Closing Bell: It's not always a great evil to want to take over a firm

Spivs, speculators, short-term traders, hedge fund managers; whenever a big take-over deal threatens the future ownership of an iconic national company, the usual pantomime villains are wheeled on stage to be pelted with rotten fruit by grandstanding politicians and anxious workers.

Like a dog growling at someone trying to take away a juicy bone, the reaction is instinctive and understandable. It's ours! And they are trying to steal it from us! A more sophisticated - or at least rational - version of the same response crops up in lengthy opinion pieces in serious newspapers and articles in learned journals. Various supposed shortcomings in the capitalist system are laid at the door of fund managers with short attention spans, who are more interested in quarterly performance figures and their next fat bonus than in providing precious capital and support for companies whose projects can take many years of expensive research before making a profit.

Like most caricatures this is part truth, part exaggeration and part downright falsehood. If you're on the wrong end of one of these deals and you lose your job, you will see it as gospel truth; if like me you're a fund manager you think it's largely rubbish.

There is a stateable case for the defence.

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First, the whole point of having tradeable shares in an operating enterprise is to provide a degree of insulation between the volatility of the financial markets on the one hand and the stability that the operating enterprise requires on the other.

It is in this sense the absolute opposite of putting business at the mercy of stock markets.

If a hundred investors put 10 each into a new business called company X, then the directors of X have 1,000 which they never have to repay. Those hundred shareholders can trade their pieces of paper not at all or several times a day; it makes no difference to the company, which can get on with running a business without having to worry that because someone wants to pull their money out they will have to close down an operation and sell assets.

Second, investors are ready to think well into the future if they believe the investment case is plausible, and sometimes the mistakes they make arise from being too long term. One of my first investment tasks over 20 years ago was to analyse the prospectus for the Channel Tunnel, a hole in the ground into which billions of pounds of shareholders' money was poured. Similar examples of fixing your eyes on the distant sunlit uplands of profit just before slipping on a banana skin were seen at previous market peaks in the 1920s, 1960s and 1990s.

Third, if you are a shareholder there is no such thing as a hostile takeover. The share price of a business at any given time is the market's verdict on - among other things - how effective the managers are at running the business for the benefit of its owners.

Company X may not have to repay the thousand pounds the original investors put into it, but they must do something with the money that provides or promises a return.

If not, the share price will fall to a level at which a competing set of managers come along and say to the shareholders: "We can run this business better than the current lot, and we're prepared to back our judgment either by buying your shares for cash or by offering you shares in the new and better business we plan to create."

Shareholders have the right to respond to such an offer in however they see fit; moreover, fund managers who manage other people's money have not just a right but a legal obligation to defend their clients' interests.

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As they used to say in Russia, "there is only one thing worse than being exploited by the capitalists: not being exploited by the capitalists."

l Gareth Howlett is fund manager director at Brooks Macdonald Asset Management.

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