Tuesday, August 01, 2006
August 1 – the National Holiday and Economic Nationalism in Switzerland
2005 was in fact a very tough year for economic patriots in Switzerland. In fact, last year already the Swiss national day was spoiled by a similar incident. Saia-Burgess a Swiss mid cap company manufacturing switches, sensors and other electronic parts for the automotive and industrial sectors, became the target of a hostile takeover bid by the Japanese Investment Company Sumida. The reaction of the people concerned – and even of those not so much concerned – were boisterous. The management of the target company published just before August 1, 2005 ads in several major Swiss newspapers asking its shareholders not to sell its shares to a foreign company. The ad read (among other things): “More and more […] successful Swiss companies become the target of foreign carpetbaggers. Nowadays, long-term investment faces the fast buck. Should our Swiss companies in the near future be exclusively controlled from abroad?” (See e.g. Neue Mittelland Zeitung, July 30, 2005, p.12)
Most of the politicians of the concerned region, but also John Doe, clearly answered ‘No’ and asked even for the intervention of the cantonal government in order to protect Saia-Burgess from the takeover attempt. Most people feared of course layoffs and the loss of tax money following the takeover and a possible delocalization and restructuring of the company and its production.
Obviously, the answer of the management was 'No' as well…for a while at least! In fact, in the beginning of September 2005, the board of directors recommended the SAIA-Burgess shareholders to accept a tender counter offer by the Chinese group Johnson Electric Holdings. The offer was 110.- CHF per share higher than the Japanese one and suddenly nationality was not that important anymore for the management. Of course, there might have been good reasons for accepting the Johnson offer rather than the one from Sumida (the management underscored notably that Johnson was ready to give SAIA-Burgess more independence than what Sumida was ready to concede).
Be that as it may, the nationalist tone of the ad from July and the vehemence of the reactions in the civil society might seem surprising in the context of globalization and increasing internationalization of economic activity. Many Swiss companies adopt very expansive strategies abroad mainly through mergers and acquisitions. In this context, it may indeed be surprising to see how nationalist arguments are – at the beginning of the 21st century – still acceptable in order to defend a Swiss company against foreign influence.
However, economic nationalism has a longstanding tradition in Switzerland and obviously it is not about to disappear. In fact, the small size of the domestic market and the high degree of internationalization of the Swiss economy might be a reason for such defensive behavior. In Switzerland, the orientation of the most successful firms towards exports and foreign markets went together, at least since the early 20th century, with a very nationalistic stance concerning the control of the companies. Speaking of Switzerland foreign financial analysts often used the term “the fortress of the alps” in order to characterize the closeness of its economy towards foreign investors. Different mechanisms of corporate governance allowed the management and the board of Swiss firms, and still allow them to a certain extent, to keep control over “their” company despite a high degree of internationalization.
The history of Swiss companies throughout the 20th century was marked by the fear of foreign influence on the Swiss economy. The term “Überfremdung” was coined in the early 20th century designating the fact to be infested with foreign capital or workforce. It was an important element of the construction of the Swiss corporate governance system throughout the 20th century. At different points in time, “Überfremdung” was the motif for the introduction of ‘selective protectionist measures’, which finally became characteristic of Swiss corporate governance. The most important of this measures was the so called “Vinkulierung”, which is a procedure by which the board and the management of a Swiss company could refuse any buyer of registered stock to exercise the voting rights. This instrument was mainly used against foreign investors and allowed the Swiss business elite to keep a grip on the companies even without controlling the majority of the capital.
Of course, at times, there were good reasons for the introduction of such mechanisms of selective protectionism. During both World Wars, Swiss companies faced problems of blacklisting because they were accused, due to the very strong presence of German capital and businessmen in Switzerland, of “trading with the enemy” or of being in reality German firms. Some companies saw their assets in the US and the UK confiscated. Thus, during and after both conflicts, “Vinkulierung” allowed Swiss companies to prove that they were really Swiss. Not only concerning the head quarters but also concerning the ‘ultimate beneficial ownership’, which was the criterion used in the US in order to determinate who controlled the firm.
Hence, the debate about “Überfremdung” gained importance during these conflicts and registered stock that allowed for ‘Vinkulierung’ was introduced in many companies during these periods.
During the 1970s, however, the reasons for excluding foreign investors got a new dimension. The influx of petrodollars from the Arabic countries lead several companies, among which also major banks, to introduce registered stock with the possibility of “Vinkulierung”. The slogan that went together with these measures and which justified also monetary policy against the appreciation of the Swiss Frank was “stop the sold out of the country!”. This shows that the debates during the 1970s were much more based on purely nationalistic arguments. Even though the fundamental reason for these measures was of course for the Swiss business elite not to lose control over the Swiss companies.
During long time, the Swiss corporate governance system proved very successful in avoiding foreign influence. Thanks to complex capital structures, with the existence of non-voting shares and registered shares that could be ‘vinkuliert’, it was possible to attract foreign capital without losing control. Despite a very marked under-evaluation of Swiss companies on the stock market, hostile takeovers were nearly impossible and were in deed very rare until recently.
This changed during the second half of the 1980s when a new kind of (Swiss) investors started to shake up the establishment with hostile takeover attempts. Thus, Werner K. Rey, Titto Tettamanti, Karl Schweri, René Braginsky and the young Martin Ebner stared to attack traditional Swiss firms such as Georg Fischer, Sulzer, Bank Leu and Usego-Trimerco Holding to name but a few. Werner K. Rey managed already in 1977 to take control of the shoe producer Bally. He emptied the company of a good deal of its assets and sold it one year later with tremendous profits. This kind of behavior of a new generation of “corporate raiders”, which was a completely unknown kind of investor until then, was harshly criticized by the Swiss business elite. Takeovers were all the more problematic, as no rules existed: there was no obligation to publish significant participations (which made “sneak attacks”, i.e. the secret buying of bearer shares, possible). No rule of equal treatment of shareholders existed either. Hence partial offers with special OTC deals were also allow. In the face of this new danger, ‘Vinkulierung’ started to show its limits: by buying registered stock, for which he did not get any voting rights, a raider could block a large number of votes during the shareholder meeting, which could allow him to obtain a majority of votes through bearer shares, which could not be ‘vinkuliert’. Also, the use of front men and the formation of alliances allowed raiders to short-circuit the Vinkulierung.
This situation where ‘anything goes’ during a takeover battle also met in peril the credibility of Switzerland as finance center. In reaction, the Swiss Stock Markets Association adopted a takeover code in 1989, which contained a clause obliging an investor to make a public offer on the totality of shares if the investor held more than 50%. This clause made the control of a company of course very costly and hostile takeover bids declined considerably after its adoption.
In parallel to the emergence of a new kind of investors, Swiss companies came increasingly under pressure by the international business community for their paradoxical behavior: aggressive strategies of expansion abroad and extremely protectionist and discriminatory behavior at home. Hence, already during the 1980s, some companies showed signs of a more liberal stance towards foreign investors. Thus, Nestlé opened its registered share capital to foreign investors in 1986, after it had been exposed to harsh criticisms in the UK the takeover of Rowntree for its ambiguous behavior. During the 1990s, more and more companies introduced a single share replacing, thus, complex capital structures most often with a registered share that could not be “vinkuliert”. (In parallel however voting caps were often introduced, which were, at least, not discriminatory). Gradually, Swiss companies became hence more open to foreign capital. This is explained by need for capital but also by pressures stemming from standards such as listing requirements of the LSE or NYSE and from international standards such as EU legislation, which influenced Swiss companies that had subsidiaries in EU countries. For these companies, most of which are among the largest in Switzerland, nationality was not so important anymore.
Yet, smaller companies, and especially mid-caps that were less exposed to the ‘international rules of the game’, changed their ways at a much slower pace. The case of SAIA-Burgess shows that nationalist arguments still seem to be acceptable. However, even here a certain change in attitudes can be observed. Several Swiss managers criticized the approach adopted by the SAIA-Burgess management as being contrary to the rules of the game (see the article “SAIA-Burgess: la voie patriotique divise” in Le Temps, August 4, 2005, p.17). André Kudelsky, CEO of the Kudelsky Group, stated that it was a paradox to have a capital structure with a single share, to raise capital on the equity market but not accepting the ‘laws of the market’ by introducing golden parachutes – which SAIA-Burgess did in August 2005. Other managers joined this criticism underscoring that ‘nationalism’ has no place in a functioning market economy.
Anyway, the Swiss might have to get used to the idea that foreigners control their companies. The quite impressive takeover wave of 2005 (SAIA-Burgess became Chinese, Unaxis became Austrian, Leica-Geosystems became Swedish etc.), at least, leads one to believe that the days are gone when Swiss companies could reap the benefits of their participation in international markets without paying the price.
Yet, Swiss citizens and patriots should take comfort in the fact that foreign investors do not seem to do much harm to the Swiss economy; quite at the contrary, as we could realize after the takeover of our national airline “Swiss International Air Lines” by Lufthansa.