COVER

THE NEW DEBATE ABOUT TAKEOVERS

D'ARCY JENISH May 4 1987
COVER

THE NEW DEBATE ABOUT TAKEOVERS

D'ARCY JENISH May 4 1987

THE NEW DEBATE ABOUT TAKEOVERS

The Bank of British Columbia and Husky Oil Ltd. went to Hong Kong investors. A British conglomerate claimed Ottawa-based Mitel Corp., a high-tech company, while Boeing Co. of Seattle outbid a Canadian rival for de Havilland Aircraft of Canada, one of the country’s money-losing Crown corporations. And now, Toronto-based Cadillac Fairview Corp., one of Canada’s largest real estate development companies, may wind up as part of Gerald D. Hines Interests of Houston. All five deals are part of a wave of foreign investment since Prime Minister Brian Mulroney’s December, 1984, declaration that “Canada is open for business again.” In that time, outsiders have snapped up almost 1,000 Canadian firms. But Chicago-based Amoco Corp.’s $5.1-billion bid for Dome Petroleum Ltd. of Calgary has ignited an unprecedented uproar and revived a decades-old battle over foreign investment in Canada.

Economic nationalists and the federal opposition parties say that the Mulroney government’s “open for business” approach has worked too well. Direct foreign investment in Canada surged to $6.7 billion last year from $3.8 billion in 1984, when the Conservatives took office. Edmonton publisher and nationalist Mel Hurtig argues that Canada will simply become an economic satellite of the United States unless foreign investment is controlled. Said Hurtig: “We’re going to lose our ability to manage our own economy.”

Damage: But some

economists say that nationalistic controls would devalue Canadian companies and increase corporate concentration by limiting the number of potential buyers.

They also maintain that Mulroney’s open-door

policy has restored Canada’s reputation in world markets after the damage caused by such Liberal initiatives as the Foreign Investment Review Agency (FIRA) and the National Energy Program (NEP). Said William Mackness, chief economist with the Bank of Nova Scotia: “There were widespread fears that capital was not safe in Canada.”

In the business community, the impending Dome sale is widely viewed as a test of the government’s ability to stand by stated policy. Energy Minister Marcel Masse told an oil and gas symposium in Toronto last November that the Tories would allow “the acquisition by foreign concerns of a Canadian-controlled firm which is in clear financial difficulty”—a definition that applies to debt-plagued Dome. Murray Armitage, a senior vice-president and director of Merrill

Lynch Canada Inc., said that the government will be accused of changing the rules in midstream if it is swayed by political considerations and blocks the sale to Amoco in favor of a Canadian firm.

Indeed, some analysts say that Canadian com• panies use economic nationalism to their advantage. Said Eugene Nesmith, president and chief executive officer of Vancouver-based

Hongkong Bank of Canada: “They have placed themselves better in a business deal by playing on the emotions.” Last November Hongkong Bank successfully beat out Canadiancontrolled Vancouver City Savings Credit Union to buy the Bank of British Columbia. For his part, Robert Price, an investment analyst with Peters & Co. Ltd., a Calgary-based brokerage firm, said that economic nationalism is strongest in Central Canada. Declared Price: “We have heard virtually no concern about foreign ownership in Western Canada.”

Still, before the Tories took office in September, 1984, the economic nationalists appeared to be winning the battle over control of Canadian industry.

Between 1970 and 1985 foreign control of all nonfinancial industries fell to 23 per cent from 36 per cent. The decline was particularly dramatic in several key sectors: in manufacturing, outside control fell to 48 per cent from 61 per cent; in petroleum, to 32 per cent from 76 per cent; and in mining and smelting, to 31 per cent from 70 per cent.

Gains: Fresh statistics are not yet available, but Hurtig and other nationalists say that Conservative government policy has resulted in a gigantic increase in foreign ownership, which will reverse the gains made since 1970. Foreignowned companies earned up to 50 per cent of all corporate profits in Canada last year, excluding financial institutions, compared with 44 per cent in 1983, according to Hurtig. And despite a large merchandise trade surplus, an outflow of interest payments and dividends more than wiped out that surplus and produced a record $8.6-billion current account deficit.

But many economists reject Hurtig’s reasoning. John Crispo, a University of Toronto political economist, argues that nationalists do not consider the actual costs of keeping the economy Canadian. For example, Crispo cites the billions of dollars in grants that Pierre Trudeau’s Liberals gave

Canadian oil companies to drill in frontier and offshore areas. Said Crispo: “Why don’t they look at the price paid for their phony nationalism?” Taxes: In any event, the degree of foreign ownership in Canada is an accident of history that cannot be reversed quickly, easily or cheaply, said Mackness. Unlike other sophisticated economies, Canada industrialized after taxation on income had reached substantial levels. Canada’s belated industrialization in the 1940s, he ar-

gued, made it difficult for entrepreneurs to accrue large pools of private capital because of taxes on earnings and income. Over the past two decades, Mackness added, huge increases in public-sector spending have consumed private capital that could have been used to buy back Canadian industry. As a result, he said, the federal government’s goal of Canadianizing the oil industry through the National Energy Program was heavily dependent on borrowed money.

Another problem associated with increased domestic ownership is even greater concentration of power in the

hands of a relatively small number of big Canadian corporations. In the case of Dome Petroleum, few Canadian companies could consider bidding. “You’re talking big numbers, especially for Canada,” said Merrill Lynch’s Armitage. “You’ve got to have an owner with deep pockets to see it through.” Indeed, the lone Canadian bidder, TCPL, is 48-per-cent owned by Bell Canada Enterprises, one of the country’s largest conglomerates with assets of more than $20 billion in 1985. New Democratic Party Leader Ed Broadbent acknowledged that corporate concentration is “a very real” problem in the search for a Canadian owner for Dome, but added: “Some trade-offs may be involved. Clearly, I want a Canadian company.” Unnamed: Still, when the opportunity exists, Canadian companies are not always willing to join the bidding fray. Indeed, Gerald D. Hines Interests, a real estate development company based in Houston, is the only declared bidder for Toronto-based Cadillac Fairview Corp. Ltd., a major property developer with extensive holdings in Dallas, Atlanta and California. But Maclean ’s has learned that a second, as yet unnamed, U.S. developer has also submitted an offer and that Cadillac’s board of directors considers it to be the leading contender.

Indeed, Mackness said that foreign investors have come to expect equitable treatment in Canada because of the Mulroney government’s policy pronouncements. That expectation gained strength, he added, when the federal government approved the $2.6-billion sale last July of Windsor-based distiller Hiram Walker-Gooderham & Worts Ltd. to British-based conglomerate Allied-Lyons PLC. Amoco’s pursuit of Dome, and the emerging political furore, may present the toughest test yet of the government’s commitment to keep Canada “open for business.”

D'ARCY JENISH

ANN SHORTELL

THERESA TEDESCO

MICHAEL ROSE