Skip to main content

The battle for Potash Corp. seems on the verge of ending, with no rival bid to BHP Billiton's $39-billion (U.S.) hostile offer in sight. It will be replaced by a new battle directed by Investment Canada. Will the agency, the steward of the notoriously lame "net benefit" test, approve Potash Corp.'s takeover?

BHP knows it is nowhere near seizing the Prairie prize even though the chances of a competing bid are falling faster than Canada's standing at the United Nations. It is well aware that politics could upset its plan, hence the statement earlier this week that Saskatoon will be BHP's "global potash headquarters," complete with a "leadership team" that would actually "live, pay taxes and raise their families in Saskatoon." As for the Saskatchewan government's fears about billions of lost revenues under Potash Corp.'s Australian ownership, BHP claims to have a cure for that too, details to come.

Well, maybe. Anyone who cares about the preservation of head offices, and the economic, social and cultural benefits that go with non-branch-plant status, should spend a few minutes reading the history of Calgary's Talisman Energy, one of the world's biggest independent oil companies.

Talisman wasn't always Talisman. It used to be called BP Canada, one of the colonial divisions of the energy giant once called British Petroleum, later the sponsor of the biggest oil spill in American history. BP Canada was the classic branch plant. It was unfocused, dabbling in (money-losing) mining as well as oil and natural gas, did little drilling and was run from afar. Even the London head office got bored with its little Canadian beast and decided to cast it adrift, oblivious to its potential in a country that was destined to become an energy superpower.

BP sold its holdings in BP Canada in 1992. The newly independent company was rechristened Talisman Energy and, a year later, recruited a hotshot British astrophysicist named Jim Buckee to focus and build the company. In came a new executive team. Out went the mining assets. Talisman expanded quickly in Canada and overseas, becoming one of the first Canadian energy companies to appreciate the potential of oil plays in the North Sea and developing countries.

Talisman bought Bow Valley Energy from British Gas and Encor from BCE. It made a big splash in war-worn Sudan (an investment it was forced to sell in 2003, after getting thoroughly roughed up human rights groups).

In spite of the Sudan setback, Talisman established itself as a formidable Canadian and international player. From the time it broke free from BP to its pre-recession peak, production went from less than 50,000 barrels a day to more than 525,000 (the latest figure is 425,000).

Investors made out like bandits. After adjusting for share consolidations, the share price went from $3 (Canadian) to $23 (it's now $18 and change) and the enterprise value - debt and equity - went from $500-million to $25-billion.

Talisman's success would have been unimaginable under BP ownership. Subsidiaries spend their whole time arguing for capital. The senior executives in the subsidiary typically report to middle management in the head office. Subsidiaries exist to execute strategy, not devise it. They don't generally get involved in non-investment activities, ranging from investor relations to intellectual rights protection. All that is done at the head office.

As a result, the subsidiary becomes a branch plant, devoid of the best careers and all the indirect jobs that go with them, at law firms, advertising and consulting agencies, right down to limo drivers and chefs. The city itself suffers, and if you don't believe that, look at what has happened to Canada's once thriving steel town, Hamilton, where Stelco (owned by U.S. Steel) is shut down.

BHP promises this time will be different. Potash Corp. will thrive under its ownership and be given a global mandate. Yet BHP is run from Melbourne and London. Saskatoon will not be a true head office unless Marius Kloppers, BHP's CEO, moves to Saskatoon, buys a shovel and clears his driveway of snow in the dead of winter.

History says subsidiaries rarely thrive. Talisman's remarkable revival when it shed branch-plant status is a story that Investment Canada should read and reread before it decides whether BHP's ownership of Potash Corp. will provide a net benefit for Canada and Saskatchewan.