The new takeover frenzy
The stakes amounted to billions of dollars as two takeover dramas with high-profile casts played out across the nation last week. In Toronto, besieged executives at Hiram Walker Resources Ltd. rallied to fend off a determined takeover bid from Gulf Canada Corp. of Calgary. Gulf, owned by Toronto’s reclusive Reichmann brothers, offered $1.2 billion for 38 per cent of the voting control in the giant energy and liquor conglomerate. Across the continent in San Francisco, executives of the real estate and construction giant Genstar Corp. considered a $2.4billion takeover bid from Imasco Ltd. of Montreal. The Montreal conglomerate was particularly interested in one Genstar subsidiary, Canada Trustco Mortgage Co., which is the country’s largest trust company. Throughout the week the spectacle of the four corporate empires marshalling legal and financial battalions to a confrontation on the stock exchanges of the United States and Canada fascinated—and disturbed—the business com-
munity and the federal government.
The twin takeovers also raised a range of concerns over ethics and social policy. In particular, Imasco’s bid for Genstar raised suspicions of insider trading because the stock soared on the Toronto, Montreal and New York exchanges two weeks ago—three days before the bid was disclosed. There were also broader issues touching on the economic benefits of a takeover fever that is gripping Canadian corporations. Some economists say that mergers produce more efficient companies because resources are amalgamated. But other economists and public policy experts say that conglomerates are now focusing their energy and their resources on making deals—instead of making goods.
Those acquisitions are creating larger conglomerates with increasingly concentrated power and dangerously heavy debt loads. Few investment specialists close to the action will talk about the situation on the record, but privately many admit that although they are participants in the transactions they are concerned. Said one,
who is close to both bids: “There is a limit out there, for crying out loud. What it means is that many Canadians may, in the near future, work for either five ultimate private owners or the government.”
The scope of the latest outbreaks of takeover fever is enormous. Late last week another wealthy Canadian family, the Belzberg brothers of Vancouver, launched a $2.7-billion bid for Kentucky-based Ashland Oil Inc. The Belzbergs have already acquired 9.2 per cent—and they are seeking total control with an offer of $60 (U.S.) a share. The Belzbergs control an estimated $6-billion empire in real estate, financial services and manufacturing.
If the Imasco bid for Genstar is successful, it will be the third-largest takeover in Canadian history. Under the terms of last week’s proposal, Imasco initially offered $54 a share for Genstar’s 37 million common shares. But as Genstar’s shares rose $1.50 higher in trading on the Toronto Stock Exchange (TSE) throughout the week,
Imasco was forced to sweeten the offer at week’s end by another $2 a share. Before that offer was made public, shrewd Imasco executives had already negotiated an agreement to buy 18 per cent of Genstar’s outstanding common shares at $54 per share from the conglomerate’s largest shareholder, the Belgian investment firm of Société Générale de Belgique.
For its part, Genstar withheld reaction to the offer until its board met in Toronto at week’s end. Then, the directors released a statement that they intended to “pursue all alternatives including continuation of discussions
with Imasco.” The offer expires on April 25—and it is fuelled by a $2.6billion line of credit from five major U.S. banks and Citibank Canada.
The attempt to acquire Genstar is in line with an Imasco policy to diversify its holdings away from the declining tobacco market. The giant conglomerate owns retail drugstores, such as Shoppers Drug Mart, and fast-food chains. But its longtime source of revenues has been Imperial Tobacco Ltd., which produces such brand-name cigarettes as Player’s, du Maurier and Matinee. Genstar’s empire is equally diversified—and intriguing. It owns land and real estate development companies, building material firms and 10 per cent of controversial Toronto brokerage firm Gordon Capital Corp.
But Imasco made the offer because of Genstar’s financial jewel, Canada Trustco of London, Ont., which has as-
sets of nearly $28 billion and profits of $92 million. Genstar acquired Canada Trustco—which had been the last widely held trust company in Canada-only last summer, after a bitter takeover battle with the trust company’s management, headed by president Mervyn Lahn. Genstar promptly merged its purchase with a financial institution it already owned, Canada Permanent Mortgage Corp. When the new firm adopted the Canada Trustco name and retained Lahn as chief executive, the financial community interpreted it as a major victory for the highly regarded Lahn.
But Lahn, an outspoken opponent of corporate concentration, was estranged from the new management led by flamboyant Genstar chief executives Ross Turner and Angus MacNaughton of San Francisco. He told Maclean's last week that his dealings with Genstar were strained. Added Lahn: “It has not been a convivial relationship.” He declared that the possibility of approaching another potential owner “had more than once occurred to me.” Said Lahn: “I did not approach Imasco. But that is not to say that I would not approach anyone else. I could be fired if you print that—but I could care less.”
As suspicions of insider trading developed, the senior executive of one Bay Street conglomerate said that many TSE traders knew about the Imasco bid five days before it was announced. The information, he said,
originated in European finance and trading circles. Last week the TSE, the Montreal Exchange and the New York Stock Exchange each launched separate inquiries into trading in Genstar stocks. And the Ontario Securities Commission (OSC), in an attempt to determine if trading was based on insider information, ordered Canadian securities brokers to freeze the funds of investors outside North America who had traded Genstar shares just before the takeover bid announcement.
Some analysts said they were also intrigued by the spectacle of conservatively run Imasco trying to swallow the high-flying Genstar. MacNaughton and Turner, who jointly run the company, are known for their extensive use of corporate jets and their preference for San Francisco as a base. Said Thomas Lockwood, a leading Toronto securities lawyer with Lockwood, Bellmore and Moore: “Genstar is not a fat cat waiting to be plucked. They are used to being the aggressor, and suddenly the attacker is being attacked.”
While that drama unfolded, Hiram Walker was making a desperate attempt to defeat a takeover bid by the Reichmanns. The brothers already hold a 10.7-per-cent voting interest in Hiram Walker through their real estate firm, Olympia & York Developments Ltd. Last summer that firm bought an 80-per-cent interest in Gulf Canada Corp. from Chevron Corp. for $2.8 billion—the second-largest acquisition in Canadian history. The Gulf bid for Hiram Walker offers $28.62 for preferred shares with voting rights and $32 for the additional common shares required to make up a 38-percent stake.
To most analysts, a Gulf/Hiram Walker merger would make shrewd corporate sense. The three Reichmann brothers—Albert, Paul and Ralph— control a $16-billion corporate empire that owns prime real estate and land development firms. Hiram Walker would bring two new elements to that empire —a natural-gas distribution firm, Consumers’ Gas Co. Ltd., and an international distiller, Hiram WalkerGooderham & Worts Ltd., which makes such well-known brands as Canadian Club rye whisky and Courvoisier cognac. It would also give Gulf Canada, the country’s fourth-largest petroleum company, control of Home Oil Co. Ltd. of Calgary, the 15th largest. Said Marshall (Mickey) Cohen, the president of Olympia & York Enterprises, of the deal’s multiple benefits: “It means we are deep in the oil business but it also gives us some diversification.”
But Hiram Walker’s board of directors put up a vigorous defence. Led by chairman and president Bud Downing
it assembled a $2.5-billion line of credit with roughly half a dozen Canadian financial institutions. It retained Dominion Securities Pitfield Ltd. in Toronto and the Morgan Guaranty Trust Co. of New York as financial advisers. And, in an attempt to buy more time, it asked the OSC to review a TSE decision to allow the Gulf bid to expire on April 4. It argued unsuccessfully before the OSC last week that the deadline should be extended to give small shareholders time to unravel the bid’s complexities. The board also informed its shareholders that the Gulf offer “significantly understates the value— and does not reflect the prospects of Hiram Walker Resources.”
But it was not clear how effectively Hiram will marshal its resources. The directors own only a minuscule portion of the shares and have no power to block the bid. During the OSC hearings last week, OSC chairman Stanley Beck asked whether the company was merely attempting to win extra time to arrange a competing bid. Some analysts said that Hiram Walker could use its line of credit to make a direct bid for its own shares—a common tactic in U.S. takeover fights. It could also encourage a competing bid by a friendly “white knight”—in its case Interprovincial Pipe Line Ltd. of Toronto, which already owns 17 per cent of Hiram Walker, or Imperial Oil Ltd., which owns 21.8 per cent of IPL.
Meanwhile, some federal politicians expressed discomfort at the takeover attempts. Although the federal government has been armed with anticombines legislation for more than 75 years, there has never been a successful prosecution in a contested merger case because the law requires proof— beyond reasonable doubt—that the transaction would operate “to the detriment of the public.” Last December the minister of consumer and corporate affairs, Michel Côté, introduced new legislation to set up a civil Competition Tribunal to examine—and, if necessary, block or modify—proposed mergers in which the acquired firm has revenues or assets of $35 million or more, and the two firms have combined assets or revenues of $500 million in Canada.
The tribunal will determine if a merger “lessens competition substantially.” The legislation to establish Côté’s tribunal has not yet passed, but, observed Toronto lawyer Gordon Kaiser, an expert in competition law, the bill would still allow a merger to proceed if it resulted in corporate efficiencies—even if it decreased competition. Said Kaiser: “The bottom line is that it will be just as difficult in the future as in the past to deter mergers that lessen competition.”
Côté’s bill also does not deal with the growing Canadian phenomenon of conglomerates gobbling conglomerates with diversified interests. The Imasco bid for Genstar, for one, may not decrease competition in any field but it increases Imasco’s influence over the
entire economy. Some Conservative MPs are concerned about that trend— but Côté told Maclean's that he is unwilling to intervene. “If 10,000 shareholders of Hiram Walker decide to sell to Olympia & York, then it is the will of Canadian business,” he said. “We have no intention of intervening in concentration because it is an international phenomenon.”
Takeover fever has also erupted in the United States and Britain, but it is
having a major effect on corporate concentration in Canada. According to figures compiled by William Stanbury, a competition policy professor at the University of British Columbia, and Christian Marfels, an economics professor at Dalhousie University in Halifax, the transaction value of the largest 20 mergers in Canada between 1980 and 1985 is 2.5 times the size of the largest 20 in the United States, compared to the relative size of each nation’s gross national product. “Macroconcentration is already higher in Canada than in many other Western economies,” Stanbury said. “I think we are putting too much power in the hands of too few people.”
Despite Côté’s hands-off approach, senior finance officials say privately that they are disturbed by the fact that nonfinancial corporations increasingly control financial institutions— and could force those institutions to accept their policies. Last week the minister of state for finance, Barbara McDougall, told the Commons that she will review the Imasco bid to take over Genstar—and Canada Trustco. McDougall invoked provisions in draft legislation—retroactive to Nov. 29, 1985—that allow the minister to prohibit the transfer of ownership of any financial institution, if that ownership change is not in the public interest.
But one Ottawa insider said that McDougall is hesitant to intervene in the Imasco case “because it is difficult to tell who is wearing the white hat and who is wearing the black hat.” He added, “What is better—having Canada Trust in the hands of Genstar executives in San Francisco or the hands of Imasco, which is 44 per cent owned by BAT [Industries PLC of Britain]?”
Still, McDougall’s expressed concern underlines the fact that merger mania is now too important to ignore. Toronto lawyer Kaiser points out that many acquisitions result in massive debt loads. Genstar acquired Canada Trustco for $1.2 billion. If Imasco now pays another $2.4 billion for Genstar, the debt load increases. “There is an awful lot of paper out there,” warned Kaiser. “That increased debt load means increased costs that have to be passed along to somebody—shareholders or consumers.” And Toronto Tory MP William Attewell, a former Guaranty Trust Co. of Canada vice-president, said that takeovers have become a vehicle for the “insidious mobilization of corporate concentration.” He added, “There are too few people controlling too much of the destiny of this country.”