Is Corporate Canada Being Hollowed Out?

Mergers and acquisitions
Is corporate Canada being 'hollowed out'?
Last Updated May 27, 2007
CBC News

The recent spate of foreign takeovers of familiar Canadian companies has turned up the heat on a familiar debate in this country — whether such takeovers are desirable, and if not, what should be done?

The federal Liberals have called for a three-month moratorium on approvals of all foreign takeovers of Canadian firms. The federal New Democrats have called for an emergency debate on the issue. The governing Conservatives, pointing out that there are conflicting views on this subject, promise to review Canada's competition policies.

And it's not just politicians who've been weighing in. Union leaders and public policy groups of all stripes have also made their views known. So, too, have some of the biggest names in Canada's business community.

Gord Nixon, the CEO of Royal Bank, raised his takeover concerns during his recent address to shareholders at the bank's annual meeting. "We have not only seen the disappearance of major Canadian household names, but the loss of Canadian presence in industries where we have long had traditional strengths."

Dominic D'Alessandro, the CEO of Manulife Financial, worried in his address to shareholders that "we may all wake up one day and find that as a nation, we have lost control of our affairs."

Not so fast, says Don Drummond, the chief economist at TD Bank. He wrote in a recent op-ed piece that "the facts don't warrant the hysteria that the Canadian economy is being sold out."

As part of his argument, Drummond cited a recent study done by the Institute for Competitiveness & Productivity, which called the hollowing out argument a "myth." It acknowledges that some of Canada's corporate stars have indeed been bought out, but argues that Canada has created many more global leaders. To give a sense of the debate, here are excerpts from the Institute's report, as well as from the address by Manulife's CEO.

The following is an excerpt from an address to shareholders given May 3, 2007, by Dominic D'Alessandro, president and chief executive officer of Manulife Financial Corp.

'I believe that ownership matters a lot' I'd like to touch upon … the extraordinarily large numbers of Canadian companies that are being acquired by foreign interests.

In 2006, more than 100 of our public companies were taken over, and the list includes some of the oldest and most well-established companies across a broad spectrum of industries, everything from hotels to retailing, to metals and mining. And the trend continues.

I sometimes worry that we may all wake up one day and find that as a nation, we have lost control of our affairs.

I think we ought to have a vigorous debate about the extent to which it matters whether or not ownership of our economy resides in Canada or elsewhere. As you probably all know, I believe that ownership matters a lot. It matters not only for economic reasons but, more importantly in my opinion, for our own sense of self esteem and pride in our country.

It may surprise some of you to hear me express misgivings about foreign ownership given that our own company has successfully invested — and been welcomed as an investor — in so many countries around the world. My concern is not rooted in any chauvinism or in any antipathy towards foreign investment. Far from it. I happen to believe that globalization is a very positive development and that trade and investment across borders is to be encouraged. Canada benefits mightily from being "open for business" and we mustn't do anything to change that.

Manulife president and CEO Dominic D'Alessandro listens to a question during the company's annual general meeting in Toronto on May 3, 2007. (Adrian Wyld/Canadian Press) My concern stems from the fact that the world is awash with capital and that the consolidation trend in many industries will inevitably continue. We are a small country with a relatively small population. Canadian companies typically aren't of a size to be global players. All too often, decisions affecting the future of important firms and the communities that they sustain are made solely with a view to the short-term financial consequences. I find it particularly bothersome that so many of our natural resource companies — which I would argue represent unique and irreplaceable assets — are now owned elsewhere.

I know that I am touching upon a very delicate subject here and that for many people, particularly some economists and other "big picture" types, any suggestion that the "markets" should be other than totally unfettered is an anathema. I appreciate, too, that even under the best of circumstances, our ability to shape our destiny will always be in question. But, this doesn't mean that we shouldn't try, or at the very least, debate the matter.

So what are some actions that we might consider taking? Well, what if we were to consider the feasibility of adopting ownership restrictions for certain sensitive sectors of our economy that would be similar to those that now apply to our financial institutions? After all, I would argue that it is a demonstrable fact that public policy regarding the ownership of our banks and insurance companies has served the country well; there is no shortage of competition in the financial services sector and the services available to Canadians are as comprehensive and as affordable as exist anywhere in the world. It is also a virtual certainty that absent the ownership restrictions all of these institutions, that we are all so proud of, would be owned elsewhere. Might it not be the case then, that such an ownership policy could be usefully extended to other sectors of our economy?

Securities regulation is another area where some useful debate could be undertaken. Many feel that Canada now has the most bidder friendly environment in the world and that this may not always be in our country's best interests. Under our rules, shareholder rights plans — also know as takeover defences or "poison pills" — fall away after a very short 60 or 90 days, leaving the target company's board with far too little time in which to explore alternatives.

On announcement of a bid for control of a Canadian public company, financially savvy buyers have the virtual certainty of knowing that a change in control transaction is highly likely to succeed, absent competition or anti-trust issues. These investors quickly acquire significant amounts of the target company's stock. The result is that for all practical purposes, the board is left with no choice but to accede to a takeover.

Source: http://www.cbc.ca/news/background/mergers/hollowed-out.html