Comment

By Colin McLean

Scotland’s listed company sector is shrinking. Takeover bids for Stagecoach and Menzies will remove two more of Scotland’s most successful entrepreneurial businesses from the stock market. Scotland once had thriving stock exchanges. Can this trend be reversed?

Volatile share prices and an easy supply of finance have spurred a takeover boom in Western stock markets. And change of corporate control in the UK has usually been easier than in other European countries. But these takeovers do bring a loss of local influence, with potential in time for headquarters to move or activity to be relocated. While in some cases new owners have invested for growth, too often takeover promises have later been set aside.

It was once thought that headquarter location mattered a lot, and certainly it can feed into a successful dynamic economy in many other ways. Decisions on sourcing accounting and legal services may be driven from headquarters and top level executives, as is corporate sponsorship and community support. Scotland has benefited historically from the ability of companies such as Royal Bank of Scotland to issue shares and acquire internationally. Does it matter where ultimate control is based?

The issue of national champions in the listed sector may no longer be crucial. Scotland’s economy includes a large public sector and many successful private businesses that see no reason to float on the stock market. Internationally, more companies are choosing to raise money privately and can grow to be major companies without seeking capital on the stock market. In Scotland, Skyscanner was one such business and there are many others here in technology and biopharma that are following in its footsteps.

Over the last decade, it has been the pattern for private companies to outperform their listed counterparts – stock markets are now simply less important, and more wealth is created in private hands. But fostering a healthy private equity sector does take a strong network of support, and supply of investment funds. Typically early-stage business growth is also supported by private wealth. Scotland has angel investor networks and institutional private equity investors, but lags countries such as Sweden in depth of entrepreneurial wealth.

One aspect of the change is the lack of listed champions carrying the Scottish brand. The renaming of what was once Royal Bank of Scotland to NatWest follows a broader trend for companies to give lower profile to their Scottish heritage. This may not be critical, as Ireland has shown, and Scotland has ambassadors in all areas of its economy and public life. Ireland has developed many major European and global businesses with strong Irish management and connections that see no need to label themselves with their domicile.

Irish businesses have benefited from having a major English-speaking market on their doorstep providing the launching pad for their international plans. Scotland has the same opportunity. Ireland and Denmark, with similar populations, have major listed companies on a scale well beyond Scotland’s sector. Companies such as Ryanair and global building products group CRH have bigger stock market values than NatWest Group or SSE. The contrast in Denmark is even more striking. It has several major businesses in shipping, health and alternative energy that are valued much more highly than Scotland’s biggest listed companies.

The challenge for Scotland may no longer be fighting to retain headquarters functions, but creating the conditions that can build new businesses as Ireland has done. Whether these are listed or remain supported by founders and private equity might not matter. But where activities such as transport or energy have strategic importance, there is a need for public engagement to protect national resilience. The weakening of globalisation and free trade has highlighted the need for shorter supply chains, energy security and sustainable business models. Whether a company is listed or not, levers for these priorities must remain.

There seems no short-term fix for Scotland’s listed sector, which seems at odds with some of Europe’s nearest counterparts. It is possible that knowledge-based businesses may need less capital in future, diminishing the role of stock markets. But the takeover trend is concerning. In many countries, sustainable inclusive growth does involve a vibrant private sector.

(At the time of writing SVM Asset Management holds positions in Ryanair, CRH and NatWest Group.)

Colin McLean is managing director of SVM Asset Management