'national Interest' Seems Like A Fuzzy Notion? It's Meant To

The Age

Tuesday February 6, 2007

KIM SAWYER and JACKIE JOHNSON - Kim Sawyer is associate professor of finance, University of Melbourne, and Jackie Johnson is associate professor of accounting and finance, University of Western Australia

Assessing the bid for Qantas will put the regulators to the test.

WHEN big Australian companies such as Qantas are under takeover threat, the national interest is usually cited. The national interest is a discretionary term, deliberately vague to allow the rejection of foreign takeovers. But it is difficult to define. When a 1994 Senate inquiry asked a member of the Foreign Investment Review Board management what constituted the national interest, the response was that "we consult widely and take account of the various views that are there".

In foreign takeovers, the national interest becomes important because a successful bidder will typically operate and report in two different countries. The divergence between ownership and operations creates a risk, which Keynes identified as: "I am irresponsible towards what I own, and those who operate what I own are irresponsible towards me." This is the risk that a national regulator must assess.

In Australia, the FIRB and the Treasurer determine what is contrary to the national interest. There is some evidence that their perceptions of the national interest are not always highly correlated with those of the community. In 2005, for example, the FIRB and the Treasurer, Peter Costello, approved both the Xstrata and BHP Billiton bids for Western Mining, yet opinion polls conducted at the time showed 81 per cent of respondents believed that Xstrata's bid should be rejected, and 56 per cent that BHP's bid should be rejected.

What then is the national interest? In the context of foreign takeovers, the national interest refers to the ability of a national government to exercise control over its strategic interests. Any dilution of this control dilutes the national interest. National security matters most. In the US, for example, the 1988 Exon-Florio statute grants the president the authority to take appropriate action to suspend or prohibit foreign takeovers of US businesses that threaten to impair the national security.

But other interests also matter. In Australia, the 1989 Foreign Acquisitions and Takeovers Regulations Act lists media, telecommunications, transport, and extraction of uranium and defence-related sectors as sensitive areas. The FIRB, however, seldom rejects foreign investment proposals. Its aggregate rejection rate of foreign acquisitions in the past four years has been only 1.5 per cent, and all but two were rejections of real estate purchases.

The low rejection rates of foreign investment proposals suggest that the FIRB is a conciliatory regulator. Other countries tend to be more assertive. In August 2006, the Italian Government opposed the merger of the Italian motorway firm Autostrade and its Spanish counterpart Abertis for reasons of the public interest. In 2005, Chinese oil company CNOOC withdrew its bid for US oil company Unocal after concerns were raised relating to the long-term energy security of the US.

The task for a regulator such as the FIRB is to assess the risk that the foreign bidder will default on its national interest obligations. The FIRB must assess whether the bidder will be a good citizen, that it will conform to legal and operating constraints, and will disclose and be accountable for any violations of those constraints. The best indicator that a bidder will default on its national interest obligations is the history of the actions of the bidder.

The rise of private equity has made the task of the FIRB more difficult. Private equity increases the risks associated with future accountability and future disclosure. It has also increased the risk associated with changes in the future ownership structure, for example, the risk that the firm may be acquired in the future by a company from a country with weak legal and governance systems.

The takeover of Qantas represents a test of the national interest. The FIRB, like most national regulators, has historically adopted the principle that the national interest is best protected by imposing minimum impediments on the flow of capital. But, with private equity, the FIRB will need to assess the risks associated with ownership and control. The FIRB and the Treasurer will be tested.

Kim Sawyer is associate professor of finance, University of Melbourne, and Jackie Johnson is associate professor of accounting and finance, University of Western Australia.

© 2007 The Age

Back to News Index | Back to Home