This article by David Green for ConservativeHome explores the economic impact of private equity taking over British companies such as Morrisons but does not mention the impact of high gearing on the future of those companies which in many cases has led to companies closing and employees losing their jobs with BhS being just one example.
However, the article ends with these words of warning:
The Government should not fall into the trap of thinking that it should never intervene in corporate takeovers. There is a public interest in stopping the Morrisons takeover. The company’s model is to own the vast majority of its shops and run some its own manufacturers and farms. It is profitable. Private equity has been granted preferential advantages. Owners are allowed to pay tax as if they make capital gains and not profits subject to higher corporation tax. And owners are able to take advantage of the preferential treatment given to company debt compared with equity. A government that used its powers to encourage Hayek’s ‘spontaneous forces’ would equalise the treatment of debt and equity to preserve responsible private ownership.
If the Morrisons bid is allowed to proceed the owners will probably sell off the shops to another company they control and lease them back, giving them a capital gain and an income stream at the expense of Morrisons. This is wealth extraction not wealth creation. If the Government allows its squeamishness towards intervention to paralyse it into inaction, it will drop helplessly into the trap described by Hayek: that of crippling the spontaneous forces of a market economy by inaction.
For the full article in pdf, please click on this link: