COLUMN

The invasion of the frenzy-feeders

Not all mergers are intrinsically bad, but far too many of the recent takeovers have meant far too much power for far too few

DIANE FRANCIS March 20 1989
COLUMN

The invasion of the frenzy-feeders

Not all mergers are intrinsically bad, but far too many of the recent takeovers have meant far too much power for far too few

DIANE FRANCIS March 20 1989

The invasion of the frenzy-feeders

COLUMN

Not all mergers are intrinsically bad, but far too many of the recent takeovers have meant far too much power for far too few

DIANE FRANCIS

Business headlines this year have been dominated by that favorite Canadian pastime, the takeover. A feeding frenzy took place as big companies were swallowed one after another, raising alarums about concentration of power. Not all mergers are intrinsically bad, but many translate into far too much power for far too few. The megatakeovers culminated in the announcement on Jan. 27 that monolithic Bell Canada Enterprises Inc. would sell 49.9 per cent of its $2.7-billion real estate empire to the billionaire Reichmanns. That sale prompted Michael Geller, president of the Urban Development Institute of Canada, to crack that “the Reichmanns’ real estate empire is becoming so big, they’ll be bidding against themselves on pieces of land without knowing it.”

Unfortunately, Canada’s most successful capitalists are not builders but paper entrepreneurs. They do not have the skills to create a better mousetrap but only to buy someone else’s. As a result, they do not make the economic pie grow by creating innovative goods and services that can be sold abroad. They merely divide the pieces differently or gobble up competitors.

January marked a record in takeovers with the announcements that Imperial Oil Ltd. intended to take over Texaco Canada Ltd., Chicago’s Stone Container Corp. would buy Consolidated-Bathurst Inc., PWA Corp. would absorb Wardair Inc. and The Molson Cos. Ltd. would bid for rival Carling O’Keefe Breweries of Canada. That same month, a Statistics Canada report confirmed that concentration of economic power had risen dramatically and said that the top 25 corporate groups in Canada had increased their share of total corporate assets to 35 per cent by 1986 from 30 per cent in 1976. Put another way, my figures showed that in 1986, 374 of Canada’s 400 largest public corporations had a controlling shareholder with 20 per cent or more of the company’s stock. By contrast, the Standard & Poor 500 corporate index south of the border in 1986 showed only 75 companies with a shareholding of 15 per cent. In comparison with the United States, Canada is a Monopoly game gone wild—and there are only a few squares left.

Economists measure two types of concentration—aggregate concentration (more assets owned by fewer entities) and product or industrial concentration (market share in specific sectors or product lines). The bad news is that Canada continues to have inordinately high levels of both. The good news is that the federal Competition Act has been attacking mergers that lessen competition substantially. Since the act became law in June, 1986, some 365 deals were investigated, nine were restructured, seven were abandoned and four were referred to the competition tribunal.

The new act was long overdue. When competition thrives, prices are lower and quality higher. That translates into huge savings for consumers, leaving them with more disposable income to buy other things or to invest. When spread across an entire population, such savings may amount to mere dollars per day per person. But collectively, that represents a redistribution of wealth out of the hands of wealthy conglomerates and into the little guy’s pocket.

The competition tribunal allowed Canada Safeway, for one, to keep the Woodwards Ltd. grocery stores it bought in May, 1987, only if there was competition from other grocery stores in the region. As a result, Safeway had to sell a dozen operations where there was no competition. And in response to opposition from the tribunal, four western Canadian dairy co-operatives abandoned their bid for Palm Dairies Ltd., an acquisition that would have given them a monopoly on milk distribution in several provinces. By contrast, before 1986, the federal government had not halted a single merger in 70 years because Ottawa had to prove that mergers would “lessen competition to the detriment or against the interests of the public.” The new act places the onus on companies to prove that a merger does not lessen competition substantially or that, if it does, the lessening may be justifiable to save a dying business or to increase export efficiency.

Since January, the Bureau of Competition Policy has been analysing each deal. Imperial Oil’s purchase of Texaco Canada will reduce competition. As a result, gasoline stations should be sold, in addition to the $550 million worth of refineries and oilfields Imperial has announced it will offer for sale over a period of five years. The Molson-Carling marriage is justifiable only if the beer market opens up to foreign competition. Now, it is a closed shop, and retail outlets in most provinces that are run by Canadian breweries amount to legalized price-fixing. The exception is Quebec, where beer is sold competitively in comer stores. That is why it is not a coincidence that Montrealers can shop around and buy beer for up to 30 per cent less than residents of Ontario and other provinces.

As for PWA’s purchase of Wardair, consumers are big losers because competition is clearly reduced. PWA is arguing that the competition in prices and services initiated by Wardair might have driven the company out of business anyway, an inevitable and self-imposed lessening of competition. If so, then Wardair’s socalled competition was doomed to failure before it began.

While the new act provides some checks against product or industry concentration levels, there remain no checks on aggregate concentration. Only ad hoc political intervention could stop the Reichmanns from taking over the biggest Canadian-owned empire, Bell Canada Enterprises. That is ironic, considering that the last time the country’s two biggest empires talked takeover—Power Corp. and Argus Corp. back in 1975—the proposed deal created a political fire storm. As a result, the government set up the Royal Commission on Corporate Concentration, even though their combined size was only a fraction of a BellReichmann marriage. In 1978, that commission concluded that concentration was harmless. But it was a royal whitewash, and the result is that Canadians are hurtling toward an economy run by a handful of families. In the absence of any public policy to arrest aggregate concentration levels, we can only hope they form a benevolent economic dictatorship.