Are We Hollowing Out the Regional Corporate Infrastructure?

By Peter Lindfield, published in the Telegraph-Journal 3rd August 2012

Toronto investment firms are supporting a $1.8 billion bid for Quebec-based hardware chain Rona by U.S. rival Lowe’s Not only does this move set the stage for a high-visibility battle between Bay Street shareholder interests and the Quebec government, but it has re-opened the debate about foreign takeovers of Canadian firms and if this potential sale is another example of the hollowing out of Canada’s corporate infrastructure.

Lowe’s, a $30 billion retailing giant headquartered in Mooresville, North Carolina, is hoping to capitalize on investor dissatisfaction over Rona’s direction. Lowe’s today has about 30 big-box stores, but its arrival has added to the stiff competition from the Canadian subsidiary of Home Depot, which operates about 180 stores. Home Hardware, a cooperative owned by 1,080 retailers, has recently expanded its number of large stores. Rona has about 1,500 retail outlets, including franchises and affiliates and operates about 840 stores under its own banner. According to some analysts, there is insufficient space in the Canadian market even for three large players.

But Quebec Finance Minister Raymond Bachand has characterized Rona as a “strategic interest”, stating that he has opposed an acquisition by Lowe’s based on the calculation that it would be potentially damaging to Rona’s 15,000 employees in Quebec and approximately 90,000 workers across Canada. Quebec’s investment and pension fund, Caisse de dépôt et placement du Québec, currently owns about 12 percent of Rona’s shares. Although Lowe’s has committed to keeping Rona’s headquarters in Boucherville, Quebec, and to continue relationships with Canadian suppliers, Mr. Bachand has mandated Investissement Quebec, its provincial investment division to investigate “every means it can use to block this transaction.”

Some economists quickly criticized Mr. Bachand, calling his intervention a “breathtaking example of sticking his nose where it does not belong” and asking “what of the interests of investors?” This condemnation of political interference into corporate affairs echoes Ontario’s Institute for Competitiveness and Prosperity 2011 report which stated that, “when Canadian companies are bought by foreigners, it simply raises the stakes for creating the appropriate balance of pressure and support for innovative, growing companies.”

According to the Institute, the hollowing out of Canadian corporate infrastructure is a myth. Their report goes on to state that Canadians should not oppose foreign investors who are prepared to acquire Canadian companies that “have not aggressively capitalized on opportunities in their own business.” Additionally, Canadians should “not be afraid to admit that sometimes Canadian management teams are not up to the challenge of global competition” and that “new, foreign-based management is needed to face it.” Impeding foreign acquisition would have the effect of “slowing the creation of new globally competitive corporations in order to staunch the takeover of existing corporations would do real harm to Canada’s prosperity.”.

In the face of this analysis, Mr. Bachand is unconvinced and unrepentant stating that, “we simply can’t think that, despite the good-faith statements made by a buyer, that in the long term economic rationalization won’t come to dominate and that this purchasing power now clearly exercised in Canada won’t be eroded over time.”

Mr. Bachand’s perspective is particularly insightful, especially if in this statement, one substitutes “Quebec” for “Canada.” Studies of the acquisition of Canadian firms by foreign interests overwhelmingly focus on the aggregate interests of Canadians nationally, as though regions—with their own economic realities—did not exist. If New Brunswickers were to contemplate the acquisition of this province’s iconic corporations by foreign interests—Moosehead Breweries, Ganong Bros., J.D. Irving Limited, to name a few—surely a public debate would ensue about the merits and risks of turning these companies over to interests not rooted in this province.


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