France to Investors: Please, Don't Ever Invest Here

It's not easy doing business in the People's Republic of France.

From Google, which was sued two years ago  for scanning and digitizing French literature, to Coca-Cola, whose products were pulled from store shelves in 1999 over complaints of a funny taste, to even Chiquita Brands, which has for years struggled to overcome French and other EU nations' preferential import schemes for bananas grown in their former colonies, this is a lesson many companies have learned over the years.

It's a lesson Yahoo! (NASDAQ: YHOO  ) learned again this week.

No soup for Yahoo!
For some time now, Yahoo! has been angling to make a big buy in France. New CEO Marissa Mayer had her eye on online video website and Google rival Dailymotion, which France Telecom (NYSE: ORAN  ) was looking to unload.

A deal was in the works for France Telecom to sell Yahoo! majority control of Dailymotion. But then, in April, France killed it. At a meeting among Yahoo!'s COO, France Telecom's CFO, and French Industry Minister Arnaud Montebourg, the latter told the former in no uncertain terms: "I won't let you sell one of France's best start-ups."

(Which is curious, because Dailymotion isn't really a "start-up" anymore, and isn't even independent. France Telecom itself bought half of the company in 2011, then the rest earlier this year, paying about $165 million in all.)

Nevertheless, that's where things stand now. France Telecom is reportedly still interested in a deal, but France itself is not.

Don't kill the baby. Just cut it in half.
And yet, Montebourg's chief of staff still insists: "The government isn't the one that closed the door." Indeed, the government might even approve of a sale... of no more than 50% of Dailymotion.

Basically, that's France's defense to charges that it scotched the Dailymotion deal -- a deal that could have netted France Telecom an 82% return on its investment (Yahoo! was reportedly willing to pay a price valuing Dailymotion at $300 million). France didn't want to kill the deal outright, Montebourg says. The French government only wanted to dictate the terms under which a private business can do business and prevent a buyer from getting what it wanted to pay for.

That's all.

Many victims, but no one's fault
Despite all this, Montebourg still insists he wants to "attract more foreign investment in France, in particular from American companies." (Good luck with that.) But the real loss here isn't to Yahoo! specifically, or even to American companies in general.

Yahoo! can always take the money it planned to spend on Dailymotion and plow it into organic investments to combat Google's YouTube dominance or to buy another start-up, just as good. (Dailymotion's only the 11th biggest online video website, after all). The real damage is to French companies like France Telecom, to entrepreneurs who build businesses like Dailymotion, and to France itself.

Investment bankers sometimes lament the fact that "it's harder to sell a French company, because of buyer perception" of a risk of government meddling. That obviously hurts the French economy, because the fewer the potential buyers, the less frenzied the bidding. The less frenzied the bidding, the lower the price ultimately paid -- meaning less money for France.

Foolish takeaway
It's hard to see the effect a single derailed deal has on France's near-$3 trillion economy. It's at the investor and entrepreneur level that the damage becomes more visible.

Thanks to the meddling of the French minister, investors in France Telecom are losing out on what could have been a $135 million profit on their company's $165 million investment. Founders of other French start-ups -- which Montebourg holds so dear -- will face more problems attracting foreign capital, starving them of the funds they need to grow.

And that's the real tragedy here. In an effort to protect French jobs and industry and promote French entrepreneurship, Monsieur Montebourg and his ilk are really only making it harder for companies with cash to invest in France -- decreasing investment, hurting jobs growth, and slowing the economy. When you get right down to it, what was bad news for Yahoo! this week will end up being worse news for France.

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