Time for Corporate Canada to go shopping abroad

Ken Smith is a senior partner with Secor Group, based in Toronto

The financial crisis put a lid on international M&As, but the drivers of global industry restructuring have continued to bubble underneath and may soon blow the cover off again. Along with pent-up financing capacity, analysts point to opportunities for strategic combinations, as well as some settling of the uncertainty in valuations that made even ready buyers cautious.

Canadian companies are likely to be particularly active. On the buy side, many companies are in better shape than their foreign counterparts, thanks to a relatively stronger economy and financial system. On the sell side, Canadian assets are attractive to foreign companies for the same reasons. As well, Ottawa is welcoming foreign investment with a renewed passion, now opening some previously protected sectors, such as telecommunications.

So, to buy or to sell?

In the past decade, Canadian companies were overwhelmingly sellers. Sales of billion-dollar companies to international interests outpaced purchases by $170-billion (U.S.), trailing only the United States and Britain in absolute terms, and making Canada the largest seller of corporate assets in the world relative to the size of the economy.

Foreign investment is in general welcomed, and can lead to resource development, efficiency improvements, growth and employment. But the sale of the controlling interest of a large, healthy company achieves none of this in and of itself. Instead, it usually diminishes the senior responsibilities left in the acquired headquarters and reduces the need for local professional services and Canadian financing.

Indeed, the dream of a global financial centre in Canada would be more realistic if more Canadian companies moved to the buy side of global industry restructuring. This would increase the scale and scope of companies headquartered here and the need for the banking and advisory services that fill the office towers surrounding corporate headquarters.

However, is it realistic for Canadian companies to be global consolidators? And would it be wise, given some of the famous failures of the past?

Many of the foreign companies that did the buying in the past decade were, in fact, initially smaller than those they bought - and sprang from countries smaller than Canada.

For example, Xstrata of Switzerland grew to $20-billion from $2-billion in the past 10 years, mostly through acquisitions, ultimately achieving the financial strength to outbid Inco for Falconbridge. Belgium's InBev grew to $60-billion from $3-billion, acquiring once-larger Anheuser-Busch and Labatt along the way.

Canada's past acquisition failures abroad, meanwhile, are now overwhelmed by the successes. In the past decade, Canadian companies that acquired abroad outperformed their competitors by more than 15 per cent in total return to shareholders in the years following these deals. This is much better than the performance of U.S. acquirers, although not as good as those from the European Union. The biggest net buyers in the past 10 years, in fact, were EU countries, from which corporations were acquiring in Canada, the U.S. and around the world.

Could this be Canada's turn? Our financial system is strong; our economy is better than most and is supporting the relative strength of acquisition currency, whether stock or Canadian dollars; and Canadian companies have established a track record of creating value in international acquisitions - just not enough of them.

Canada can reverse the imbalance if government and corporate boards and leadership can shift their frame of reference to the global context.

For example, government needs to negotiate for a better balance of foreign acquisition policies internationally: It will be tough for Canadian companies to be consolidators while they remain the easiest to buy in the world.

On the sell side, securities policy intended to empower shareholders can effectively throw a company into auction upon any good offer. On the buy side, a range of explicit and implicit barriers make it difficult to acquire major corporations in the largest EU countries (as in some American states). Ottawa should take the opportunity of current Canada-EU free trade negotiations to rebalance such policies.

Corporate boards need to take a long-term perspective. While a sale premium can be tempting, it is a one-time gain that pales in comparison with the value that can be created as a buyer over the long term (think of the international acquisitions of companies such as Manulife, Cisco, TD Canada Trust, Barrick, Xstrata).

Boards should be asking management for the global strategy, and reweighing the potential value versus risk of international acquisitions, especially given the superior shareholder returns of Canadian companies buying abroad.

Corporate leaders, too, need to raise their ambitions. On one hand, Canadian conservatism may be one reason our companies don't often make bad purchases abroad. But remaining content with the modest growth offered by the Canadian market alone is underserving shareholders and, as industries become more global, will ultimately result in loss of competitive scale and scope.

It's time to reverse the selloff - and for Canadian companies to live up to their full potential on the world stage.