TCS Daily

"National Champions": The Real "Old Europe"

By Claude Barfield - April 27, 2004 12:00 AM

Whatever one thinks about the validity of Defense Secretary Donald Rumsfeld's distinction between "old" and "new" Europe vis-à-vis the war in Iraq, there is little doubt that the actions of the French government, dictating the merger between Sanofi Synthelabo SA and Aventis SA, represent a fundamental throwback to the "old" Europe of dirigisme, in the name of a spurious national interest. It also represents a crucial challenge to EU competition authorities, who should now step forward to defend a "new" Europe based upon a merger and acquisition policy that allows market forces to play out.

Outwardly, the issues stemmed from a three-way private struggle among the French company, Sanofi; the Swiss company, Novartis; and the Franco-German company, Aventis (created in 1999, by the merger of France's Rhone-Poulenc and Germany's Hoechst). The real story, however, revolved around the determination of the French government to create a French "national champion." In pursuit of this goal, it intervened at every step of the negotiations, threatening Novartis executives repeatedly, while cajoling Sanofi executives to increase the bidding for Aventis, whatever the market-based value.

Pushed by the French finance ministry, Sanofi made the initial move in late January with a $57 billion bid to take over Aventis. Aventis' executives made no secret of their hostility to the bid, and by late February they had sought out Novartis as a white knight alternative. A merger between the two companies would have create the world's No. 2 drug giant, behind Pfizer Inc. in the United States. In addition, Novartis is counted as having one of the strongest future drug pipelines in the business, with the potential of 5-6 blockbuster drugs on the market in the next few years.

In early March, however, the French government publicly intervened when an aide to President Jacques Chirac told the head of Novartis' French unit that the Novartis-Aventis merger was "undesirable." (This stance by the French government was also compromised by the close personal and political relationship between Sanofi CEO Jean-Francois Dehecq and President Chirac.) Subsequently, French Prime Minister Raffarin reiterated the government's opposition, playing the defense/terrorism card and arguing that Aventis' vaccines were crucial to France's defense against bioterrorism. This position was widely derided in both political and financial circles, as evidenced by the quip of one analyst (as quoted by the Wall Street Journal): "It's not as if Aventis is being acquired by the Libyan government."

As a result of a wave of private sector criticism and rumblings from the EU competition directorate, the French government seemed to retreat -- at one point, the French industry minister stated that the government would remain neutral. This was where matters stood on Thursday, April 22, when Novartis, emboldened by the turn of events, threw down the gauntlet to the French government by public announcing that it would begin merger talks with Aventis. Giving the lie to the previous vows of neutrality, the new French Finance Minister Nicolas Sarkozy immediately took a direct hand by calling the heads of both Sanofi and Aventis and in effect ordering them to put together a deal. Said one French government official: "We are not going to let the Swiss put their hands on something it has taken us years to build." The pressure worked, and on Sunday Sanofi and Aventis announced merger plans after Sanofi increased its offer some 14 percent, to $65 billion (and a golden parachute payoff of almost $30 million for the Aventis CEO).

The brazen, repeated and very public intervention of high French government officials represents a major challenge to EU competition and merger rules. If the EU competition directorate is to retain any credibility, it must take at a minimum launch a full-scale review of the role of the French government in the lead up to the merger. While other EU governments have skirted EU competition rules, France leads the pack in the number and magnitude of its dirigiste actions -- under both Gaullist and socialist governments. Witness the decades' long French attempt to create and sustain a national champion in the computer industry with the hapless Bull; and just last year, the government bailed out French Telecom and Alstrom, the high-speed train manufacturer in order to retain a national identity. It is time for a "new" European competition policy that reinforces rather than thwarts free capital and investment markets.

Meanwhile, given the new company's relatively weak drug pipeline and its inefficient sales structure, future market forces may once again defeat the heirs of Richelieu and Mazarin.

Claude Barfield is Resident Scholar at the American Enterprise Institute.


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