JOHN DeMONT August 28 1989



JOHN DeMONT August 28 1989





The writing was on the wall a year ago. William James, the tough-talking, independent-minded chairman of Falconbridge Ltd., realized last May that his giant mining company had become a prime target for a takeover attempt when Placer Dome Inc., its largest shareholder, decided to sell off its 25-per-cent block of stock. The only question was who would eventually control Falconbridge. Noranda Inc., another Toronto mining giant run by James’s old friend and former boss, Alfred Powis, was a determined suitor. But Noranda wanted to take control by slowly buying only 51 per cent of the

Falconbridge shares. As a result, earlier this month, James enticed AMAX Inc., a Greenwich, Conn.-based resources company, to bid $2.8 billion for his prized company. Then, last week, Noranda and Trelleborg AB, a Swedish industrial and mining conglomerate

that already has three per cent of Falconbridge, fired back with a $2.2-billion offer to buy the 72.5 per cent of the Falconbridge stock they do not already own. “It is a fact of life,” James told Maclean’s last week. “Companies want to grow, and the easiest way is through acquisitions. All it takes is money.”

Control: The ultimate winner in the battle for Falconbridge is still in doubt. The offers have gone to the shareholders, and they will have to choose between the two bids. But one of Canada’s biggest mining companies is certain to fall under partial control of a foreign owner. Falconbridge is one of many Canadian firms in that position. Recently, foreigners have been buying up Canadian companies at a furious rate—largely because they consider them to be underpriced. During the first six months of 1989 alone, foreigners spent $10 billion on Canadian companies—triple the total for all of 1988. Some analysts say that the activity is just a short-term phenomenon caused by well-financed acquisitors cashing in on low Canadian stock prices. But others say that the takeover binge is fuelled by new and powerful global forces that will change the face of corporate Canada. Declared Mahmud Jamani, a Toronto mergers and acquisitions specialist with the investment firm Clarkson Gordon/Woods Gordon: “I don’t see anything on the horizon that could slow down the buy-out action.”

Outcry: The prospect of even more billiondollar foreign buy-outs could become a major issue for Prime Minister Brian Mulroney. He already faces a growing outcry from economic

nationalists, who claim that Canada is surrendering its economic sovereignty by allowing an increase in foreign ownership, particularly American. At the same time, concern about the prospect of foreign takeovers is spreading through the senior levels of many Canadian companies, and some chief executives have started taking measures to defend themselves against unwanted invaders. Meanwhile, some Canadian companies are waging their own takeover wars, especially in the United States, where they are buying up assets at an astonishing rate (page 38). As well, leading Canadian economists, and Statistics Canada’s own figures, indicate that Canadians are still firmly in control of their economy. And many executives welcome the foreign buy-outs because they bring new sources of financing and much-needed expertise to Canada.

The current surge of foreign buying comes after a lengthy period of declining foreign control of the Canadian economy. University of Toronto economist Alan Rugman, a leading Canadian expert on foreign investment activi-

ty, said that Statistics Canada figures show that, over the past 15 years, American ownership in Canada has steadily decreased. In 1970,

28.4 per cent of all Canadian nonfinancial corporations, including those in the manufacturing, petroleum and coal industries, were U.S.owned. By 1986, that figure had dropped to

20.5 per cent. The decline in American ownership is even more pronounced in the Canadian petroleum and coal industry: 77 per cent was U.S.-owned in 1970, compared with 43.4 per cent by 1986. Currently, Rugman said, Canadian ownership of all Canadian companies is over

70 per cent.

Still, with each passing month, more and more Canadian firms are falling into U.S. hands. During the first half of this year, foreign buy-outs of Canadian companies have included U.S.-controlled Imperial Oil Ltd.’s $4.9-billion acquisition of Texaco Canada Inc. That transaction was second in size only to American-owned Amoco Canada Petroleum Ltd.’s $5.5-billion 1988 buy-out of Dome Petroleum Ltd. As well, Chicagobased Stone Container Corp. paid $2.6 billion for the Consolidated-Bathurst Inc. pulp and paper company. According to press reports, American firms are also interested in such Canadian institutions as Inco Ltd., Alcan Aluminium Ltd., Canadian Pacific Ltd., Placer Dome Inc. and Stelco Inc. And with the Canada-U.S. Free Trade Agreement (ETA), which came into effect on Jan. 1,1989, raising a continental economic umbrella over North America, more takeovers seem certain. Said Milton Barbarosh, a Florida-based mergers and acquisitions consultant: “Canada is now part of the normal acquisition process for American takeover artists.”

Run-up: Around the world, huge national corporations that have outgrown their own markets have discovered that the acquisition of foreign firms is the quickest and most economical way to grow. Instead of having to build new firms from the ground up, by taking over another firm they can command instant markets and earnings. By 1992, the European Community (EC) is expected to be fully integrated into a free trade bloc, and, during the run-up to that date, major European corporations are preparing for tariff-free competition by merging and acquiring new assets around the world. As well, Japanese firms, encouraged by vast earnings from their foreign trade surpluses, are now aggressively shopping for new acquisitions (page 40).

The FTA will likely make Canadian companies even more attractive to European and Japanese firms. Washington officials say that they want full access to the EC after 1992 and that, if they do not get it, they will block European imports. As a result, European firms may attempt to buy their way into the North American free trade market by acquiring Canadian firms. As well, Japanese firms, which also have expressed concern over U.S. trade sanctions, are expected to purchase Canadian assets as an indirect route into the American market. Said Michael Nedham, a director of Lancaster Financial Inc., a Toronto-based mergers and acquisition firm: “Investors see Canada as a bridge into North America.”

Prize: Meanwhile, Canada’s own multinationals and businessmen are shopping the world for prize assets.

The highest-profile raid on the United States was led by Toronto tycoon Robert Campeau, who spent $13 billion between 1986 and 1988 to acquire Allied Stores Corp. and Federated Department Stores Inc.—the largest and certainly most spectacular and controversial takeover of a U.S. firm by a Canadian in history.

While governments have not restricted the current wave of foreign takeovers sweeping around Europe and North America, it was not always so. Indeed, the former Liberal government of Pierre Trudeau enacted tough foreign-ownership policies. Under the Liberals, the Foreign Investment Review Agency enraged corporations in the United States when it intervened to stop the takeover of Canadian companies. And under the National Energy Program unveiled by the Liberals in 1980, Canadian oil exploration firms were even offered incentive programs that helped them acquire their foreign rivals (page 37).

Refused: But when Mulroney was elected in 1984, the Tories quickly changed direction.

With the political slogan _

“jobs, jobs, jobs” still echoing from the just-completed election campaign, Mulroney declared the country “open for business.” And with that, the Foreign Investment Review Agency was replaced with Investment Canada. And since its inception in 1985, Investment Canada has examined 696 applications for foreign takeovers, but it has not refused any.

Most corporate raiders and many consultants in investment firms argue that there are strong economic arguments in favor of allowing

the wave of takeovers to continue unchecked. Such raiders as the American multimillionaire T. Boone Pickens and Carl Icahn say that takeovers are usually a positive force in the marketplace because they often result in the dislodging of inept corporate management. At the same time, some economists add that restructuring and buy-outs reduce overheads

and make companies more efficient and profitable.

That threat is not lost on Canadian businessmen. In fact, many Canadian firms are taking evasive action to avoid foreign invaders. Canadian Pacific, which earlier this month was the subject of takeover threats, was rumored to have hired a Boston consulting firm in 1987 to advise it on how to defend itself against unwelcome suitors. Recently, CP has sold off a number of prime assets. As a result, the company

_ now has a large cash fund for

its defence and is also less appealing to takeover artists once attracted by those assets. The growing threat of takeovers in Canada has even led several companies to launch U.S.-style shareholder rights plans—so-called poison pills—designed to enable them to fend off corporate predators. The increasingly ^ popular plans force would-be acquisitors to negotiate with 3 company directors, rather

1 than dealing directly with

2 shareholders. Said Charles ~ Hantho, president and chief £ executive officer of Montre-

al-based Dominion Textile Inc., which recently put its own poison pill into place: “We’re professional managers who want to enhance the shareholders’ value. It would be unfair to them if we didn’t.”

Although University of Toronto economist Melvin Watkins, for one, agrees that foreign ownership of the Canadian economy has

dropped, he said that he believes that free trade and the wash of global takeovers will lead to increased foreign control. If that happens, he said, profits will increasingly flow out of Canada to the parent company. And Maude Barlow, chairman of the Council of Canadians, has expressed concern that Canada will slowly lose control of its vital oil and gas supplies as U.S. firms move north to purchase reserves.

Raiders: The wave of takeovers even has critics on Wall Street, where most of the takeover action originates. Prominent New York City economist Henry Kaufman recently told a House committee that the shift toward debt financing by United States corporate raiders is endangering the health of the free enterprise system because it could lead to an unstable economy. And John Kenneth Galbraith, the renowned Harvard University economist, told Maclean’s, “The huge amounts of capital that are being used for takeovers is capital that is lost to productive investment” in such things as new factories. Those and similar concerns could soon be at the forefront of a growing and emotional national debate.