Pirelli and the limits of the free market

One perverse outcome of the doctrine of free markets is that its supporters oppose the state protecting their countries’ industries against foreign takeovers, even if those foreign firms are state-owned. Many European firms have been bought by Chinese state-owned businesses in recent years. The latest was Pirelli. 

Last week the 143-year-old Italian tyre-maker was taken over by China National Chemical Corp (known as ChemChina) in a €7.1 billion deal brokered by Marco Tronchetti Provera, whose first wife was Cecilia Pirelli and who remained CEO after their divorce.

ChemChina has bought out Pirelli’s largest shareholder, holding company Camfin, which in turn is owned by a number of families including the Pirellis, Morattis, Acutis and Malacalzas, Russian oil firm Rosneft and several Italian banks. True, this is not a conventional family business, but the family influence was strong. 

Provera said that his aim in selling the firm was “to provide a safe future for Pirelli” by protecting it from corporate predators that might “destroy the company.” 

It is easy to argue that this sort of sale is a bad thing, and not just for sentimental reasons. Family-controlled businesses are long-termist, perform better for longer than other firms and often want to keep their operations in the communities that they come from, creating jobs and over time network effects. Businesses whose ultimate owners sit in the politburo in Beijing might have other priorities.

Can governments do anything to help families who might make distressed sales? Recent controversies over voting rights in two European countries suggest a way. In France there has been consternation over the so-called Loi Florange, which gives those who have owned shares for more than two years double voting rights.

This has proved controversial, and many CAC 40 firms have voted not to apply the rule. (One, Vivendi, is in turmoil because 10% shareholder Victor Bolloré, the owner of a family media empire, wants to keep his double votes.)

In Italy the government introduced a similar “loyalty scheme” whereby long-term owners could double their voting rights. The idea was that they would be able to sell off some shares without losing power, and the shares would be bought by foreigners. So the scheme would protect family owners while bringing much-needed investment into Italy. The reality, however, has proved somewhat different.

But these sorts of schemes are not all bad, especially for firms who might be prey for opportunistic hedge funds which do not have the business’s long-term needs at heart. Double voting rights would, of course,  have meant that Pirelli was protected against the “predators”.

Some argue that Pirelli will be able to enter the Chinese market now, and that this should be good for it. Maybe. But their arguments smack of a simple distaste for messiness. In recent years Pirelli’s ownership and internal politics were harder to untangle than a plate of spaghetti al pomodoro and some say it represents all that is wrong with Italian business.

Perhaps. But only a free market dogmatic could argue that a Beijing-based purveyor of pesticides and animal feed, which is ultimately owned by the Chinese state is guaranteed to be a better steward of one of Italy’s industrial crown jewels than a bunch of Italians, however quarrelsome.