Tuesday, May 29, 2007

The takeover of Alcan by Alcan't

In the dog eat dog world of corporate takeovers, you have to get the players straight. In this case Alcoa is Alcan and and Alcan is Alcan’t.

As confusing as that may seem at first blush, it’s actually very easy to remember when you realize that Alcoa can defend itself from foreign takeover, whereas Alcan can’t. Despite the reciprocity that we all think may be contained under NAFTA, the sad truth is that Canada didn’t sign a NAFTA deal with Alcoa’s home country. For incorporation purposes, Alcoa resides in Pennsylvania and is protected by the rules that govern incorporation in that state. Meanwhile, the target is governed by rules not of Quebec’s making, but those of Canada. Alcoa can defend itself from takeover whereas Alcan can’t. Not my idea of meeting the lofty goal of a level playing field. Time for Canada to wake up to the real world before Canada becomes Can’t ada. That can’t be too far off.

Wasn’t taxing income trusts also universally promoted under that equally false construct known as leveling the playing field?

Canada is currently under the rule of Canada’s New Government™, who on economic matters seem hell bent on maintaining the status quo. Maintaining the status quo is a sure fire way to render Canadian companies not only more vulnerable to foreign takeover but further serves to economically coddle Canadian companies in such a way that they never learn how to be competitive in the first place. Take the income trust issue. This is the most ill-conceived policy known to modern man. Flaherty has even outdone himself. This is a quantum leap of stupidity that vastly exceeds the “merits” of his jailing the homeless policy.

Through the evolutionary process of aligning the needs of capital users with the needs of capital providers, a new form of business organization emerged in Canada. We were very much on the forefront for once, and now others are emulating our demonstrated success, just as Canada now finds itself in the hands of a totally uninformed group in office who are quick to pull the plug on this grand experiment, just as it was nearing the finish line as the rightful victor. This new business organization was so sought after by the capital providers in both Canada and abroad, that the capital providers accorded higher values to those businesses that structured themselves in such a manner. These” early movers” were, in turn, duly rewarded by the marketplace with a lower cost of capital making them inherently more competitive and better able to pursue a broader range of investment alternatives not otherwise economic for their lesser brethren, the traditional corporations. Only good came from that, e.g. the tertiary oil recovery method known as CO2 sequestration used in Canada’s mature oil fields, a boon for the environment, oil recovery and shareholders and Canada’s potential leadership in new tertiary recovery techniques. Virtually all of which is being done by the low cost of capital income trusts. Done by choice, not through environmental legislation.

So what does Canada’s New Government™ do? Do they consult? No. Do they panic? Yes. Panic first and legislate second and firmly enshrine the status quo into place. Alcan is a member of that status quo. Just like Inco was a member of the status quo that got acquired by foreign owned CVRD. It will no doubt come to all of you as a great surprise to learn that Inco was seriously considering conversion into an income rusts as viable defense alternative to defend itself from the hostile CVRD takeover. You could get the whole story from Inco CEO Scott Hand, but now that he sits on the Manulife board, his memory may have faded. The conversion of Inco to a trust would have been a huge bonanza, especially for Canada’s treasury and continued pride of place as the mining center of the world that we are slowly conceding to others, not to mention a bonanza for Inco’s shareholders and the Canadian capital markets.

So by actively coddling Canadian companies through enforced legislation that turns the clock back to yesterday’s status quo, we are raising a whole generation of government coddled companies, like BCE, Manulife and Power Corporation and those who were successful in enshrining the status quo to the detriment of the emergence of a more competitive and sought after form of business model. It’s no wonder that “Molson’s can’t sell beer to Mexicans”. Corporate Canada is constantly coddled as captive market competitors unaccustomed to real world competition. That strategy bodes poorly in the world of globalization. By protecting these companies from the realities of the larger world, government is simply attempting to give extended life to an endangered species. This benefits no one. Not even the coddled companies themselves, as these protectionist policies protect no one, least of all Canada’s overall competitiveness as a nation. Why do you think Dominic D’Alessandro has jumped so vociferously on the protectionist bandwagon? He sees the writing on the wall and it reads, John Hancock. He doesn’t want to become someone else’s John Hancock. If Dominic D’Alessandro truly wants to compete in the real world, he needs to live in the real world. Capital providers, not capital users should define the capital market ground rules. We have the proverbial wolf in the hen house.

We demand a level playing field, not a contrived and fictitious level playing field whose angle is only measured by words not degrees. To the extent that government’s tax collection is unaffected (as it is in the case of income trusts), then capital providers should be the sole decision makers of which shoe best fits. Failing that, we’ll take our money to markets where it’s well treated and well respected and that certainly isn’t going to be the next greatest debt financing by the second coming of BCE known as KKR. Too bad they won’t be offering a 20% discount on their home phone service the way they offered a 20% discount on investors’ BCE bond portfolios. The worst part of that damnable approach is that it is the cable company version of negative option billing. By the way, what number do I call to cancel my Bell Canada phone account? Rogers Home phone sounds like my kind of company. I think the cable guy now understands what the phone company never did. This is the world of ERISA, not capital market’s carpet baggers. (see Diane Francis' article Canada Lacks Investor Protection.

It’s time that the ERISA mindset permeated Canada’s New Government. How difficult can that be?

Or can’t, as the case may be?

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