Business

THE NEW IMPERIALISTS

Anthony Whittingham August 11 1980
Business

THE NEW IMPERIALISTS

Anthony Whittingham August 11 1980

THE NEW IMPERIALISTS

Business

Anthony Whittingham

Arthur Erickson now has another stopover to add to his gruelling monthly circuit. Back and forth constantly between Toronto and Vancouver, with weeklong trips to Saudi Arabia and exploratory visits to China sprinkled in between, Canada’s famed West Coast architect will now be spending part of every month in Los Angeles. Erickson’s success last month as the architect chosen to lead the design team for the $1billion Bunker Hill development project in downtown L.A. gives him newfound U.S. exposure.

But to Cadillac Fairview Corporation, the Toronto real estate development company that won the contract to finance and build Erickson’s project, working in the U.S. is old hat. In fact, in the week following the Bunker Hill announcement, Cadillac Fairview casually picked up another contract across the continent—the $310-million River Walk redevelopment in New York City— to add to its already impressive list of ongoing projects in six U.S. cities.

None of those announcements generated screaming headlines on either side of the border—no boastful flagwaving in Canada, no nervous nationalism in the U.S. Rather, it is an increasing pattern. Last month, Vancouver’s First City Financial Corp. spent more than $10 million to take another bite of the New York-based Bache Group Inc., sixth-largest brokerage house in the U.S. Just last week, Toronto’s International Thomson Organization Ltd. invested a further $32 million in its Dallas-based oil and gas partnership. Both moves were greeted with a similarly quiet response. And a few weeks earlier, when Toronto’s Jannock Limited opened a gleaming new brickmaking plant in Mineral Wells, Tex., few of the residents were even aware it was Canadian money and Canadian expertise that had brought 60

new jobs to their community. “It’s not something you go waving the flag about,” explains Jannock’s Jay Atkinson, vice-president of the large Toronto holding company that now has $40 million invested in various ventures across the U.S. “The Americans are delighted to have us and many know we’re Canadian. But we’re businessmen, not diplomats.”

Much of it is quiet. Some almost silent. But it is there and growing. Canadian business is expanding its horizons and investing outside the country, particularly in the United States, at a rate faster than the statisticians can measure—a surge of economic imperialism unequalled in the nation’s history. Canada is now the third-largest investor in the U.S., trailing only the Netherlands (with figures swelled by giants Shell and Unilever) and Great Britain, and well ahead of both Japan and West Germany. Canada’s U.S. investments, ranging from land and buildings to businesses, are worth between $6.5 and $10 billion. There is no exact reckoning: Statistics Canada, the U.S. department

of commerce and The Conference Board each produce different figures. Not only is it hard to measure the speed—last year it jumped by possibly as much as $1 billion and will likely do almost the same again in 1980—but some of it eludes the record-keepers. The $447million acquisition of the Flintkote Company of Connecticut by Montreal’s Genstar Ltd. earlier this year, for example, is visible, but the millions of dollars in private real estate sales or small businesses may never officially appear.

What does emerge is a changing profile of Canadian business, a growing community no longer held back by stifling delusions of its own inadequacies. “Canadian businessmen finally seem to be waking up to the fact that in one area after another they’re every bit as competent as their U.S. or European counterparts,” says one of Genstar’s two chief executives, Angus MacNaughton. “It’s about time, too, if we ever hope to stay afloat in the larger world economy.” This changing attitude shows first on the home front, where the past five years have seen major investment and expansion by Canadian businesses within Canada it2 self. Investment by Cají nadians within Canada § last year, specifically > to buy back formerly 2 foreign-owned firms, K totalled more than $700 million, significantly outpacing by nearly $100 million the inflow of foreign investment buying up Canadian companies. Record Canadian corporate profits (up last year by 41.6 per cent over the year before) have put extra billions into company coffers, money then used for corporate shopping sprees. Only some of this cash has been channelled into new job-creating ventures. A disproportionate amount has been spent on take-overs, the corporate cannibalism that saw $2 billion in publicly traded shares gobbled up on the Toronto Stock Exchange alone in the first half of 1979, with little impact on the economy other than concentration of ownership.

But as Canadian companies have gained the confidence to continue this spree outside the country, the benefits do start to accrue—in the form of dividends flowing back into the country. (These payments, sent by subsidiaries back to the parent company, will help in the long run to offset Canada’s current deficit. In 1979, nearly $1.5 billion flowed out to head offices of foreignowned companies operating in Canada.) In part, it’s a worldwide trend. The U.S. has never been a safer investment haven—heightened by the current recession (allowing investors to acquire U.S. companies at depressed prices) and the prospect of the economy picking up again soon. “Today is the perfect time to go shopping for companies in the U.S.,” notes Michael Graham of Toronto’s A. E. Ames, a brokerage house. “U.S. equities are the best bargains in the world.” Adds Max Clarkson, who retires this year as dean of the University of Toronto’s business school: “The Canadian economy has been pretty thoroughly picked over for acquisition

and expansion, so looking outside the border into the U.S. was the next logical step.”

This push during the past five years has brought startling developments. After all the years of Canadian browbeating over U.S. and other foreign domination, Canadians now have a greater stake in the U.S. economymeasured as a proportion of population and gross national product (GNP)—than Americans have in Canada. With a population and GNP more than 10 times greater than Canada, the U.S. has a direct investment only four times greater than the flow in the other direction. In total dollars, of course, and as a proportion of the Canadian economy— 55 per cent of the nation’s manufacturing, 58 per cent of Canada’s mining and 72 per cent of the country’s oil and gasforeign ownership in Canada continues to outstrip Canada’s efforts abroad. But the tide may be turning.

A decade ago only a handful of large Canadian companies—Massey-Ferguson, Seagrams, Inco and Alcan, among them—dared do business outside the country, so the change, as Canada enters the ’80s, is dramatic. Even a random sampling is impressive. Interna-

tional Thomson Organization Ltd., with headquarters in Toronto and newspaper and publishing interests throughout Canada, the U.S. and Britain, has made enough U.S. acquisitions that it now owns more newspapers than any other publishing conglomerate in North America. Sun Life Assurance Co. of Canada, 13th-largest life insurance company on the continent, is pushing hard into the U.S., with advertising campaigns in major U.S. mediums including The New York Times and The Wall Street Journal. Brascan Limited, for decades a conservatively managed utility holding company with holdings

in Brazil, last year attempted a $1.3-billion take-over of New York’s F. W. Wool worth Co. Had it succeeded, it would then have been the largest allcash corporate take-over in U.S. history. Since then, having itself been taken over by another Canadian company, Edper Equities Limited, Brascan has spent $70 million so far this year in small U.S. acquisitions, with more likely to follow. Dominion Bridge Company Ltd. of Montreal, the industrial equipment subsidiary of Canadian Pacific Enterprises Ltd., has been quietly buying U.S. companies, for a total of 22 since 1970, and is now poised for another similar move in the $400-million range.

Unchallenged leaders in the swoop south are the real estate companies. The dozen largest, led by Cadillac Fairview, Olympia & York Developments Ltd., Nu-West Group and Daon Development Corp., have office towers, condominiums, shopping centres and other projects approaching $5 billion already in

place or under development in the U.S. As a group, these companies are now considered the world’s largest and most diversified developers. Canadian retailers Coles Books and Classic Bookshops have shops strung along the eastern seaboard as far south as Florida and are now venturing westward. Peoples’ Jewellers, Shoppers Drug Mart, Consumers Distributing, Birks, the Grafton Group (owners of Jack Fraser and other clothing stores) are active, either opening new stores or buying existing U.S. chains.

The cavalcade continues. Canadian cable television companies are winning lucrative licensing privileges in cities throughout the U.S. Telecommunications manufacturers, led by Montreal’s

Northern Telecom Ltd., are making major inroads, with Ottawa’s Mitel Corporation completing a $55-million takeover this month. The Big Five Canadian chartered banks have sprouted agency offices in at least a half-dozen major U.S. commercial centres and, in some cases, have bought up smaller U.S. savings and loan companies to open their tills into the vast pool of U.S. business and consumer credit and financing—as well as helping Canadian companies finance their push south of the border.

The list, in short, is long. The motives fuelling this new expansionary push, as well as the methods of achieving it, are often as varied as the companies themselves and the colorful senior executives who run them. Key to almost every

move has been “timing”—having the right money and the right corporate strategy in place at the right time. Another key motivator is growth. That’s often an urge felt by companies anxious to maintain the momentum necessary to challenge the ambitions of top employees or satisfy the egos of owner-managers—as well as keeping shareholders happy. Cadillac Fairview’s executive committee chairman, Eph Diamond, for example, the man who helped guide the company’s spectacular forays into the U.S., says that Cadillac never considered abandoning Canada, but it recognized by the mid’70s that the building boom in Canada was beginning to trail off. “We simply

couldn’t foresee keeping our annual growth rate at the levels we wanted if we restricted ourselves to the Canadian market,” he says. “Market conditions in the U.S. were right and we had the expertise and experience to move in.”

In some cases, companies have expanded into the U.S. in order to develop the expertise and to survive. “Internationalism is a fact of life, pure nationalism is a fact of death,” says Roy Cottier, a vice-president of Northern Telecom which has invested $425 million in U.S. expansion during the past five years. “Without our U.S. operations, we’d experience double death, being overtaken not only in world markets but within Canada as well,” he says, adding that Northern Telecom’s U.S. operations, headquartered in Nashville, Tenn., support, 2,000 related Canadian jobs which wouldn’t otherwise exist.

On the other side of the coin are the companies that started out with a marketing advantage, especially in the real estate and retailing fields, and were shrewd enough to spot their chance to fill a void. Shoppers Drug Mart, for example, supplies a clean, almost sterile efficiency, a sharp contrast to most U.S.

pharmacies normally twinned with hardware and general merchandise operations. Explains Shoppers’ Chairman and founder Murray Koffler: “We figured, hell, why not try to crack the U.S. market. There was certainly no one down there doing things quite the same way we do.” Today, six years after opening its first U.S. store in Palm Beach, Fla., Shoppers operates 27 outlets in the U.S., with 10 more planned over the next year. Still other Canadian companies are finding themselves forced to move into the U.S. or not do business with the U.S. at all. Some 36 states now have Buy America legislation or offer incentives to U.S.-manufactured products. Last month’s announcement by Montreal’s Bombardier Inc. that it would build a transit vehicle assembly plant in the northeastern U.S. was an example of such prompting.

But whátever the corporate strategy, expansion into the U.S. has usually a lot to do with sheer “chemistry,” the driving personality of senior management, combined with a certain competitive pride derived from “making it” in the big league. Dozens of Canadian corporations have enjoyed a major trans-

fusion of new blood during the past decade as older, more traditional owners and managers have gradually given way to a more aggressive crop of newcomers, many armed with crack business school training. This significant change in the complexion of Canadian business has caused the bold new approach of companies penetrating the once-intimidating membrane separating Canada from the larger world outside. “There’s no denying,” says Jannock’s Atkinson, “that it makes you feel good as a Canadian to know that you can go down to the States and make it.”

If there’s a dark side to this desire— as the more fervent Canadian nationalists believe—it’s that some Canadians seem to like doing their business in the U.S. a bit too much. For instance, Genstar and Dominion Bridge, both of which have moved their executive offices out of Canada and into the U.S. to

be closer to their future growth areas, are nonetheless sometimes charged with selling out.

The fact is some Canadian businessmen simply prefer the American way of doing business, saying they find the U.S. climate more receptive to innovation, more deal-oriented. In spite of the U.S. regulatory environment, with its thicket of rules covering everything from environmental protection to financial disclosure—operating inthe U.S. is, if anything, more complex than in Canada—some businessmen still view the U.S. as the last bastion of free enterprise. These are the entrepreneurs who feel more at home with the U.S. promise of “life, liberty and the pursuit of happiness” than with Canada’s safer, if greyer, guarantee of “peace, order and good government.” Sighs Toronto investment analyst Laird Grantham, “Still, it isn’t much in Canada’s interest if all these companies moving to compete in the larger American market simply end up becoming American.”

The question is, however, whether large-scale investment outside the country, including the corresponding outflow of capital, is helpful to the Ca-

nadian economy, even assuming the companies involved maintain their Canadian corporate citizenship. Ardent nationalists, such as former federal finance minister Walter Gordon, argue

that the capital employed in Canadian foreign expansion should first be used to buy back foreign-controlled operations in Canada. The Trudeau government has, for example, outlined repatriation goals for the oil and gas industry. Further, how long will the U.S. welcome continued foreign investment while America-first isolationism signals a nationalist retrenchment within the U.S.? So far, most Canadian busi-

nessmen operating in the U.S. report Americans “couldn’t be more receptive,” as Genstar’s MacNaughton says. Some, however, wonder if the smiles will fade if the U.S. recession lasts longer than predicted.

Whatever the future of Canadian investment in the U.S., Canadian businessmen today feel euphoric. And this new imperialism has provided a tremendous surge of confidence to a sometimes moribund private business sector, an intangible benefit that may infuse the Canadian economy with the energy and aggression needed for its own future.