Pierre Faddoul, Founder & Managing Director of Square Associates.
The current pandemic that we are living through, and that is still unfolding, has undeniably severe human consequences. A second consequence, one which has been highlighted by actors of both the public and private sectors, is an undeniable economic and financial impact. On the latter, although we had one of the fastest moves into bear market territory for most of the world’s equity indices, the rally that has ensued has few believers. The consensus view is that this is a “bear market rally” and that a “double bottom” will be established once the economic data shows the real impact, and gets factored in earnings estimates. The daunting US jobless claims figures of last week are a somber reminder of that, and that’s just 3 weeks of data in.
Within that context, it appears nearly inevitable that a vast number of companies, whether publicly listed or privately held, will see their valuation significantly decrease with a risk of “overshooting to the downside”, meaning a loss of value greater than what is fundamentally warranted by the prospects of the company. This scenario is likely to be indiscriminate, and may very well hit companies that could be classified as “of strategic importance” to a nation. Which opens up the risk of having these strategic companies taken over by unfriendly parties that are not solely financially motivated, or may have some ulterior motivations at some point in time. Therefore, the need for a fund, or any similar structure, that would be tasked with taking significant stakes in companies deemed as “of strategic importance” to France or to other European nations is a necessity for the preservation of the integrity and the avoidance of misuse of these corporate assets of national priority. This risk has been recently highlighted by the EU Guidance Paper dated March 25th, 2020[1]: “…Among the possible consequences of the current economic shock is an increased potential risk to strategic industries”. The same paper strongly advises EU country member to step up their effort in protecting companies that are deemed of national interest from unfriendly takeovers, and invite them to increase their FDI (Foreign Direct Investment) screening efforts.
Moreover, the risk to corporate assets of national vitality being misused or misappropriated by a new owner extends to all sectors. Nuclear energy and defense systems are 2 sectors that have been always viewed as strategic to any country therefore warranting higher-than-average intrusion from public authorities: however, in this day and age of rapid technological innovation, the definition of strategic assets can be extended to technology companies that provide vital IT infrastructure for example; or as this current COVID-19 crisis has shown, a biotech company with patents or expertise in a specific area or application. Large industrial companies have always been seen as “national champions” and have traditionally enjoyed forms of government support: the automotive sector is a good example, with the French government owning 15% of Renault; and the US government rescuing GM and Chrysler during the global financial crisis. However, this also needs to be expanded to include any industrial company, large or small, that produces a good or service of national importance: companies of all sizes that produce ventilators would fall into that category in the current context. Even startups that own specific technology or patent or expertise may be considered of strategic importance; and these early-stage companies having less access to finance than their late-stage/publicly listed counterparts are an even more vulnerable target for takeovers.
It follows that there is a crucial need for a “Protection of strategic assets Fund” that would be tasked with taking significant stakes in companies of different sizes, in different sectors, in different stages of growth…during this phase of high uncertainty and expected downward valuations. The Fund should be seeded by one or more EU nation, if not the EU itself, with an expected yet not exclusive emphasis on the largest economies where most of the strategic corporate assets are: Germany, France, Italy, Spain. Non-EU nations should also be allowed as funders of this structure in order to ascertain neutrality and multi-lateralism. A wide range of instruments should be allowed under the Fund’s mandate as to offer maximum flexibility as well as allow the proper objective to be attained: as such, common equity is an obvious option, but also convertible debt; debt with attached warrants; or even “golden shares” as prescribed by the EU Guidance Paper of March 25th; or holding options. These types of structure already exist in some countries, sometimes in a reduced mandate form: for example, in 2013 the EUR 7.2 billion takeover of Dutch telecom group KPN by Mexican billionaire Carlos Slim was blocked by KPN Foundation, a foundation that was set up to protect key national infrastructure when the former state monopoly was being privatized, by exercising an option to buy certain shares that will give it almost 50 percent of KPN’s voting stock. A similar structure, with a wide mandate in terms of sector and instruments, is a crucial necessity for the long term appropriate use of corporate assets of national vitality during this unique crisis that we are all facing.
[1] EU Guidance Paper dated March 25th, 2020: https://trade.ec.europa.eu/doclib/docs/2020/march/tradoc_158676.pdf
About Square Associates (www.square-associates.com)
Square Associates is a boutique consultancy based in Singapore which specialises in strategic and financial advisory, capital raising and cross-border M&A. We advise businesses (early, mid, late-stage and listed companies) in different sectors and geographies on their growth, and provide them with the strategic and financial advice to achieve their objectives. Assisting us in our work is a strong global network of boutique advisory partnerships in Dubai, London, Dakar and Mauritius comprised exclusively of seasoned senior investment professionals with international backgrounds in bulge bracket financial institutions.