Monday, September 24, 2007

Foreign Takeovers

I'm as free market economy as they come, but the recent rash of foreign takeovers over Canadian companies got me to thinking. What happens when those companies get bought out? Are Canadian companies buying as many foreign companies and if not why, and what companies are buying Canadian companies?

The answers to these questions are a bit disturbing to say the least, but what is more disturbing is the lack of action from the current government.

1. What happens when those companies get bought out?
While each deal is different, the usual end result is the loss of a corporate head office, and often the loss of many more jobs. As well, when a Canadian company becomes a subsidiary to an international conglomerate, corporate tax revenues also disappear. International corporations have many methods of playing with numbers to move revenues to the area with the lowest tax rates, which is not likely to be Canada. And so, when Canadian businesses are subject to foreign takeovers, we lose the corporate tax base, high paying corporate head quarter jobs, and spin off industries.

2. Are Canadian companies buying as many foreign companies?
No they are not. Many more Canadian companies are being bought, than foreign companies being bought by Canadians. Is this normal for free market economies? Not really. Well over half of Canada's manufacturing sector is foreign owned, while in the U.S., Japan, Germany, the U.K., Italy, France, the Netherlands, Norway, Finland and Sweden, foreign ownership in the manufacturing sector is less than 4 percent. Its gets scarier when you start looking into foreign ownership of companies controlling natural resources.

3. and if not why?
This is a complicated issue, but here are my gut feelings, and some reasons for them.

A. Lack of fair playing field rules. Many countries, including Australia and the U.K., have what are called fair playing field rules. These are laws that stipulate for any foreign takeover to be allowed, the company being taken over must be legally capable of taking over the foreign company taking them over. For example, Oil and Gas giant Primewest recently agreed to a 5 billion dollar takeover bid from TAQA North, a wholly owned subsidiary of the Abu Dhabi National Energy Company. TAQA can takeover Primewest, but Primewest cannot takeover TAQA. Another example is Inco's takeover by Brazilian giant CVRD. The Brazilian maintains shares with veto power, essentially eliminating the possibility of Canadian company taking CVRD over. We don't need the government to protect Canadian companies form unprotected foreign competitors, but we need the government to enforce fair rules.

B. Government not using the power of the Investment Canada Act. This act allows the Federal Government to block foreign takeovers if it is found that these takeovers do not have a "net benefit for Canada." It is simply not being used.

C. Taxes. Our corporate tax structure is overly complicated, favours certain industries over others, and is too high (Canada = 36%, Finland = 29%, Norway and Sweden = 28%, Brazil = 25%, Ireland = 12.5%, OECD average = 28%). This is a strategic disadvantage for Canadian businesses. The tax system should be simplified, applied equally across industries, and taxed at a rate that is competitive with other similar countries. I'm told the Income Trust debacle has left many companies vulnerable to foreign takeovers. I'm not entire sure I see the connection yet, however I believe going back on a campaign promise, especially one that impacts people's savings and pensions, is reprehensible. I would prefer to see one simplified tax system applied across all companies.

I believe the we need to re look at the rules around foreign takeovers. Economists believe we need to re look at the rules around foreign takeovers. Canadians believe we need to re look at the rules around foreign takeovers. Its too bad our government doesn't.

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