A takeover in Britain shows shareholders still rule the corporate roost
For most people, coming into work is about more than picking up a pay slip. Not everyone aims to change the fate of humankind at the office. But even a sense that one’s employer is making a useful product helps escape the lure of the duvet in the morning. Bosses hype this up. It has become fashionable to claim that the pursuit of purpose in the service of “stakeholders” matters more than pleasing shareholders. The outcome of a takeover battle shows how removed from reality the rhetoric is.
On September 20th, Philip Morris International (PMI), a giant cigarette-maker, announced it had convinced over three-quarters of the shareholders in Vectura, a British pharmaceutical business, to back its takeover plan. Thus, a maker of inhalers designed to combat respiratory diseases will soon be fully owned by a firm whose products often cause them. Whatever sense of purpose the research scientists toiling at Vectura may have had when it was independent is unlikely to survive intact becoming Marlboro’s sister company.
If stakeholderism had any teeth, this would have been the moment to bare them. Vectura is certainly among those beyond-mere-shareholder companies. It was spun out of academia in 1997. Its annual report talks of building a business that delivers value to stakeholders, among them employees, suppliers and patients. Staying independent was probably a stretch given Vectura’s ho-hum performance in recent years. But the winning bid of £1bn ($1.4bn) valued each share at just 6% more than an offer by Carlyle, a private-equity group without PMI’s health baggage.
Self-interested legal analyses exist on both sides as to whether Vectura’s directors were compelled to recommend the highest cash offer. Justifying its decision, the board spoke of its “fiduciary duties”. It appears to have interpreted these duties as weighing whether 165p a share offered by PMI was indeed a larger figure than the 155p offered by Carlyle (Bartleby has run the numbers and concludes that it was). That did not stop the directors from insisting that “wider stakeholders could benefit” from a deal with PMI.
Where the battle lines were drawn is telling. Anti-tobacco campaigners led the charge against PMI. They did not pretend stakeholders beyond the shareholder register were in a position to block the deal, not even staff (who may receive bountiful bonuses). Instead, their main argument was to point out that a PMI-owned Vectura’s long-term profitability would suffer if its scientists were left unable to participate in industry conferences, or if doctors balked at prescribing medicinal products tarred with big tobacco’s brush. The implication was that stakeholders matter, but only in so far as keeping them happy leads to bigger shareholder profits down the line.
Ultimately, nobody disagreed that the outcome was for owners of the stock to decide. Even that might have derailed the creation of a pharma-tobacco group, given the presence on Vectura’s share register of many fund managers whose bosses trumpet their stakeholderist tendencies. Plenty make money peddling funds that specifically exclude tobacco, and rarely lose an opportunity to paint themselves as visionaries looking beyond just profits. But if a high-minded portfolio manager held out from handing over his Vectura shares to PMI on moral grounds, he has been hiding behind a thick pile of glossy reports about the importance of ethical investing.
Quite often, stakeholder satisfaction will align with shareholder success. A happy workforce, satisfied customers and so on tend to lead to good financial outcomes. In this case, PMI will get from Vectura something that matters more than its target’s (modest) earnings. The purveyor of cigarettes has pushed hard into smoke-free products. This started with vaping, but is now extending to things that have nothing to do with nicotine. Buying Vectura, which will be run independently, is a signal that PMI is serious about that strategy. This seriousness of intent matters more to investors than Vectura’s narrow prospects.
Helping PMI pivot from cigarettes could itself be painted as delivering such large societal benefits so as to offset the likely impact on Vectura’s current stakeholders. Perhaps in future, such arguments will feature in takeover battles. That would at least be consistent with the airy pronouncements of how business has moved beyond shareholder value. For now, deciding which bid is better is still a case of comparing two figures and going with the bigger one.