The tricky balance of foreign ownership
Should the federal government be tightening the rules that dictate foreign investment limits in Canadian companies? As rumours continue to swirl around a possible acquisition of Waterloo's Research In Motion, continued delays in long-promised updates to the Investment Canada Act are only adding confusion to the state of the regulatory environment and its overall impact on investment north of the border.
The beleaguered BlackBerry maker has made headlines for a series of market misses that have sliced more than three-quarters of its share value over the past year and made it a frequent target of takeover speculation. Of all the companies — including Microsoft, Amazon and Samsung — that have reportedly expressed interest in a partial or full RIM takeover, all are American. Speculation around a foreign takeover of the veritable crown jewel of the Canadian tech space has amped up calls for the federal government to finalize its stance on foreign ownership of Canadian companies.
The tech space has faced such ambiguity before. When Globalive Communications, a Canadian company largely owned by Orascom Telecom, a global holding company, attempted to enter Canada's wireless market, the CRTC blocked its bid, saying at the time that the company failed to meet Canadian ownership minimums.
Despite the fact that most shareholders and members of Globalive's board of directors were Canadian, the regulator said that high dependence on debt financing and technology from Orascom, its Egyptian-based parent company, cast doubt over whether the company would truly be Canadian-controlled.
The November 2009 decision was overturned a month later by then-Industry Minister Tony Clement and Globalive soon launched service under the WIND Mobile brand. The flip-flop ignited the foreign investment debate, with critics and supporters debating the merits of greater access to capital against the risks of being perceived globally as a protectionist nation.
After the Globalive/WIND decision was reversed, Prime Minister Stephen Harper cautioned against assuming it reflected the government's long-term policy. He characterized it as a one-time call that was specifically aimed at moving things forward in the telecom industry following a protracted spectrum auction. But federal government's inconsistency on the matter — both before and after the December 2009 decision — has hardly calmed the waters.
The Globalive/WIND outcome contradicted the government's earlier decision to block a bid by Alliant Techsystems for Canadian aerospace and robotics pioneer MacDonald, Dettwiler and Associates seemed to signal a more restrictive position. More recently, that perception was reinforced by Ottawa's call to stop the hostile takeover of the iconic PotashCorp by BHP Billiton.
Despite repeated pledges by the federal Conservatives to update the Investment Canada Act to more precisely define the rules for foreign ownership of Canadian companies, the law, originally enacted in 1985 by the Mulroney government, remains unchanged. An modernized ICA would clarify the landscape for potential suitors before they decide whether or not a deal is worth pursuing. It would also grease the skids for the companies themselves, as well as their investors and other stakeholders, by allowing them to more easily explore potential deals and partnerships. The economy of 2012 — accelerated, Internet-driven, and globalized — is a far cry from the landscape in place when the ICA was first written almost 27 years ago. Today's companies deserve legislation that's kept pace with a changing world.
A less opaque regulatory environment would prevent the kind of long-term dithering that stands in the way of the market's attempts to preserve and maximize shareholder value.
While RIM's share value languishes amid continuing attempts to regain traction, activist investors clamouring for structural change are stymied by rules that, in their view take key M&A and partnership options off the table. Harper has stated repeatedly how important the tech sector — and RIM, in particular — is to the Canadian economy. But as RIM's competitors continue to move forward, the smartphone vendor remains stuck in neutral, hands tied by rules that keep potential partners from even stepping forward.
While Ottawa twiddles its thumbs over legislation that could streamline the process of investment — foreign as well as homegrown — in a wide range of Canadian companies, opportunities are being lost as confidence in the markets that surround them wanes. The process of protecting Canadian business interests from perceived foreign encroachment is no longer best served by simply limiting how much money can come from abroad. What Canadian companies of all stripes really need is for the government to finally fix outdated legislation that confuses stakeholders, reduces business agility and competitiveness and ultimately drives interest elsewhere.
Carmi Levy is a London, Ont.-based independent technology analyst and journalist. THe opinions expressed are his own. firstname.lastname@example.org