The Return Of Spezialaktie: Why We Live In The “Great Forgetting”

In a previous edition of this newsletter we wrote about the Western politicians' penchant for windfall taxes on energy companies.

In case you missed it, you can find it here. A windfall tax is a one-time tax or surcharge on an industry or sector when unexpected economic conditions result in one-off atypical profits.

The big problem with these taxes is that they discourage investment. If you know that the government will step in and politicize and extraordinarily tax you if profits rise above a certain level, then you will be reluctant to invest in its jurisdiction versus other possibilities.

If companies (and most certainly their executives) are held responsible if profits fall then it is difficult not to do likewise when profits surge.

We obviously took the position that Western countries shouldn't pass these taxes because it would only exacerbate the underinvestment of the past decade. And we would end up being only more dependent on foreign sources of oil that care little about ESG investing goals, the environment or global warming.

Anyway, the point we want to make today is that these taxes were not new. In fact, they were a regular feature of economic policy for a long time and are one of the many previously settled questions that are somehow coming back from the dead.

In another recent edition of this newsletter we made mention of economist Tyler Cowen's argument that we are currently living in an age best described as "the Great Forgetting" because we seem so determined to ignore the (many) lessons we have painfully learned about policy in the past.

Our version of the Great Forgetting might be the "Night of the Previously Long Dead Economic Policies." Let us know what you think, we are still workshopping it......

One such zombie are state-held shares (or spezialaktie in German where they were very popular) which were very common in Europe during the era of state privatizations in the 1970s and 1980s.

And now they are back!

The reason they are back is largely that countries are becoming very concerned about foreign purchases of strategic companies and assets. They don't want to lose the crown corporate jewels to unfriendly regimes or even allies that might have a very different take on what is optimal.

This is all part of a larger twin theme of industrial policy and protectionism as countries try and counter the negative effects of globalization without

The canonical example in this current debate is the UK semiconductor company, Arm.​

We have written about the company before. It is interesting because now that the purchase by American chip giant Nvidia has fallen through, we said it would likely be listed and that that would matter in terms of where that happened.

The UK would be determined to keep it in the UK, by hook or by crook. Well, now that is exactly what is happening. There are (governing) politicians suggesting that the best way to keep UK interests aligned with Arm's development is to take a "golden" share in the company, for strategic reasons.

This argument is entirely wrong.

In fact, golden shares are a terrible idea in general and they almost certainly would be in Arm's case.

Why?

Well because if the government owns even a minority stake it very quickly negatively impacts the company itself. If the stake is too small to matter then it is just a waste of money but if it is large enough to be able to veto takeovers or policy decisions then, shockingly! - investors will care and assign a discount to the company's shares.

If there is a discount then that impacts the ability to hire talent and cement partnerships or conduct mergers or purchases. Over time, these factors will also likely lead to the company gradually losing whatever competitive advantage it once had.

Further, if the government will, of course, be tempted to further interfere. It will want to have a say in strategic company decisions and this might be great for the United Kingdom but it will very quickly be a clear negative for the company.

Surprise! Nothing saps the creative energy and innovative culture of a vibrant and impressive company like Arm faster than state ownership. Is this really THAT difficult to believe?

Arm might be a huge strategic asset today but if the government takes a chunk of it, it won't be for long.

And guess what!?

The list of examples from recent history are legion. In the UK, in France, in Germany and beyond. There is a reason that there is no great state owned company in Europe or the US. And let us not get started on China.

There might - wincing - be a case for owning a share or keeping a very close eye on defense companies and that might even stretch to cybersecurity companies in the present age of high technology but they almost certainly wouldn't extend to semiconductor companies like Arm.

The best thing for Arm would be to let it float on a stock exchange and use those funds to invest in remaining competitive, innovative and strategically flexible.

That would ensure it would remain a world beating technology company and that, in turn, would be great for the United Kingdom.

Funny how that works....

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