Canada is in the midst of a chilling mid-sized business mystery.
In just a few short years, hundreds of companies that employ between 100 and 499 people vanished – and no one knows exactly why.
This phenomenon is alarming because mid-sized firms are more productive, hire more Canadians and have more clout on a global scale. Against a backdrop of warring governments, massive sovereign debt loads and a shifting trade picture, their importance to the country’s economy has never been higher, their rapid disappearance never more in need of an explanation.
Global competition is fierce not only from Asia and other emerging markets, but increasingly from next door, as the United States lures manufacturers back home. Demographic factors of an aging population, meanwhile, are already set to curb Canada’s economic growth in the years ahead, putting pressure on public finances and the country’s tax base, making the vibrancy of its private sector all the more essential.
All told, 527 mid-sized companies vanished between 2007 and 2010 – representing a drop of 3.6 per cent compared with a rise of 2.6 per cent of businesses in general, according to numbers compiled by the Business Development Bank of Canada (BDC) and released exclusively to The Globe and Mail. This shrinking pace is all the more worrisome given the outsized importance of mid-sized businesses, which represent 12 per cent of Canada’s gross domestic product and 16 per cent of the jobs.
The country now has just over 14,000 firms of that size, compared with almost a million small businesses and nearly 3,000 large ones, leaving Canada overwhelmingly comprised of businesses too small to generate job growth, too small to drive an economic recovery, and ultimately too small to ensure the country can compete for trade with the new global superpowers in this post-crisis world.
The mystery of Canada’s disappearing mid-sized firms has even some of Canada’s top economic thinkers puzzled – and racing against time to turn clues into a cure.
“Where did they go? Did they become smaller, because of the state of the economy, did they merge with others, get bought up by other [foreign or Canadian]companies? Why is the number decreasing?” asks Pierre Cléroux, BDC’s vice-president of economic analysis. “We’re trying to understand it better so we can propose a solution.”
THE SCENE OF THE CRIME
For Canadian Hydro Developers Inc., a rare mid-sized company in the renewable energy business, the end of life started with a hostile takeover bid from giant TransAlta Corp. in July, 2009.
“It was a massive disappointment” when the offer was made, because the company was in a growth trajectory that was heading it toward big-company status down the road, said former Canadian Hydro chief executive officer Kent Brown. “The hardest thing in my life was the day before we publicly announced [the offer] sitting down with staff and telling them. It was horrible. ... We were just hitting our stride.”
Calgary-based Canadian Hydro, founded by brothers John and Ross Keating in the late 1980s, built a diverse portfolio of almost two dozen wind, hydro and biomass plants in four provinces. By the time of the TransAlta takeover, it had annual revenue of more than $80-million and 150 employees.
The company fought the bid, but eventually TransAlta won out with a sweetened offer. Mr. Brown now runs BluEarth Renewables Inc., a tiny green energy startup.
Canadian Hydro’s disappearance from the diminishing galaxy of medium-sized companies resulted from a number of specific circumstances. It was widely held and did not have a single strong shareholder to block the offer, and its share price had sunk because of the recession, making it more vulnerable.
But it also reflected broader pressures that make it hard for mid-sized firms to thrive. Part of the problem is that many investors want liquidity and dividends, and that tends to steer equity into large companies instead of mid-sized ones that need capital to fund growth, Mr. Brown said. It also means many mid-sized companies are pressured to prematurely pay dividends, limiting their options and weakening their balance sheets.
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