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Does the UK ‘discourage innovation’ as much as overseas investors say?

18 May 2023

Microsoft’s president said the UK was hostile to foreign investment after its failed bid for Activision Blizzard, but the CMA only blocked 1.5% of deals over the past decade.

By Tom Aylott,

Reporter, Trustnet

The UK’s hospitability to overseas investors has been bought into question since Microsoft president Brad Smith condemned the country for discouraging foreign investment.

His comments came after the Competition and Markets Authority (CMA) blocked Microsoft’s $68.7bn bid for video game developer Activision Blizzard, which is behind some of the biggest console and PC games including World of Warcraft and the Call of Duty franchise.

The British regulator said that deal would give Microsoft an unfair monopoly in the cloud gaming sector, of which it is estimated to already hold a 60-70% market share.

Nonetheless, Smith said the decision was “bad for Britain,” adding that the CMA had send a message to global markets that “will discourage innovation and investment in the United Kingdom”.

“This decision, I have to say, is probably the darkest day in our four decades in Britain,” he added. “It does more to shake our confidence in the future of the opportunity to grow a technology business in Britain than we’ve ever confronted before.”

Despite these strong words, this rejected takeover is one of the rare instances where the CMA has blocked an acquisition.

A study by Thompson Reuters last year found that the regulator has only prohibited 1.5% of the merger and aquation (M&A) requests it reviewed over the past decade.

Contrary to Smith’s claims that the UK is hostile to technology, Unicorn UK Smaller Companies co-manager Simon Moon said the high volume of overseas takeovers has left Britain with a relatively limited technology offering.

He explained: “We're very good in the UK at nurturing tiny tech businesses, we're just not good at following them through to conclusion because take this rather myopic view that once you’ve had your money you need to self-fund your growth.

“You’re likely to prefer a market where you can get repeated rounds of funding to accelerate your growth.”

This is reflective in the FTSE 100 index, where only two constituents – Sage and Auto Trader – are technology companies.

Alex Game, Unicorn UK Smaller Companies’ co-manager, said that most up-and-coming technology companies in the UK move abroad for better funding opportunities before reaching a significant size.

“The UK is very good at providing capital to early stage tech and software businesses,” he added. “What we're less good at is continuing to provide capital through their development phase and valuing them accordingly.

“The valuation discrepancy between UK tech and US tech for the past decade has been enormous, so there's always this valuation arbitrage claim which stops them from progressing.”

Giving dual-listed companies in the UK more freedom could help to retain technology businesses and offer more competitiveness with the US, according to Game.

He said: “We need to figure out how to direct investment capital to these businesses and improve their valuations. That's ultimately what is needed to attract bigger tech businesses to the UK in the first place.”

Financial Conduct Authority chief executive Nikhil Rathi gave an update on the regulator’s UK listing reforms in March, suggesting that it would give greater power to those with high voting shares in a company.

Game said that easings restrictions on company founders in the UK would make it closer to the US’s more permissive listing regime.

“The FCA are trying to make it more attractive for tech businesses to list in the UK,” he said. “Making changes to dual class structures, for example, might make the UK a bit more open because that’s a big issue for tech founders who want to remain an element of control.

“It's part of the reason why they decide to list on Nasdaq and it’s something the UK really hasn’t gotten its head round. Dual class structures would make it more supportive.”

This could help, but Moon said it will take a shift in mindset among UK investors to make the nation more appealing.

The UK market is so full of ‘old school’ sectors that technology companies can sometimes be overlooked.

In the UK’s largest major index, the FTSE All Share, only 18 constituents – accounting for 1.1% of the index – are technology companies. Banks, financial services and energy businesses on the other hand take up almost a third (30.2%) of the index.

Moon said: “We're just not used to it in the UK at the moment and that has to change. The successful fund managers of the future will be the ones that change the approach.”

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