Ichy, This otta set you off: For sale: Corporate Canada
GORDON PITTS
theglobeandmail.com
From Saturday's Globe and Mail
A corporate champion, whose history reaches back 80 years, is devoured by a foreign rival.
Nationalists lament the loss of a Canadian crown jewel, along with its prized head office jobs and a homegrown research expertise.
The year is 1989 and the company is not Dofasco, Inco or Falconbridge, but Connaught BioSciences Inc., a vaccine powerhouse with roots in Sir Frederick Banting's discovery of insulin in the early 1920s.
Now, flash forward to 2006, 17 years after the takeover of Connaught by France's Pasteur Mérieux. The name Connaught is long gone but life goes on in its Toronto laboratory. Having gone through three foreign mergers and four name changes, it is now a division of Sanofi Pasteur of Paris.
Related to this article
Articles
Case study No. 1
Editorial: Not so hollow
Internet Links
Seen & Heard: The hollowing out of the Canadian economy
Latest Comments
#12, RBC is the only Canadian owned corporation with sales of...
I would like to know what percentage of Canadians actually invest...
Way to make a false dichotomy of choices #13! I applaud the obfuscation...
Canada must be one of the very few developed countries in the...
18 reader comments | Join the conversation
Yet its 20-hectare campus north of Toronto is home to three times as many researchers as in 1989. It holds world product mandates, including an expanding cancer vaccine program and a whooping-cough breakthrough vaccine with a huge global market. It is, arguably, more successful than ever.
This is not how a head office decapitation is supposed to turn out — not according to nationalist hand-wringers and Bay Street alarmists. It is supposed to be about hollowing out, the destruction of Canadian jobs, income, clout and autonomy — and not greater opportunities, better jobs, and strong research support.
The Connaught controversy marked one of the periodic episodes of hollowing-out fever that grips the Canadian psyche. Today, a frenzy of romantic longing is building up around Falconbridge, Inco, ATI, Dofasco, Vincor and other Canadian icons that are being lost in a paroxysm of global consolidation.
Yet the Connaught story also demonstrates how feeble and futile this nostalgia can be. Corporate names come and go; high-level jobs are shuffled. The Toronto Stock Exchange may lose a listing or two, and institutional investors hunt more feverishly for portfolio balance.
But new opportunities emerge, and, assuming the country continues to turn out smart, postsecondary graduates, this talent and free capital will reaggregate around a new group of companies.
The series
--------------------------------------------------------------------------------
Saturday: An Overview: Canadian companies are being swallowed up by foreign rivals at a record pace. Is it the end of Corporate Canada as we know it?
Monday: Anderson & Devon: Anderson Exploration's executives lost their jobs when Devon Energy bought the company. So they started a new business in the same building.
Tuesday: Discreet & Autodesk: Six years after it was bought out, Discreet Logic lives on as a software brand. And so does the entrepenurial spirit of its former staff.
Wednesday: Newbridge & Alcatel: Nine executives were let go when Alcatel took over Newbridge in 2000. Almost everyone found their way into new tech enterprises.
Thursday: MacBlo & Weyerhaeuser: Noranda's takeover of MacMillian Bloedel was thee turning point in Vancouver's passing from a proprietor town to a branch office town.
Friday: Labatt & AmBev: Labatt found a happy union with a new Belgian owner. Then the parent merged with Barzil's AmBev, and the culture changed again.
--------------------------------------------------------------------------------
Sure, the loss of Connaught meant a little less swagger on the world stage. But could it have survived and thrived as a standalone? “There would certainly be issues around the funding of R&D,” says Mark Lievonen, the 23-year company veteran who runs the Canadian arm of Sanofi Pasteur.
In fact, the hope for vaccine discoveries now lies with smaller, nimbler firms, argues geneticist Robert Church, a professor emeritus from the University of Calgary, who led a futile bid in 1989 to keep Connaught's head office in Canada (although with investment backing from Singapore).
There is a strong complement of these rising biotech stars in Canada, “We lost a flagship but we replaced it with a whole flotilla of smaller entities,” Prof. Church says.
Indeed, it is impossible to make a macroeconomic case that hollowing out is happening — or has ever happened. “To me it is rather more subjectively poignant than abstractly measurable,” says Tom Kierans, a former investment banker and a corporate director whose boards include Manulife Financial, one of Canada's small band of aggressive international acquirers.
Yet that poignancy explains why this issue still incites such passion. Despite all the evidence that hollowing out isn't occurring, many Canadians, including economists, have a gut feeling that the spate of foreign mega-takeovers is hurting us profoundly.
That paradox haunts Glen Hodgson, an economist for the Conference Board of Canada, who reads all the literature indicating that foreign takeovers and inward investment are a boon for the Canadian economy, bringing know-how, innovation and capital.
“The top-down numbers say we shouldn't be that worried,” he says. The trouble is that, Sanofi Pasteur excepted, a lot of bottom-up experience tells a different story. In Montreal, for example, the exodus of head offices after the 1976 Parti Québécois election victory seriously diminished the city's economic importance. If takeovers continue to take out major Canadian companies, there is reason to fear a similar ripple effect. “I'm conflicted on this,” Mr. Hodgson says. Blame former York University president Harry Arthurs for this hollowing-out talk. As the North American economy became more integrated because of free trade, he documented how, in the early 1990s, U.S. multinationals were stripping out Canadian headquarters, slashing local boards of directors and concentrating decision making in the U.S. Hence, branch plants replaced full-fledged local companies.
The hollowing-out concept was born. In recent years, the term has been expanded to any head office loss accomplished by any means. It is shorthand for the elimination or reduction of head offices, with fewer senior executives and therefore a loss of decision-making clout, in the wake of foreign takeovers.
It is equated with less local R&D, and the effective loss of brain power and career opportunities to other countries. More significantly, head office loss is supposed to wipe out the support services that make a city and a country prosperous — corporate law firms, management consultants, public relations specialists and headhunters. It means a general lowering of tone and spirit, because head offices are big providers of philanthropy, arts funding and community leadership.
Yet statistics suggest it does not happen exactly this way. Cross-border capital shifts are generally rising in the open global economy, and Canadians have been net exporters of capital. Over the past 10 years, we have generally been investing more abroad than foreigners have been spending in Canada. But some economists say the real crisis is that Canada is losing its share of global foreign direct investment. Jack Mintz of the Rotman School of Management at the University of Toronto sees it as a product of an uncompetitive tax system.
Even so, both the numbers of head offices in Canada and employment levels in head offices increased strongly from 1999 to 2005. Foreign-owned firms accounted for all the growth in head offices and most of the gains in headquarters jobs. “Much of the dynamism in Canada's head office sector actually comes from foreign-controlled firms,” Statistics Canada reports.
What it shows is that not all foreign owners strip out Canadian head offices. Some buyers, such as private equity investors, want to maintain the status quo or even invest more in Canadian operations — perhaps with an eye to spinning out assets in a public company.
But other buyers are industrial players on a consolidation drive, and that's what leads to hollowing out. The foreign investment numbers obscure a darker reality, argues Kenneth Smith, managing partner with Secor Consulting in Toronto. Mr. Smith says that over the past two years, Canada has gone from a net buyer to a net seller in control acquisitions of operating businesses. He has analyzed cross-border transactions of $1-million (U.S.) or more: They show a dramatic shift in net investment toward international purchases of Canadian firms.
In Mr. Smith's view, the big problem lies in the weak recent performance of Canadian companies as global consolidators. This timidity is actually surprising given that Canadians do well at integrating foreign operations. He says possible reasons for this failure are increased risk aversion among corporate managers and directors and excessive emphasis on short-term earnings. The large foreign acquirers made long-term bets to position themselves as global leaders, he says, and now can reap the rewards by buying their Canadian rivals.
So it is our negative balance of trade in fostering globally active national champions that really hurts. Canada may be losing its biggest base metal miners, its most successful steel company, its major computer chip design company, but that kind of flow and flux is typical in an open global economy. The problem is that despite the best efforts of Barrick, Manulife and Alcan, we are not hollowing out other countries' organizations, and we are not sprouting new goliaths to replace our lost champions.
This failure is felt acutely on Bay Street, which is painfully contorted over the issue: It likes fees from mergers and acquisitions but laments the narrower investment choices, which means heightened trading volatility and less business down the road. Such mixed emotions are also typical of our biggest acquirers, such as Barrick's Peter Munk and Manulife's Dominic D'Alessandro: They bemoan the loss of Canadian head offices while they themselves benefit from open M&A markets elsewhere.
Beyond the rhetoric, David Wolf, an economist with Merrill Lynch (Canada), says 203 companies have disappeared from the Canadian equity market since beginning of 2004, of which 109 are large deletions ($100-million or more in market capitalization). “An already narrowing market is becoming even more consolidated,” he writes.
The loss of natural resource companies is even more vexing, because it erodes areas of financing, legal and capital markets expertise where Canada is perceived to be a global leader.
Mr. Kierans, the former investment banker, argues that Canada has enjoyed highly efficient capital markets for mining and energy. Its global stature took a bit of a hit with the Bre-X scandal; now, with Falconbridge gone and Inco likely to disappear, there will be a huge void in the Canadian market universe.
The freed-up capital would eventually find other uses, and new players would eventually be born. But it would take a decade or so, and meanwhile the TSX takes a hit. The same pattern would repeat if energy giants EnCana or Suncor were taken over and delisted from the Toronto exchange.
That explains why the most obsessive hand-wringing about hollowing out exists on Bay Street. These concerns are not minor, but the controversy has the feel of an inside-Toronto preoccupation. In the rest of Canada, the concern is more about preserving jobs in resource towns, or extracting higher levels of charity donations. In those areas, foreign firms tend to be as good as Canadians.
Yet there has to be some psychological cost to Canadians from the perception that when Inco and Falconbridge are both in the hands of outsiders, almost the entire Sudbury basin, the bedrock of Canada's mining industry, will be foreign-owned.
On the flip side, the good thing about resources is that whoever owns the production companies, the actual rocks and oil remain in Canadian ground. People, on the other hand, are highly mobile — and that is the biggest problem with foreign takeovers. Tom Long, partner at headhunter Egon Zehnder International in Toronto, says he worries about losing “schools of experience” — a supply of Canadian companies where rising managers can gain valuable seasoning in their own country.
“The schools of retailing and consumer goods have shrunk dramatically,” Mr. Long says, as these sectors have hollowed out. Young graduates have to go to Europe or the United States for in-the-trenches training and it is hard to get them back, he says.
If there is a hollowing-out crisis, that is where it really bites — it is costing us our best and brightest, and there is no easy prescription for treating it. The nationalists urge stronger government conditions on takeovers, but the danger is the cure will be worse than the sickness.
Everyone agrees the issue needs study, particularly in terms of hollowing out's impact on careers, incomes and Canada's standard of living over time. Mr. Kierans puts it best: “It's too damn complex to be smart about.” |
