Foreign takeovers of Canadian corporations: should we care?

The latest flashpoint in the long-standing conflict over the loss of Canadian corporations to foreign buyers is over potash. Potash is the stuff from which industrial fertilizers are made.

Given the clout of the Australian mining giant BHP Billiton, the largest mining company in the world, it is likely that the $38.6 billion (US) takeover of Potash Corp will succeed. It will be reviewed to determine if Canada receives a ‘net benefit’ under the Investment Canada Act. But as only one takeover since 2007 has been turned down—for the space division of Vancouver-based MacDonald Dettwiler and Associates, to a US firm—it is likely this one will be rubber-stamped.

So another resource company will move out of Canadian control.

The list of iconic Canadian corporations that are Canadian-no-longer is fairly shocking. Since 2007, we have lost Hudson Bay, Inco, Falconbridge, Dofasco, Alcan, and Stelco, to name the largest. 2007 was the previous all- time high of foreign takeovers, but 2010 has a larger number of transactions already. Despite reviews to ensure a ‘net benefit’, the track record is not reassuring—US Steel did not honour promises to Stelco workers, and Brazilian Vale did not keep its commitments to former Inco workers.

Such takeovers usually pit nationalists against investors. Maude Barlow, National Chairperson of the Council of Canadians, argued, ‘This [the Potash Corp takeover] is the wrong way to go. When you hand over all the power over these resources to international investors, be they backed by a large country or just private investors, you lose control, you lose the ability to take care of your local economy, your local environment.’

Meanwhile, business leaders claim it is good for Canada because we are short of capital—although some are not as sanguine. Dominic D’Alessandro, while he was still CEO of Manulife Financial, worried that we might ‘all wake up one day and find that as a nation, we have lost control of our affairs.’

When you look at a graph of the foreign takeovers of Canadian corporations, you would be entitled to wonder why it suddenly spiked in 2007. The reason for the sudden surge in Canadian companies being the target of hostile takeovers is not much discussed. Nor are the economic implications for our productivity as a country.

It turns out there are a lot of very interesting and complex interactions beyond the nationalist argument. There is an argument that Canadian companies started being gobbled up at an unprecedented rate by foreign giants because Stephen Harper broke his promise not to tax income trusts. This may seem too obscure to be credible, but as long as corporations could convert profits to trusts, they had sufficient cash to withstand takeover bids. Once Stephen Harper broke the promise to never tax income trusts, not only did many Canadian seniors lose their savings, the bonanza of takeovers began.

Right after the taxing of income trusts, Penn West’s CEO predicted that foreign takeovers would increase in the energy sector. ‘Where you’ve seen a Canadianization of the energy industry, it will go the other way, there will be a lot of purchases,’ said William Andrew, chief executive officer of Penn West, on November 2, 2006 (Bloomberg, ‘Canada’s Trust Tax May Spark Oil Industry Takeovers.’) Sure enough, on August 24, 2010, it was announced that Penn West Energy Trust PWT.UN-T had signed an $850- million natural gas joint venture in British Columbia with Japan’s Mitsubishi Corp.

Another Harper government change encouraging more takeovers was smuggled into the 2009 Budget Implementation Act. The Investment Canada Act was amended so that only acquisitions of more than $1 billion, are reviewed. A one billion dollar purchase looks like peanuts as we watch the potash takeover, but any firm sold for less than one billion is no longer reviewed at all.

The effect of all the foreign purchases of previously Canadian companies was to drive up foreign direct investment (FDI). That indicator is generally seen as positive. The growth in the tar sands also increased FDI. But there are downsides to that kind of growth (making no comment on the environmental costs). With a higher FDI and higher oil exports, the loonie rose to heights not seen since the early 1970s. That led to a collapse in export- dependent sectors. Pulp and paper and manufacturing took big hits, with over 300,000 jobs lost in manufacturing alone. And these job losses were before the 2008 recession.

In its 2008 Report to Canada, the Organization for Economic Cooperation and Development (OECD) warned that our economy was being increasingly skewed to tar sands production, risking the other regions and other sectors. That phenomenon is called ‘Dutch Disease,’ after the negative impacts of early development by the Netherlands in North Sea oil. The OECD warned Canada to avoid Dutch Disease and go slow in the tar sands.

Sensible economic strategies take all of Canada into consideration; all regions and the need for a diversified economy. The fire sale of Canadian industries is not only an issue of national sovereignty. It has an important impact on a wide range of economic indicators, including productivity. As more jobs are lost in resource and manufacturing sectors, the job market shifts to service jobs. Our declining productivity rate, now falling well behind the US, is also attached to losing our own corporations.

Hanging on to Canadian corporations, controlling our destiny is more than high-minded rhetoric. It has a lot to do with Canadian competitiveness, productivity, and a strong economy in all parts of the nation.

Elizabeth E. May is the nominated candidate for the Green Party of Canada in Saanich Gulf Islands. She lives in Sidney.