Wednesday, September 1, 2010

Elizabeth May asks: "Foreign Takeovers of Canadian Corporations: should we care?"

Foreign Takeovers of Canadian Corporations: should we care?

By: Elizabeth May
Published: September 1, 2010
Island Tides


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 --  Vancouver-based MacDonald Dettwiler and Associates, of its space division, to a U.S. 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 a year of all –time high foreign takeovers, but 2010 has a larger number of transactions already.  Despite reviews to ensure a “net benefit,” the track record is not re-assuring,  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 versus 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 the reason Canadian companies started being gobbled up at an unprecedented rate by foreign giants was that 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 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 Netherlands in North sea oil.  The OECD warned Canada to avoid Dutch Disease and go slow in the tar sands.

Sensible economic strategies think of all of Canada, 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.


Anonymous said...

Her logic is very good.

Too bad the public is so easily fooled with cheap drama like the Russian planes story being timed with Harper' northern visit to justify buying fighter planes.


Anonymous said...

I would assume that a Canadian worker would work harder for a Canadian owned company than for a foreign owned company. Does that sound logical? BB

Anonymous said...

BB - Bingo!

Something I learned recently ... horrible but kind of funny at the same time.

The term "Brazilliant".

This term is used and applicable when an upper management person comes up with a very ill conceived, poorly planned and generally stupid idea that usually goes against physics, Canadian climate and quite frequently common sense in general. These ideas are often costly.
Workers are not permitted to disagree, even the idea or proposal is illegal. If the proposal, idea or whatever goes through and fails - workers are blamed as if they have any authority or input when making these decisions.

The idea, proposal or whatever - especially when this failure lingers and remains highly visible is referred to as Brazilliant.

* Please note that term does not apply to the people of Brazil - simply the corporate swine they send to Canada.

Dr Mike said...

Elizabeth May gets it , so why don`t the rest of these politicos get it??

Making a publicly owned corp go private or selling it to offshore interests does nothing to enhance it`s economic value to Canada.

Privatization & leveraged buy-outs kill the overall gov`t tax pools limiting the gov`t`s ability to supply social programs , infrastructure & jobs.

Privatization & foreign controlled ownership limits options for individual investors which in turn limits the overall ability to procure decent income streams--this means less income & less tax paid.

Killing the trust market enhanced foreign & private ownership as the cost of capital soared & the protection against takeover was dashed as these trusts were devalued.

What a mess & everything seems to lead back to a loss of revenue to the gov`t.

Less revenue = less social programs.


If I connect the dots .............


Dr Mike Popovich

PS---way to go Elizabeth , nice job.

Issachar said...

Elizabeth May speaks, should we care?

Not really, no.

The Greens are currently trailing behind the NDP, the Liberals and the Conservatives. The Greens are a non-entity politically. This isn't an issue because Ms. May talks about it anymore than it would be if the chair of political science at a medium sized university brought it up.

Now, if Michael Ignatieff was saying something about foreign investment in Canada, that would be news.

Issachar said...

And by "currently trailing", I meant "are and have always been".

Brent Fullard said...

Issacher mused:

"Now, if Michael Ignatieff was saying something about foreign investment in Canada, that would be news."

Are you saying Michael Ignatieff is oblivious to the issue of foreign takeovers and foreign takeovers are no where on his radar screen?

That can't be good. For him or anyone else (foreigners excepted)

Issachar said...

@ Brent Fullard,

No, I'm quite sure that Mr. Ignatieff is aware of the issues surrounding foreign investment. I suspect that his understanding is a little more nuanced that Ms. May's rather blatant appeal to nativism.

Brent Fullard said...

So "nuanced" as to be non-existent.

Kid Leduc said...

What I don't see here is an understanding that foreign corporations are now tax-free in Canada -- they can use inter-co debt to transfer Canadian income before in-house interest expense to the foreign head-office and (not) pay tax under a foreign tax code.

In theory this could be okay if Canada had large corporations invested abroad and who are moving income back to Canada to be taxed as Canadian income but the reality is that Flaherty has buggered those rules too.

Ya wanna blame somebody for this? Blame the NDP who like the Green know diddle about international tax treaties. As Trudeau said our MPs are nobodies -- green grocers and church ministers and the like. It was the old CCF who made it hard for Canadians to invest in their own oil industry. May God help us. The road to hell is lush with good intentions.

Anonymous said...

BHP has also said they will pull out of Canpotex. That can’t be good for Canada.

First, the Chinese would like nothing better than to break Canpotex up. This would reduce pricing power immensely. This would have a serious effect on not only the revenues of the remaining members but the royalties the Government of Saskatchewan collects.

Second, Canpotex may survive with its remaining members Agrium and Mosiac but one has to understand that the production capacity marketed by Canpotex is not equal. That is, although Canpotex is owned equally by these companies the amount of throughput is not equal. Agrium’s share of the throughput is the smallest.

See the link:

Canpotex has plans to build a $250million or so for a new potash terminal at Prince Rupert and about $250 million for expansion at their North Vancouver, BC terminal for a total of $500 million worth of long term investments in BC. These investments will create many good quality long term jobs as well as several years of high value construction jobs.

BHP has plans to build a new terminal in Vancouver, WA
If BHP pulls that throughput capacity from Canpotex, will these expansion investments be needed? Not a chance when PCS is the biggest proportion of terminal throughput. Do you think that BHP will not direct all of PCS’s throughput to Vancouver, WA to lower the unit price of handling thus giving them a cost advantage over Agrium and Mosiac the remaining members of Canpotex?

The BHP takeover will cost Canada and in particular BC and Saskatchewan huge amounts in lost jobs, royalty and tax revenues. However the US and Australia will make out quite nicely thank you.

Thank you Jim Flaherty for your income trust debacle. The gift of tax losses to the Canadian people that just keeps on taking.

Mike said...

Indeed, businesses in Canada still surviving as of the moment. Canadians would rather stay here than go to other countries and earn nothing. My wife has a small retail business and to make sure our finances are still stable, I suggested her to seek an estate lawyer in Ottawa for proper assistance and counseling with regards to our business. And it really helps.