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Yes, Canada lost a lot of head offices in the foreign takeover binge, but we sure sold out at the right time
The $165-billion merger of AOL and Time Warner in 2000 was so disastrous that it was celebrated as the biggest, stupidest deal ever, one that will be studied for decades by MBA students with a taste for financial gore (all currency in U.S. dollars). The copycat calamities in other industries, if on somewhat smaller scales, will make for fun reading too.
In banking, one of the biggest debacles came in 2007, when the carve-up of Dutch bank ABN Amro helped wreck the Royal Bank of Scotland (it had to be nationalized by the British government after the 2008 financial crisis). The mess is now bringing down Italy’s Monte dei Paschi di Siena, which bought the Italian arm of Amro at an outlandish price. In mining, Rio Tinto, one of the world’s largest mining companies, bought Montreal’s Alcan at the peak of the market in 2007 (a bad year, that one) for an eye-watering $38 billion. Since then, Rio has written down Alcan’s value by about $30 billion. For his sins, Rio CEO Tom (Honey, I Shrunk the Equity) Albanese was fired this past January.
Albanese was not alone in the bonehead department. Many foreign takeovers of Canadian companies made between 2006 and 2008 – the bubble years – have come to grief, with writedowns galore. Indo-European steel giant ArcelorMittal vastly overpaid for Hamilton’s Dofasco. Ditto U.S. Steel for Stelco, Xstrata (now merging with Glencore) for Falconbridge and Brazil’s Vale for Inco. Bloomberg has estimated that the global mining and steel industries have taken $50 billion in writedowns in the last year alone. Dud Canadian acquisitions would account for a big chunk of those losses.
Which brings me to me. For years, I have been rather hot and bothered about the hollowing out of corporate Canada – the wholesale disappearance of head offices in virtually every industry because of foreign takeovers. The sellouts turned Canada into a sort of snowbound banana republic, dominated by the oil sands companies, with a few banks, insurers and BlackBerry and Bombardier thrown in.
I still believe the lack of head offices of any size will hurt Canada in the long run, but I never gave Canadian investors and the CEOs who ran these companies credit for gorgeous timing. The value destruction since the bubble popped has been shocking. Citigroup analysts estimate that mining companies delivered an average annual return on newly invested capital of 18% between 1999 and 2007, when the party ended. From 2008 to 2011, the returns went to negative 11% – slowmotion suicide if numbers like that persist. Too bad Quentin Tarantino is not a maker of financial documentaries (though “Kill Tom” doesn’t quite roll off the tongue like Kill Bill).
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