November 5, 2010

The Sale of Potash:

Canadian Governance and Hostile Takeovers

Yvan Allaire | IGOPP

The Canadian government blocked the company BHP-Billiton from acquiring Potash Corp, giving the would-be acquirer 30 days to improve on its offer.

Why, after Alcan, Falconbridge, Inco and others would the Canadian government even consider approving this deal; because Canada, it seems, is easily intimidated when it comes to the rough game of international competition. The Canadian government is rife with free-market advocates who, in the opinion of several pundits, committed the horrible sin of “’political expediency” by blocking the takeover of Potash.

These pundits, of all stripes, came out of the woodwork to remind us all that shareholders are the “owners” of the company, that Canadian firms also make acquisitions abroad (Quick: name the last successful “hostile” takeover abroad by a Canadian company). We are also sternly warned about the damage to Canada’s reputation as a destination for foreign investments etc., should the Government of Canada block a takeover by a foreign company. In the course of the next thirty days, commentators will make their case again, leaning hard on the “conservative” principles espoused by the Harper government.

“If you’re a conservative, you must support the right of a company’s shareholders to dispose of their assets as they see fit, untrammelled by government intervention.

If you’re a conservative, you believe investment dollars should flow to where they’re wanted, and that protecting Potash Corp. from the market would endanger Canadian investors looking to acquire assets abroad.”

(John Ibbitson, Globe and Mail, November 3rd 2010)

The argument about shareholder sovereignty sounds particularly hollow. It seems to be based on a residual belief that share holding has remained what it used to be: a fairly stable group of people and funds who believe in the prospects of a company. Well, average holding period of shares has dropped under one year; in the bizarre world of short sellers, stock derivatives, day-traders, black pools, high-speed traders, flash orders, speculators of all stripes, etc., etc.,  the notion that whoever happens to hold shares of a company on a particular day is the legitimate “owner” of that company seems strange. In all decent societies, tourists don’t vote, gamblers don’t own the casino!

In the hours and days after (sometimes before) a bid to acquire a company has been announced, a massive volume of transactions occurs with the net result that a substantial proportion of the shares ends up in the hands of hedge funds and arbitrage funds. They, and other speculators, are supposed to be treated as the hallowed owners of the company holding a legitimate right to decide on its fate and future! […]  Read more