Limit state takeovers – by Jack M. Mintz (National Post – July 24, 2012)

The National Post is Canada’s second largest national paper.

Canadian oil and gas markets are being rocked by a lot of news lately, whether it involves building pipelines in Canada or potential economic turmoil in Europe. The latest is Monday’s announcement that China National Offshore Oil Corp. will pay $15.1-billion in cash to take over Nexen at a 66% premium relative to the 20-day average stock price.
The immediate consequence is to make a lot of Nexen shareholders richer, since the share price shot up from $17.29 to $26.35.
The Nexen takeover also lit up the chattering political classes in Ottawa. The federal government will need to make a critical decision over whether to approve this takeover under the Investment Canada Act. In my view, the worst decision would be one based on poor economics and perceptions. The best decision would be a clear policy focused on “net benefits” when assessing takeovers of Canadian companies by foreign state-owned enterprises and sovereign wealth funds.
Certainly, the usual nationalists will be out in full force, pushing to block the takeover. My skin crawls with dubious concepts such as “strategic assets,” “national champions” and “hollowing out.” The idea that underperforming companies should be protected from takeovers flies in the face of credible evidence built up over the years showing that foreign direct investment generally contributes to a dynamic economy.
If Canada wants to be a global economic power and play in the big leagues, it is evitable that some of its cherished companies could be taken over in a highly competitive international market for capital.
Canadian companies are also buying many foreign companies, which is something we should be proud of.
Typically, foreign direct investment brings fresh management and technology to the Canadian economy, something to welcome. Evidence provided by Statistics Canada is revealing: Foreign-owned companies on average perform better in terms of productivity, worker compensation, and research and development intensity.

Besides, foreign direct inflows to Canada are just not that large: 4% of GDP in the period 2006-10. Canada’s FDI inflows as a share of GDP are 57th highest of 119 countries, less than the United Kingdom (4.5%) and Sweden (5.9%). Further, Canadian outbound investment is 21st highest in the world (3.75% of GDP).

But not all acquisitions are the same. Takeovers that compromise Canada’s national security are unwise and should therefore be blocked (such as the case of MacDonald Dettwiler, which owned a unique technology). Nor will Canadians be interested in takeovers of sensitive businesses related to the defence industry.

The acquisition of Canadian companies by state-owned companies or sovereign wealth funds (whether from China, Russia or elsewhere), is a less clear-cut matter. Should Canada permit the nationalization of its business sector through foreign state ownership?

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