Just when you thought corporate Canada would run out of profligate, economically useless ways to waste vast sums of money, along comes the latest data on mergers and acquisitions (M&A). According to Thomson Financial, the combined value of takeovers involving Canadian companies almost doubled in 2006, to an awesome $230-billion (U.S.). (For those who follow the quaint, old-fashioned practice of valuing Canadian companies in our currency, that’s $270-billion.)
Let’s put it in perspective. A sum equivalent to one-fifth of our GDP was allocated last year to acquire and merge Canadian companies: building corporate empires. In contrast, Canadian business spent just $170-billion on capital investment: building the real economy.
I have been complaining loudly about the inadequacy of business investment — relative to our economic needs, and relative to record profits. Now we know what the titans of business have been up to, instead. For each dollar they spent building the economy last year, they spent $1.60 building their empires.
Each time a new deal is announced, the marrying executives boast about “synergies” and efficiencies. In reality, the M&A action is a corporate shell game, with few if any real economic effects.
Some important patterns are visible in the M&A report. The biggest deals involve resource companies — including six of the top 10 takeovers. Many deals involve foreign takeovers, like last year’s buyouts of Inco, Falconbridge, and Fairmont Hotels. These takeovers represent a huge capital inflow to Canada, but one that does next to nothing to actually develop our real economic potential. (I have nothing against foreign investment, as long as it does something productive.)
The current M&A boom is reminiscent of a similar binge in the late 1990s, just before the dot-com meltdown. At its peak in 1999, Nortel Networks paid $3-billion (U.S.) for a software start-up (Qtera) with no revenues and 170 employees. We all know what happened to Nortel.
Back then, intoxicated buyouts were justified on the basis of the Internet’s awesome value-creating potential. Replace the word “Internet” with “mineral,” and you could sing the same hymn today.
Somewhere around the corner, a price will again be paid — when resource prices tumble, and bullish spreadsheets that underline today’s inflated valuations suddenly turn to slag.
The Toronto Stock Exchange hits new highs almost daily, with rumours of still more takeovers (aluminum could be next) fuelling the fire. Just don’t bet your RRSP this frenzy will produce any lasting value on which to retire.
I’ve always been curious why business leaders (juiced on cheap finance and idle cash) are given free rein to drive up the prices of the stuff they buy with such wild abandon. Consider the biggest deal of 2006: the takeover of Inco by Brazil’s CVRD. The deal cost $20.3-billion (U.S.).
Yet Inco’s tangible assets (including property, plant, and equipment; inventories; cash) were worth barely half that, according to its last annual report. The remaining premium is just a huge bet that Inco profits will remain sky-high, thanks to inflated global commodity prices.
If workers’ wages grow by more than 2 per cent, the Bank of Canada clamps down hard. But in business, nobody questions an “inflation rate” of 100 per cent or more in the market for corporate control. What does this say about our economic priorities? And why don’t we take away the CEOs’ punch bowls, when their partying starts to overwhelm our whole economy?
In reality, the takeover binge reveals the bankrupt business leadership of uncreative executives who’ve been given way too much money to play with. Rather than inventing something new, expanding our capacity, or investing in real productivity, they pay outrageous prices for companies that others built. Bottom-line earnings appear to “grow,” and so might share prices (for a while, anyway, until the debt comes home to roost). Every marrying CEO — whether hunter or hunted — gets a golden parachute, assuaging any lingering regrets over lost empires. And Bay Street, as usual, takes a juicy cut of every pointless deal.
But from the perspective of our real economic potential and productivity, at best this shell game is a sideshow. At worst, it’s a portent of trouble ahead.