Dutch takeover law sympathetic, but risks bureaucracy, arbitrariness and discounts

Tuesday 21 February 2017 | 11:40 CET | Market Commentary

The Dutch government has proposed legislation giving it the right to block takeovers of essential infrastructure or services. An investigation would be launched if the bidding party was suspected of links to criminal activity, showed signs of financial instability or lacked a transparent ownership structure. The subject of the takeover would have to be of significant scale (for example, at least 1 million customers or a 30 percent market share). An investigation could also be triggered after the takeover is a fact, if the new owner shows signs of problems. The proposal is open for public comment until 30 March.

While no one is likely to have problems with the intent of the legislation, it does raise a number of questions. What kind of risks does the government envisage? Are existing laws not enough to prevent such risks? Isn't this something that should be dealt with at the EU level? How do you set clear and objective criteria for when a takeover could be blocked? Would previous deals stand up under the new law (KPN privatisation, Ziggo takeover, Vodafone and Ziggo merger)?


To start, we note that the sale of infrastructure, such as KPN, means the government has lost control to a certain extent. Hiring private IT companies for managed services, such as Fox-IT, also introduces a degree of risk. What kind of risks are there? We see three issues:

  • Disruptions to service. Mismanagement or investing too little may be the cause. Various remedies are available, such as commercial service-level agreements (SLAs), market competition, laws such as universal service and net neutrality. The draft bill also sees political motives playing a role, such as blackmail through shutting down key networks.
  • Bleeding the takeover target. This happened some years ago with the takeover of the Danish PTT, TDC. Its international assets were sold, investments were cut, and the company was saddled with debt in order to pay the new owners dividends. To a certain extent we've seen the same with Ziggo, which paid for its own takeover, and VodafoneZiggo, which was loaded with debt in order to start immediately making payments to its owners.
  • Misuse of information (tapping, hacking, etc.). Legislation is already in place to handle this. The problem is more one of enforcement.

Red flags

The draft bill names three possible 'red flags' among acquiring parties:

  • Criminal activities. Companies such as Telia and Samsung have been linked to bribery, and BT is undergoing a major accounting fraud in Italy. The latter was a problem a number of years ago at MCI WorldCom and KPNQwest. Even at well-respected companies such problems cannot be ruled out. 
  • Financial vulnerability. Does this refer to balance sheet ratios, and if so, where are the limits? If a company's balance sheet deteriorates due to a downturn in business how would the government intervene?
  • Non-transparent ownership structure. This may refer to structures common in Asian conglomerates, where a small stake in a holding company can give complete control of a group, or different classes of shares with different voting rights, as is common with internet companies like Alphabet, Facebook or Snap. Control remains with the founders, even through their equity stake is relatively small. Another example is the range of media companies in which John Malone has say, despite holding only minority stakes (Liberty Global, Liberty Media, Liberty Interactive, Discovery, Starz, etc.).

Arbitrary, bureaucracy and discounts

Liberty Global is a good example. With a weak balance sheet and non-transparent structure (A and B shares), it acquired a national cable network in the Netherlands. This is far from a catastrophe. America Movil's attempt to acquire KPN put all of The Hague (government and KPN) on the back foot, even though there was no concrete reason per se to push away the buyer. 

Furthermore, we should not forget that various big telecom companies are already in foreign hands: VodafoneZiggo (Vodafone and Liberty Global), T-Mobile (Deutsche Telekom) and Tele2 (Tele2 Group).

No company will pass easily through this kind of screening. In theory, Dutch shares would carry a discount as a result, as is already the case at Proximus, which is still majority controlled by the Belgian state. KPN can wave goodbye to its theoretical takeover premium. Each takeover will require a re-evaluation, introducing additional bureaucracy. Are the existing laws and rules not already enough?

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