Canada was, quite literally, built with foreign investment. From the mid–19th century, British investors supplied much of the capital necessary to finance the railways, buildings, canals and other infrastructure its colony required. Later, American industrialists built lumber and newsprint mills, mines and manufacturing plants. Despite constant internal bickering about the consequences of allowing it, Canada came to be regarded internationally as a nation quite open to receiving foreign capital. In the past five years, however, several high-profile takeovers proposed by foreigners were spurned. Most recently, Ottawa surprised many by blocking a bid by Malaysia’s Petroliam Nasional Berhad (Petronas) to acquire Progress Energy Resources for $5.9 billion. More important, this prompted speculation that China National Offshore Oil Corp.’s outstanding $15.1-billion offer for Nexen might receive similar treatment. Most bizarrely, provincial officials in Quebec intervened this summer to oppose an attempt by Lowe’s, the American home-improvement retailer, to purchase Rona, that province’s celebrated vendor of hammers, reciprocating saws and drywall. And while Bell Canada is a decidedly domestic company, the recent decision by the CRTC to reject its bid for Astral Media only confirmed in some minds the notion that Ottawa is in a mood to meddle in large deals.
On their face, these events seemingly contradict what Prime Minister Stephen Harper and his lieutenants have been saying for years. In February, Harper personally visited China to deliver the message that Canada was not only open to foreign investment, but eager to diversify away from its traditional reliance on American capital. “Our governments, our business leaders and our peoples have worked diligently to identify and to seize opportunities for expanding mutually beneficial trade and investment,” Harper told one audience. This represented the most prominent of what have become routine Canadian delegations dispatched to Asia and elsewhere. These efforts took on greater urgency last year after TransCanada Corp.’s efforts to build a tarsands oil pipeline in the U.S. stumbled in the face of intense political opposition there. Canada’s traditional partner, some believed, was beginning to take our fruitful bilateral relationship for granted.
The mixed signals on foreign investment are, as one might expect, sowing confusion among foreign companies and investors. Sandy Walker, a lawyer with Fraser Milner Casgrain bearing extensive experience with foreign acquisitions, says she recently met a Chinese regulatory lawyer who resented what she regarded as Canada’s aversion to Chinese investment. Walker also regularly encounters American private investors who follow foreign takeover reviews by the Canadian government closely—a big change from five years ago, when they paid no attention whatsoever. “They are concerned about what’s going on,” she says. “Foreigners, they don’t know what to make of this.”
Reuters columnist Robert Cyran recently contended that Canada’s “definition of industries worthy of protection has become incredibly expansive,” and that the country was no longer quite so open for business as once it had been. Some equity analysts lowered ratings on Canadian companies they previously believed might be takeover targets (Talisman Energy, for example), invoking the logic that the Petronas-Progress blockage would drive foreign buyers to shop elsewhere. The law firm Osler warned clients that “for the moment, it would be prudent to assume that the [foreign takeover] approval process is becoming more difficult.”
How grave is the damage to Canada’s reputation? And what price might we pay for it? In the short term, probably little. But it could cost us dearly if the confusion is left unresolved.
Anxieties over foreign investment are nothing new. During the early 1970s, for instance, Canadians wondered to what extent American money should be welcomed. The U.S., after all, was then embroiled in an unpopular war in Vietnam. Germans and Italians were also buying up large tracts of farmland. It was then that the foundations were laid for Canada’s approach to vetting foreign transactions. The government of Prime Minister Pierre Trudeau introduced the Foreign Investment Review Act (FIRA) in 1973, forming a federal agency to advise on the respective benefits and hazards of particular transactions. The Investment Canada Act (ICA) honed the approach in 1985.
If nationalists hoped these measures presaged an era of keeping the Yankee barbarians at bay, they were to be sorely disappointed. Having established these protocols, successive Industry ministers rubber-stamped virtually every foreign takeover proposal brought before them. About 90% of the transactions reviewed under FIRA were approved. The ICA was even more permissive: since 1985, virtually all of the 1,600 purchases reviewed got a thumbs-up. (The rare exceptions usually involved cultural industries; at least three were rejected.) Although most of these deals involved companies that weren’t household names, Ottawa also stayed its hand as some of Canada’s most well-known companies—including Alcan, Dofasco, Inco and Molson—fell to foreigners. A more welcoming environment would be difficult to imagine.
The foreign review process has always been a black box. In principle, the Industry minister must determine that a transaction will be of “net benefit” to Canada before allowing it to proceed. In practice, the act is a farrago of abstract clauses that afford the minister considerable discretion. With virtually every bid meeting meek approval, though, few cared what went on inside the box.
Certainly buyers were occasionally browbeaten into making concessions in the form of undertakings to gain approval, but even this was far from threatening. Doug New is a partner at Fasken Martineau but earlier in his career served as a special adviser to the deputy commissioner of the Foreign Investment Review Agency. He recalls a speech by former federal politician Alastair Gillespie, who served as minister of Industry between 1972 and 1975. “He had been questioned in the House about the Act,” New says. “And he said, with respect to undertakings, ‘If some company comes into Canada to set up a business to make Frisbees, and the Frisbee market should disappear through no fault of its own, of course we would never enforce those undertakings.’” It became known as the “Frisbee speech,” and for years it gave foreign acquirers confidence the government wouldn’t throw the book at them if they failed to live up to their promises. Says New: “That was the general condition: that the government would be reasonable in all circumstances.”
Under these conditions, compliance with the Investment Canada Act was little more than an annoying formality. During the aughts, the debate over foreign investment revolved primarily around the question of whether Canada was being “hollowed out” by outsiders (primarily American) who bought its largest corporations and ran them as mere outposts. Since 1985, the U.S. has been the largest acquirer in Canada (accounting for 60% of all acquisitions) while Britain, France, Japan and a handful of other developed countries accounted for most of the rest. Just a tenth or so could be attributed to that broadest of categories, “other countries.” China was essentially irrelevant.
But of late, Canada has encountered buyers of a less familiar variety: state-owned companies and sovereign wealth funds from emerging markets like China and Malaysia. They want our oil, natural gas and metals and they have deep coffers. Their arrival has prompted yet another debate about the merits of foreign investment, this one centring on the nature of state-owned enterprises and the rapacious evil some imagine they might visit on Canadian commerce. Would their generous state backing help them run private competitors into the ground? Would they use the same labour and environmental practices they’re familiar with back home? Would they spy? This rekindled the debate over foreign investment, and raised unfamiliar new issues to boot.
Ironically, perhaps, it was under Harper’s Conservative government that foreigners first felt the Act’s sting. The attempted acquisition of the space division of MacDonald Dettwiler and Associates occasioned the first time an Industry minister officially poured burning oil on a transaction. The minister of the day, Jim Prentice, killed a $1.3-billion offer from Alliant Techsystems, an American company. New says that when discussing the Investment Canada Act with clients, Alliant-MDA rarely gets mentioned. He speculates it’s because clients felt they understood the government’s rationale and “didn’t find it unsettling.” Prentice intimated that in doing so he intended to keep MDA’s space technologies under Canadian control. The government, after all, reportedly provided MDA with $445 million in R&D funding to develop them.
BHP Billiton’s blockbuster bid for Potash Corp. was a different matter. New says it comes up often. Seeking to muscle its way into the fertilizer business, the Anglo-Australian mining gargantuan bid $38.6 billion to buy all of Potash, the world’s largest producer. Saskatchewan’s premier, Brad Wall, wasn’t keen; the province stood to lose tax revenues and didn’t relish seeing the province’s pre-eminent company fall to come-from-aways. To the surprise of many, then–Industry Minister Tony Clement blocked the deal. “As to why Mr. Clement did what he did—well, that was never explained,” New says.
And that, in a nutshell, is the problem that has plagued Canada over the past two years. Although foreign acquirers may be discouraged by occasional rejections, the impact is amplified when nobody is quite sure why. In the absence of any official statement, pundits contemplated a range of theories on the Potash rejection—that Ottawa regarded potash (a crucial fertilizer ingredient) as a strategic asset, that it had adopted a sudden aversion to foreign intrusion on major natural resource companies, or perhaps simply that Harper’s Tories sought to improve their chances in the then-upcoming federal election. “One thing businesses and investors do not like is uncertainty,” New observes. And the still-unclear outcomes of the CNOOC and Petronas bids have only compounded the bafflement. (Although the official rejection of Petronas’s bid for Progress startled many, it was not actually quashed. Federal officials have clarified that Petronas is welcome to keep trying, and the company has elected to extend its bid to do precisely that.)
It’s not just the takeovers themselves; companies now need to worry more about what comes afterward. In 2009, Industry Canada sued Pittsburgh-based U.S. Steel as a means for forcing that company to comply with undertakings it made while acquiring Hamilton-based Stelco. This was another first, ultimately resulting in a negotiated settlement under which US Steel made what the government called “significant new and enhanced undertakings.” The Frisbee had become a razor-edged boomerang—and foreign acquirers needed to be more careful throwing it.
While these events dominated the headlines, one should not exaggerate the magnitude of change. Industry Canada continues to rubber-stamp nearly every foreign merger application that comes across the minister’s desk. Says Walker: “For the vast majority of transactions, it is business as usual.” Indeed, the latest statistics show that for the 12 months ended June 30, the minister reviewed and approved 14 transactions. None was refused. This alone strongly argues against any inference of protectionist hordes rampaging across the land. But perceptions matter nonetheless, and Canada will pay a price if prominent crushed deals reverberate in foreign minds.
Quantifying the impact of recent events on Canada’s reputation is frustratingly difficult. Cyran, the Reuters columnist, pointed to quarterly mergers and acquisition (M&A) statistics from PricewaterhouseCoopers, showing that Canadian M&A volumes retreated 21% compared to the same quarter last year. Given Canada’s recent “protectionist instinct,” Cyran contended, this was hardly surprising.
Julian Brown, a partner in PwC’s consulting and deals practice in Toronto, doesn’t buy that argument. He attributes the recent declines primarily to the slowing of Chinese economic growth. The country’s looming leadership transition may have put some acquisitions on hold, and China is also busy digesting previously acquired foreign assets. “There’s a lot of explanations that are, to my mind, in absolutely no way linked with the recent blockages of foreign takeovers,” Brown says.
What little evidence that does exist is largely anecdotal, and therefore unsatisfactory. But in Brown’s experience, a few scotched deals are no great mischief. “I don’t think individual transactions really influence M&A behaviour in anything other than the very short term,” says Brown. “What would influence it would be an overall legislative ban on any foreign majority ownership in the oilsands.” During the 1970s, Britain’s Labour government actively discouraged foreign investment, he says. Argentina issued similar vibes this year by nationalizing YPF, the oil company. But Canada seems a great distance from taking such radical actions.
It’s not as if Canada has suddenly been shunned. In late August, PetroChina, that country’s largest oil producer, announced it seeks to boost its overseas production to half its total output (from about a tenth currently) in less than a decade through acquisitions. Canada made its short list of shopping destinations. One Chinese analyst told the China Daily that PetroChina must “bear in mind that overseas acquisitions are not easy given these assets they purchase are considered sensitive.” At least one observer, then, appears to grasp that blockbuster natural resource bids are likely to cause a stir in many destination countries.
Walker, for her part, argues that many state actors in China and elsewhere “recognize political exigencies and may well understand that the government has to ease concerns on the part of the Canadian public…if there are some limitations imposed, they may still think Canada’s a worthwhile place to invest.”
If some foreigners are inclined to be patient with Canada, it may be because other developed countries are no more hospitable. Last month, U.S. President Barack Obama issued an executive order demanding Ralls Corp., a Chinese company, abandon a wind power project located near a military base in Oregon. This arrived during an election campaign that has witnessed Obama and his Republican opponent, Mitt Romney, both seeking to reassure voters they will keep Americans safe from China. Meanwhile, Australians “have been watching foreign investment coming from Asia with the same types of concerns” as those of Canadians, New observes. Despite such controversies, neither country has been excommunicated by the bishops of global capitalism.
Frustrated foreigners might be well-advised to be patient. Beyond the headlines, what’s actually happening is a gradual removal of investment barriers across the developed world. According to a report published jointly by the OECD, World Trade Organization and the UN Conference on Trade and Development in late October, G20 countries have generally avoided introducing measures restricting foreign investment since the recent financial crisis and, indeed, have continued to eliminate existing restrictions.
Canada’s doing its part. In June, the Telecommunications Act was amended to liberalize foreign investment in the telecommunications sector. Henceforth, foreigners are able to buy controlling stakes in telecom companies, provided they have market shares lower than 10%. That paved the way for Egyptian company Orascom Telecom Holdings, to convert its non-voting shares in Wind Mobile to voting shares in October, thus assuming control of the small wireless competitor. Egyptian billionaire Naguib Sawiris, Orascom’s founder, said publicly a year ago he regretted starting a carrier in Canada, partly owing to Ottawa’s failure to amend what he regarded as archaic foreign-ownership restrictions. Presumably his discontent has now been assuaged somewhat.
What’s more, the international trend is toward signing bilateral investment treaties and other measures designed to stimulate investment. Canada’s on board with that, too. In September, China and Canada signed a foreign-investment promotion and protection agreement intended to strengthen the bilateral relationship.
Two anticipated events might do much to resolve the present uncertainty. First, federal Industry Minister Christian Paradis is expected to rule soon on whether the CNOOC-Nexen transaction should proceed. The outcome will be watched closely, particularly by state-owned enterprises from emerging markets. If consummated, CNOOC-Nexen would be the largest-ever overseas takeover by a Chinese company. If it fails, there will almost certainly be a chilling effect. Arguably, Chinese sentiment still hasn’t recovered in the wake of the negative public outcry provoked by CNOOC’s run at Unocal in 2005. CNOOC underestimated the political debate it would provoke by bidding for an underperforming and reasonably small U.S. oil company; its inexperience effectively handed the contest to a competing bid from U.S. oil giant Chevron. The failed $6-billion bid by China Minmetals (another state-owned enterprise) for Noranda, a Canadian copper and zinc miner, in 2004 had similar consequences: Canada did not see another major Chinese bid until this year.
Concurrent with its ruling on CNOOC-Nexen, many expect Ottawa will issue more detailed guidance on the standards it will apply to future foreign takeovers. Indeed, in recent months Harper has vowed several times his government will soon release a “framework” statement outlining its approach. That would mark the culmination of two years of soul-searching on the part of his government, which began with the Potash rejection.
It’s fashionable to accuse Ottawa of dragging its heels. This is not without justification: many predicted years ago Asian state-owned enterprises would soon be shopping Canada in earnest, yet Ottawa did little to prepare. But Harper stated the truth when he said recently that CNOOC’s offer for Nexen raised a “range of difficult policy questions.” Even greater transparency, which on its face may seem a no-brainer, could create unintended problems. “With certainty comes rigidity,” warned lawyers from Osler in a briefing to clients. “Arguably, any attempt to quantify the “net benefit” test and to make it independent of politics and politicians would result in the rejection of a far greater number of investments.” If the years of foot-dragging ultimately result in better-conceived policy, this year’s confusion will have been worth it.
What exactly the Conservatives have in mind is unclear, although there’s no shortage of speculation. One is that Ottawa will press China to permit Canadian companies to make acquisitions on Chinese soil. Another is that the review process will be amended to introduce additional hurdles for state-owned enterprises. One hopes that whatever it comes up with, Ottawa’s much-anticipated clarification will provide more answers than questions. Canada cannot afford to leave foreign investors guessing indefinitely.