BUSINESS WATCH

Lament for a cherished asset

If the Connaught sellout is approved, Investment Canada’s director should be impeached and his joke agency disbanded

Peter C. Newman October 16 1989
BUSINESS WATCH

Lament for a cherished asset

If the Connaught sellout is approved, Investment Canada’s director should be impeached and his joke agency disbanded

Peter C. Newman October 16 1989

Lament for a cherished asset

BUSINESS WATCH

If the Connaught sellout is approved, Investment Canada’s director should be impeached and his joke agency disbanded

BY PETER C. NEWMAN

Few takeovers have detonated more verbal fireworks than the proposed sale to France’s Institut Mérieux SA of Connaught BioSciences Inc., this country’s leading vaccine-maker and the crown jewel of our embryo scientific community.

Unless Ottawa steps in to halt the sell-off, by the end of this month the Canadian firm whose roots are intertwined with the initial production of insulin and the historic achievements of Nobel Prize winners Banting and Best will have slipped out of our control. The corporate showdown has pitted investors’ short-term gain against national long-term goals. The economic benefits to Connaught shareholders of accepting a cash offer of $942 million for their stock are being weighed against the nationalists’ cry that enough is too much, that with this—of all companies—we must halt the surrender of our economic sovereignty.

While both points of view are valid, the real reason Connaught must not be sold has little to do with either of these simplistic appeals. The real issues are much more serious. Even in an increasingly globalized marketplace, some industrial assets have intrinsic value, a price beyond their dollar cost in the marketplace. They cannot be bartered away if the nation where they operate is to retain any hopes of competing effectively in the high-tech environment of the 21st century. Connaught is precisely such a company because it affords us the only important window Canada has into biotechnology, among the fastest-developing of the essential future sciences. Without such access to advancements in fields like genetic engineering, we are destined to remain an industrially marginal nation, stagnating on the northern periphery of the world’s geography. Connaught is that important, and we have no other scientific pool to take its place.

The sellout is also against the national interest on a much more immediate and pragmatic level. The proposed combination of the two pharmaceutical giants would result not, as Connaught chairman Brian King keeps assuring us,

in cost-saving synergies, but in a cartel that would monopolize the distribution and pricing of most of their joint vaccines and drug products. While Connaught shareholders might benefit in the short run, our already financially strained health system would suffer dearly, and eventually all Canadians would be penalized for the higher costs of essential pharmaceuticals.

According to insider estimates, as much as three-quarters of the two companies’ product lines overlap, with few alternate sources available. There would be nothing to stop the merged, French-controlled firm from raising prices almost at will. It is not the promise of scientific advantage created by combining two great companies that is driving this deal, but the hope of multiplying profits.

Because Connaught’s chief Canadian clients are provincial departments of health, the spectre of artificially inflated pharmaceutical costs ought, by itself, to be enough to prompt Investment Canada to reject this deal. But despite the weight of evidence, Investment Canada’s ruling, due on Oct. 30, will almost certainly follow every other favorable foreign-takeover decision handed down by the agency since its formation by the Mulroney government on July 1,1985. Yet the sale of Connaught clearly does

not meet Investment Canada’s own terms of reference that such major takeovers must be proven to have some national benefit. If the Connaught sellout is approved, Investment Canada’s director should be impeached and his joke agency disbanded.

The strangest aspect of this charade is that Connaught need not be sold at all. The company has virtually no debt, its treasury is bursting with more than $180 million in cash, its assets include 52 acres of prime real estate in northern Toronto worth at least $100 million, and its return on research dollars is higher than that earned by Mérieux.

The ultimate irony of the current impasse is that Connaught was originally nationalized in 1972 because the Trudeau government wanted to ensure that Canada’s only producer of insulin and major manufacturer of biologicals remained in domestic hands. The laboratory was purchased from the University of Toronto through the Canada Development Corp., then a government agency, for $26 million. A dozen years later, as part of the Mulroney privatization wave, the CDC spun it off, prompting Mérieux to buy a 12.6-per-cent interest.

When Mérieux took its original run at Connaught in 1988, the Canadian company righteously objected that if the French firm were to achieve control, “it will be in a position to allocate future product development, research and marketing opportunities in a manner economically advantageous to Mérieux and disadvantageous to the operations, employees and shareholders of Connaught.” Despite Connaught chairman King’s current pledges that Canada would retain some research facilities, his previous warning is just as true now as it was then. Whatever facilities might stay here would be under French, not Canadian, control.

When King decided to sell the company he heads, his office was flooded by 78 bids. It’s a curious paradox that he chose to be swallowed up by the same firm he so harshly rejected in its previous offer. (It’s interesting to note that King has negotiated for himself a golden parachute consisting of three years’ salary and a buy-out of his stock, worth $5 million, if the merger squeezes him out.) Even more curious is the fact that if the Mérieux offer is aborted for any reason, King has arranged that Connaught will have to pay the French firm a $10million cash bonus—all for the dubious privilege of almost having succeeded.

Although King has repeatedly tried to represent the deal as a merger rather than a takeover, under the $32-per-share Mérieux offer last year the French company would have held 51.4 per cent of the combined stock, and with the latest $37 offer it will still own well over 50 per cent. At the same time, the University of Toronto, which originally sold its Connaught holdings to the CDC with the clear provision that it remain in Canadian hands, has taken King and his cohorts to court—stepping in where Ottawa fears to tread.

All in all, it’s a rotten deal for Canada, and it must be stopped. If we allow this one to slip through, we may as well give up any pretension of remaining significant players in tomorrow’s high-tech world.