Creative destruction, eh! Why there’s no reason to fear the demise of Canadian companies – by Joe Martin (National Post – March 26, 2015)

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

Don’t worry about the demise of Canadian companies. Others will replace them and become world beaters in their fields

Some observers are concerned by the destructive nature of capitalism in Canada that has seen the demise of Nortel, the near demise of BlackBerry, and the flight of automakers to Mexico. The list goes on and on. Most educated observers are aware of the problems, fewer are aware of the creative processes that continue to breathe life into the Canadian economy.

A recent Economist article noted “A lack of larger firms means fewer jobs, and a less resilient economy.” So what has happened in the Canadian corporate sector in the past 30-plus years in terms of larger employers?

In 1980 the 10 largest non-financial corporate employers had nearly 650,000 employees. In 2013, the most recent year for which there is comparable data, the top 10 employers had over 1.1 million employees, an increase of 72% at a time when the Canadian population grew at a rate of 43%. Not all of these jobs are in Canada because Canadian businesses have become more globally oriented, but then not all the jobs were in Canada in 1980.

Eight of the 10 companies on the list in 2013 were nowhere near the top 33 years ago. Let us first look briefly at the two largest: Onex, a Canadian private equity (PE) firm and Walmart Canada, the Canadian subsidiary of the American retail colossus, and then at Magna and Alimentation Couche-Tard.

In Schumpeter’s classic definition of creative destruction he refers to “industrial mutation… that incessantly revolutionizes from within, incessantly destroying the old one, incessantly creating a new one.” That is almost a textbook definition of a PE firm, which is the antithesis of the old holding company or conglomerate, like Argus. PE firms took off in the 1980s as they acquired corporations from conglomerates and returned those companies to their core competence. They did this by improving the management of the company and once that was done selling the company, a process that could take up to 10 years from beginning to end.

When people think about PE firms they tend to think of the U.S. market, where PE is at least 20 times larger than in Canada, and of firms such as Kohlberg Kravis Roberts, Blackstone, Carlyle and, since the last presidential election, Bain Capital where Mitt Romney was CEO. When they think of the Canadian market they often think of large pension funds such as Teachers Pension Plan or CPP Investment Board, which have PE divisions.

But the most successful North American PE firm is Toronto-based Onex, founded by ex-Winnipegger Gerald Schwartz. Since its founding in 1983 Onex has generated a 28% rate of return and has made Schwartz a billionaire. And while most of those 200,000 plus jobs are not in Canada, Onex is important because of its high-level corporate positions in Toronto and the professional services they demand.

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