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Vale operations in Sudbury, Ont. (GINO DONATO)

Vale operations in Sudbury, Ont.


It's better to own shares in the seller than the buyer Add to ...

Defending the strategy of Canada's so-called iconic mining companies as they are sold one by one is a bit like admitting you admire the Toronto Maple Leafs.

Whether it's Potash Corp. of Saskatchewan Inc. now, or Inco Ltd., Falconbridge Ltd. and Alcan Inc. before, all share one thing with the Leafs: a perception they didn't try hard enough to compete and so it's inevitable that they ended up losing out.

For the Leafs, the obvious measuring stick is the standings.

For the Canadian resource companies, it's the fact that the latter three have been swallowed up by foreign buyers and Potash Corp. may soon share that fate thanks to a hostile bid from Australia's BHP Billiton.

The global game in commodities has shifted from mining to deal making. With a few exceptions, Canada's big old miners have shown little interest in becoming buyers and transforming into giants like BHP, producing multiple products and vast amounts of cash that support huge acquisitions.

However, Canada's miners, like the Leafs, are winners by another measure, and in business it's the one that really matters: They make a boatload of money for shareholders.

Because for shareholders, years of experience and study show one thing consistently. It's better in business to be the seller than the buyer at acquisition time, no matter how much fun it is to read in the headlines about Canadian companies on the takeover trail, swashbuckling through foreign lands.

Most studies show that it's the rare merger or acquisition that creates value for the buyer's shareholders. At best, many break even and many studies argue that most mergers in fact destroy value for the owners of the purchaser. Catch investment bankers in an introspective moment and they will acknowledge that.

A study of 4,000 deals by Boston Consulting in 2007, at the tail end of the last merger boom, found that when acquisitions do create value the "lion's share" of it goes to the sellers.

That echoes a 2002 review of 128 studies of mergers and acquisitions by business professor Robert Bruner, who concluded that "the mass of research suggests that target shareholders earn sizable positive market returns, [and]that bidders (with interesting exceptions) earn zero adjusted returns."

Some of the worst performing acquisitions for buyers, according to consulting firm McKinsey, are those based on strategies "such as pursuing international scale, filling portfolio gaps, or building a third leg of the portfolio." Those are the very types of strategies mining companies such as BHP espouse when branching out from what they have always done into producing other commodities like, say, potash.

Bill Doyle, chief executive officer of Potash Corp., says that's why his company never left fertilizer.

"I am a big believer in sticking to your knitting," Mr. Doyle told The Globe and Mail's Brenda Bouw in an interview. "One thing that is really important to success is to know what you don't know."

Perhaps as a result, it's been far more fun to own Potash Corp. than BHP. Over the past 10 years, BHP shares have returned 18.5 per cent a year. That's stellar, but far behind the 25 per cent per year return from Potash Corp. (and that's before factoring in the pop from the BHP bid).

Those who would prefer Canadian companies be buyers than sellers point to other benefits, like the legions of lawyers and bankers needed to support large head offices, and to the perceived problems of losing those head offices.

The best retort to that is probably one word: Calgary. Canada's energy capital is full of scores of entrepreneurs who have made fortunes starting companies, growing them and selling them before starting off all over again. This circle of life sustains a full ecosystem of lawyers and bankers and other tertiary businesses, plus lots of small head offices, some of which grow into very large ones.

So rather than bemoaning the loss of Potash Corp. or demanding the government step in to save it, maybe the best course of action is to take the cash and rebuild. If only the Leafs would.

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