional base and the marginalization of Greek funds on the Athens Stock Exchange. It is no coincidence that more than 30 listed and non-listed closed-end funds existed at the time while less than 14 today and their number is getting smaller. Given the fact that the majority of local retail investors had put their money in small-capitalization stocks, where most of these closed-end funds used to invest, one can give another reason for the limited participation of Greek retail in the local bourse despite its significant advance over the last three years. The proponents of government policies encouraging the creation of so-called national champions locally point to the new international business environment, an offspring of globalization, to make their point. They correctly point out that there is an explosion of intra-country and cross-border mergers and acquisitions that lead to new bigger corporate groups which can attain sizable economies of scale and have greater capacity to invest huge sums. They argue that there should be a national economic policy that would facilitate the marriage between Greek corporations to create entities of a much bigger size. If this is not done, they warn, a good deal of large local companies will end up in foreign hands in the next five to 10 years, something that could have a negative impact on employment, competition and the Greek capital markets. Moreover, since the headquarters of the multinationals would be abroad and their decisions based purely on business criteria, the country will lose a good deal of its political and economic leverage in the greater geographical area.   The proponents of government policies favoring the creation of national champions usually bring up the example of the banking sector. They do not forget, either, to praise the announced merger of Delta Holdings with croissant maker Chipita in the food sector, arguing it discouraged multinationals from entering that specific Greek market. It is indeed very hard for anyone to argue against the need for Greek firms to get bigger in order to achieve greater efficiency, especially in marketing and information technology, since labor legislation does not provide much leeway for cutting costs. Also, companies with a larger capitalization are more noticeable on the radar of foreign institutional investors. However, despite all the hoopla about M&A activity, one should not forget that international studies show that one plus one does not make more than two in most corporate marriages as initially intended. Interestingly, this is the case in the banking sector, where Greece has already experienced a failed attempt to merge two large banks in the not-so-distant past. In addition, one should not forget another merger case in which it took a large private sector bank, Alpha Bank, a few years to absorb another relatively large state-owned bank at the time, Ionian Bank. Of course, there have been other successful mergers by large Greek banks of smaller ones but they had complementary activities.        Size not everything This means attaining a bigger size cannot be the only determinant for a merger if it is to be successful. So, if the government intervenes, as in France, to help facilitate the marriage of two large firms with overlapping operations in order to create a national champion, the most likely result will indeed be a larger but not more efficient firm. Moreover, assuming politicians offer some sweeteners to induce the parties to agree to the creation of national champions, they will learn that precious capital has been distracted, costing a good many jobs in the medium-term. The only happy ones may be those working for the national champions but Greece cannot afford this. So, with the exception of a very few sectors, such as defense, the government should not turn the clock back as some of its counterparts are doing in other EU countries.