Another article with the same theme from the star. Perhaps being a branch plant and back office is just our thing, we seem to be good at it so maybe we should see this as a strength (Ireland is another example of a highly successful branch plant/back office economy). Canada (and hence Toronto) represents a decent quality, safe, stable environment with honest and hard working people (maybe like a nice suburb for world capital).
Let's make a deal
Nov. 26, 2006. 10:24 AM
DAVID OLIVE
To hear it described by economists of the right-wing persuasion, Canada is a less friendly place to do business than many of its industrialized peers. But that's not the way it appears to takeover artists who vote with their money. Both domestic and foreign acquisitors have been buying up a storm of late, and experts see the trend continuing.
Canadian merger and acquisition activity (M&A) has soared by 64 per cent in the first nine months of this year. In the third quarter alone, according to data compiled by Toronto investment firm Crosbie & Co. released last week, M&A deals worth $90.3 billion were consummated, shattering the previous record set six years ago at the top of the dot-com and telecom booms.
This has been a blockbuster year for the foreign takeover of iconic Canadian firms. In the first nine months of 2006, offshore buyers have acquired Falconbridge Ltd., Inco Ltd., Dofasco Inc., Hudson's Bay Co., Four Seasons Hotels Inc., ATI Technologies Inc. and most recently La Senza Corp. in a deal announced last week that will merge the Canadian lingerie retailer with U.S. counterpart Victoria's Secret.
Canada's biggest mining company, its two largest hotel chains, its top software maker, its best-run steelmaker, its #1 wine producer and its dominant ski-resort operator have succumbed to foreign takeovers with a total transaction value of more than $60 billion. Canadian shareholders in those firms and the 131 other local companies snapped up by foreigners obviously have reaped quite a bonanza.
You want to see a hostile climate for takeovers? Try the United States, where in the past two years the U.S. Congress has thwarted efforts by a Chinese firm to acquire an oil and gas company, Unocal Corp., whose assets are almost entirely outside America; and a proposed acquisition by a Dubai-based company of port facilities on the U.S. Eastern Seaboard.
You want to see entrenched CEOs and directors who man the barricades against intruders, no matter that the intruders' plans might better serve the shareholders? Look again to the United States.
Consider these two examples, one American and one Canadian.
Over the past year or so, Las Vegas investor Kirk Kerkorian amassed a stake in troubled General Motors Corp. of close to 20 per cent. He then insisted that GM shake up its unimpressive top-management ranks and commit to a more ambitious turnaround plan than it is pursuing, or that it forge a joint venture with the better-run Renault SA and its Nissan Motor Co. affiliate.
No such luck. After pretending at length to study Kerkorian's proposed remedies, the GM board acted on none of the demands of an interloper Detroit regarded as an 89-year-old crank. Last week, Kerkorian began selling off his GM stake, turning his attention to an industry that does a better job of understanding its customers. That is to say, he's upping his stake in casino operator MGM Mirage Inc.
Second example. In order to gain global heft in a rapidly consolidating mines and minerals sector worldwide, Inco last year launched a friendly merger initiative with the larger Falconbridge, which incorporates many of the legendary assets of the former Noranda Inc. The goal was to create at least one world-class Canadian player in a field now dominated by a Big Three mining giants based in London.
But the Canadian deal architects botched the job, allowing European Commission regulatory approval of the proposed transaction to drag on interminably while metals prices soared. That eventually attracted competing offshore bids, and when the dust settled, Falconbridge was in the hands of London-based Xstrata PLC and Inco was swallowed up by Brazil's Companhia Vale do Rio Doce (CVRD).
Not one high-placed political or bureaucratic official spoke against that further "hollowing out" of the Canadian industrial economy. No regulator deemed the transaction worthy of intervention. And a chorus of Bay Street analysts and financial media commentators ridiculed the hapless Inco and Falconbridge dealmakers while cheering on the foreigners for their savvy and stealth.
Unlike the GM board, the directors of Inco and Falconbridge, though obviously enamoured of their planned "made-in-Canada" combo, promptly acceded to the richer offers made to shareholders of their firms by the foreign bidders. That was not atypical behaviour.
As Sharon Geraghty, a Toronto M&A lawyer with Torys LLP, told the Star last week, "If someone makes a [takeover] proposal to the company at an attractive premium, it's very difficult for a board to just sit on that proposal." That's the mentality of board directors in Canada, increasingly under pressure from institutional investors and corporate governance activists to extract the highest price for their company on behalf of shareholders, in the process subordinating all other considerations.
You can bet that editorials in the left-wing Liberation and its right-wing Parisian counterpart, Le Monde, would not be cheering on foreign takeover dealmakers. And the Elysee Palace would have rather a lot to say — on national television, in all likelihood — about the perils to the Republic posed by a planned foreign advance on a component of the French business establishment. To Michelin SA, for instance, or drugmaker Sanofi-Aventis SA (a newly formed combination largely engineered by Paris bureaucrats).
A persistent Italian finance minister spent months last year in his ultimately successful effort to block a proposed cross-border bank merger. In Germany and Britain, federal politicians often tie no-layoff guarantees to approval of foreign takeovers of domestic assets, as with Bombardier Inc.'s acquisition of plane maker Short Brothers of Belfast and German railcar maker Adtranz, respectively. In both cases, the government-imposed restrictions have been a nightmare for Bombardier as it copes with bloated workforces that sabotage any prospect of generating a respectable return on capital.
Throughout Europe, the European Commission's burgeoning anti-trust bureaucracy nit-picks not only domestic and cross-border mergers on the Continent, but has twice thwarted planned combinations of American firms that do business in Europe — a form of the dreaded "extra-territoriality" of which the U.S. is more often accused. No amount of lobbying in Brussels by then-CEO Jack Welch could move the EC to approve General Electric Co.'s planned merger with Honeywell International Inc. And it was the EC's blocking of a WorldCom Inc. merger with Sprint Corp. (now Sprint Nextel Corp.) that ultimately exposed WorldCom as an accounting scam, reliant on ever-larger takeovers to maintain the illusion of growth, and triggering WorldCom to file the biggest bankruptcy filing in history.
The United States has its "poison pills" by which domestic firms can thwart hostile takeovers, often in the form of laws passed by the local state legislature. China demands local part-ownership not only of acquisitions of Chinese firms but of newly launched enterprises financed by offshore interests. Remnants of command-economy practice continue to discourage offshore acquisitions of local assets in India and Japan. Takeovers and start-ups financed by foreigners in Russia and developing world countries are routinely subject to expropriation or reneging on contracts on government orders.
By any comparative measure, Canada is an acquisitor's paradise. We have no "industrial policy" worthy of the name, no ambition to create "centres of excellence" in R&D and manufacturing with which proposed takeovers in most European and Asian countries are expected to conform.
As a matter of policy, we expect a "net benefit" to Canada from foreign acquisitions, but as a matter of practice we don't demand one. The argument is ceaselessly made that, for the sake of reciprocity, we mustn't discourage foreign investment because: (a) We need the money; and (b) We wouldn't want other nations to block our attempted takeover of their industrial assets.
But if there is a capital shortage in Canada, how is it that our giant investment pools — the public and private pension funds and buyout firms like Onex Corp. and Brookfield Asset Management Inc. — have a surfeit of resources to buy port facilities in Britain and office towers in Houston? As for reciprocity, we could sell the entire Athabasca oilpatch to China and it would not alter Beijing's restrictions on Nortel's investment in that country one iota.
Back of the argument that we should not try to extract meaningful benefits from offshore takeovers of our industrial infrastructure is the suggestion that we're not far from a certain hillbilly parochialism for even letting the idea cross our minds. To which one can only respond that the Japanese acquisition of two Hollywood studios and a vastly overpriced Rockefeller Center in the late 1980s spawned an entire new genre in American publishing of novels and non-fiction treatises about a looming non-violent reprise of Pearl Harbor — timed precisely for the collapse of the Japanese economy into a recession of 15 years' duration.
As an experiment, it would be interesting to gauge the U.S. reaction to the foreign takeover, in the space of nine months, of U.S. Steel Corp., J.C. Penney Co., Intel Corp., Walt Disney Co., Marriott International Inc., Hilton Hotels Corp. Phelps Dodge Corp. and Limited Brands Inc. (Victoria's Secret) — the rough equivalent of the type and size of Canadian firms that have lost their independence to foreign decision-makers since the beginning of this year. The effect might be just a bit jarring for our U.S. friends. Certainly it would at least raise questions about the logical outcome of such a trend.
Which is not to argue that a proliferation of proud Canadian firms slipping down foreign gullets is a bane to our industrial progress (a subject for a different column). It is to say that Canada, contrary to your local Chamber of Commerce's claptrap about unsupportable tax burdens and stifling bureaucracy, is viewed by outsiders as a great place to do business. And with its relative lack of economic parochialism, it is probably the world's happiest hunting ground for takeover artists.
Canada's for sale. And no one seems much interested apart from the buyers.
Additional articles by David Olive