The $165-billion merger of AOL and Time Warner in 2000 was so disastrous that it was celebrated as the biggest, stupidest deal ever, one that will be studied for decades by MBA students with a taste for financial gore (all currency in U.S. dollars). The copycat calamities in other industries, if on somewhat smaller scales, will make for fun reading too.
In banking, one of the biggest debacles came in 2007, when the carve-up of Dutch bank ABN Amro helped wreck the Royal Bank of Scotland (it had to be nationalized by the British government after the 2008 financial crisis). The mess is now bringing down Italy's Monte dei Paschi di Siena, which bought the Italian arm of Amro at an outlandish price. In mining, Rio Tinto, one of the world's largest mining companies, bought Montreal's Alcan at the peak of the market in 2007 (a bad year, that one) for an eye-watering $38-billion. Since then, Rio has written down Alcan's value by about $30-billion. For his sins, Rio CEO Tom (Honey, I Shrunk the Equity) Albanese was fired this past January.
Albanese was not alone in the bonehead department. Many foreign takeovers of Canadian companies made between 2006 and 2008–the bubble years–have come to grief, with writedowns galore. Indo-European steel giant ArcelorMittal vastly overpaid for Hamilton's Dofasco. Ditto U.S. Steel for Stelco, Xstrata (now merging with Glencore) for Falconbridge and Brazil's Vale for Inco. Bloomberg has estimated that the global mining and steel industries have taken $50-billion in writedowns in the last year alone. Dud Canadian acquisitions would account for a big chunk of those losses.
Which brings me to me. For years, I have been rather hot and bothered about the hollowing out of corporate Canada–the wholesale disappearance of head offices in virtually every industry because of foreign takeovers. The sellouts turned Canada into a sort of snowbound banana republic, dominated by the oil sands companies, with a few banks, insurers and BlackBerry and Bombardier thrown in.
I still believe the lack of head offices of any size will hurt Canada in the long run, but I never gave Canadian investors and the CEOs who ran these companies credit for gorgeous timing. The value destruction since the bubble popped has been shocking. Citigroup analysts estimate that mining companies delivered an average annual return on newly invested capital of 18 per cent between 1999 and 2007, when the party ended. From 2008 to 2011, the returns went to negative 11 per cent–slowmotion suicide if numbers like that persist. Too bad Quentin Tarantino is not a maker of financial documentaries (though "Kill Tom" doesn't quite roll off the tongue like Kill Bill).
I remember Barrick chairman Peter Munk telling reporters in 2006, when Inco, Falconbridge and Alcan were under foreign attack, that Canada's beating corporate heart was being ripped from its chest. He had toyed with the idea of bundling these resource biggies into one giant company. The idea was to create a version of BHP Billiton, the planet's top digger.
Munk's idea came too late. The takeover battles were raging, CEO egos were tracking equity values into bubble territory and Canadian prizes went to their maniac pursuers, only to become toxic after the 2008 financial collapse and subsequent recession. If Munk's dream had come true, there is little doubt the Canadian BHP today would have run into trouble, even if combining the three companies had made strategic sense.
Much of the Canadian resources sector is a sorry sight: Alcan's value written down to the equivalent of pocket change, the steel industry in Hamilton gutted, and Falconbridge and Inco long gone, their mining operations slashed. Too few Canadian-controlled energy companies of any size are still standing, save for Suncor and Canadian Natural Resources, now that the oil sands giants have suddenly been squeezed by falling bitumen prices. It's enough to make you want to down a two-four of beer, except that the big Canadian beer companies are long gone, too.
If there is a consolation prize, it is that Canadian investor greed and short-sightedness paid off financially. Rio sent rival bidders packing by paying a 65 per cent premium for Alcan. Who could resist? Fat premiums were paid for other diggers and pumpers, too.
Did Canadian investors know the end of the supercycle was nigh? Did they know that the Chinese demand curve could not stay vertical forever? Maybe, maybe not. But give them credit for making chumps of the foreign buyers. Here's hoping that those wily investors will use some of their loot to create new Incos and Falconbridges. Better yet, how about creating new companies in renewable energy, communications, transportation and life sciences that would be less prone to murderous cyclical downturns? If Canadian investors don't match their selling talent with building talent, Canada really will be a chilly banana republic.
Eric Reguly