The recent spate of foreign takeovers of familiar Canadian companies has turned up the heat on a familiar debate in this country — whether such takeovers are desirable, and if not, what should be done?

The federal Liberals have called for a three-month moratorium on approvals of all foreign takeovers of Canadian firms. The federal New Democrats have called for an emergency debate on the issue. The governing Conservatives, pointing out that there are conflicting views on this subject, promise to review Canada's competition policies.

And it's not just politicians who've been weighing in. Union leaders and public policy groups of all stripes have also made their views known. So, too, have some of the biggest names in Canada's business community.

Gord Nixon, the CEO of Royal Bank, raised his takeover concerns during his recent address to shareholders at the bank's annual meeting. "We have not only seen the disappearance of major Canadian household names, but the loss of Canadian presence in industries where we have long had traditional strengths."

Dominic D'Alessandro, the CEO of Manulife Financial, worried in his address to shareholders that "we may all wake up one day and find that as a nation, we have lost control of our affairs."

Not so fast, says Don Drummond, the chief economist at TD Bank. He wrote in a recent op-ed piece that "the facts don't warrant the hysteria that the Canadian economy is being sold out."

As part of his argument, Drummond cited a recent study done by the Institute for Competitiveness & Productivity, which called the hollowing out argument a "myth." It acknowledges that some of Canada's corporate stars have indeed been bought out, but argues that Canada has created many more global leaders. To give a sense of the debate, here are excerpts from the Institute's report, as well as from the address by Manulife's CEO.

The following is an excerpt from an address to shareholders given May 3, 2007, by Dominic D'Alessandro, president and chief executive officer of Manulife Financial Corp.

'I believe that ownership matters a lot'

I'd like to touch upon … the extraordinarily large numbers of Canadian companies that are being acquired by foreign interests.

In 2006, more than 100 of our public companies were taken over, and the list includes some of the oldest and most well-established companies across a broad spectrum of industries, everything from hotels to retailing, to metals and mining. And the trend continues.

I sometimes worry that we may all wake up one day and find that as a nation, we have lost control of our affairs.

I think we ought to have a vigorous debate about the extent to which it matters whether or not ownership of our economy resides in Canada or elsewhere. As you probably all know, I believe that ownership matters a lot. It matters not only for economic reasons but, more importantly in my opinion, for our own sense of self esteem and pride in our country.

It may surprise some of you to hear me express misgivings about foreign ownership given that our own company has successfully invested — and been welcomed as an investor — in so many countries around the world. My concern is not rooted in any chauvinism or in any antipathy towards foreign investment. Far from it. I happen to believe that globalization is a very positive development and that trade and investment across borders is to be encouraged. Canada benefits mightily from being "open for business" and we mustn't do anything to change that.

Manulife president and CEO Dominic D'Alessandro listens to a question during the company's annual general meeting in Toronto on May 3, 2007. (Adrian Wyld/Canadian Press)

My concern stems from the fact that the world is awash with capital and that the consolidation trend in many industries will inevitably continue. We are a small country with a relatively small population. Canadian companies typically aren't of a size to be global players. All too often, decisions affecting the future of important firms and the communities that they sustain are made solely with a view to the short-term financial consequences. I find it particularly bothersome that so many of our natural resource companies — which I would argue represent unique and irreplaceable assets — are now owned elsewhere.

I know that I am touching upon a very delicate subject here and that for many people, particularly some economists and other "big picture" types, any suggestion that the "markets" should be other than totally unfettered is an anathema. I appreciate, too, that even under the best of circumstances, our ability to shape our destiny will always be in question. But, this doesn't mean that we shouldn't try, or at the very least, debate the matter.

So what are some actions that we might consider taking? Well, what if we were to consider the feasibility of adopting ownership restrictions for certain sensitive sectors of our economy that would be similar to those that now apply to our financial institutions? After all, I would argue that it is a demonstrable fact that public policy regarding the ownership of our banks and insurance companies has served the country well; there is no shortage of competition in the financial services sector and the services available to Canadians are as comprehensive and as affordable as exist anywhere in the world. It is also a virtual certainty that absent the ownership restrictions all of these institutions, that we are all so proud of, would be owned elsewhere. Might it not be the case then, that such an ownership policy could be usefully extended to other sectors of our economy?

Securities regulation is another area where some useful debate could be undertaken. Many feel that Canada now has the most bidder friendly environment in the world and that this may not always be in our country's best interests. Under our rules, shareholder rights plans — also know as takeover defences or "poison pills" — fall away after a very short 60 or 90 days, leaving the target company's board with far too little time in which to explore alternatives.

On announcement of a bid for control of a Canadian public company, financially savvy buyers have the virtual certainty of knowing that a change in control transaction is highly likely to succeed, absent competition or anti-trust issues. These investors quickly acquire significant amounts of the target company's stock. The result is that for all practical purposes, the board is left with no choice but to accede to a takeover.

Canada's 72 global leaders in 2006

• Abitibi Consolidated
• Agrium
• Alcan
• Ashton-Potter
• Atco Ltd.
• ATS
• Axcan Pharma
• Barrick Gold
• Bombardier
• CAE
• Cameco
• Canam Steel
• Canfor
• CCL Industries
• Celestica
• CHC Helicopter
• Chemtrade Logistics
• CGI
• Cinram
• CN Rail
• Connors Bros.
• Coolbrands
• Cott
• Couche-Tard
• Dalsa
• Finning International
• Fording
• Four Seasons
• Gildan
• Harlequin
• Husky Injection Molding
• Imax
• Jim Pattison Group
• Linamar
• Maax
• MacDonald Dettwiler
• Magellan Aerospace
• Magna
• Major Drilling
• Manulife Financial
• Marsulex
• McCain's
• MDS
• Methanex
• Mitel
• N. American Fur Auction
• Northern Telecom
• NOVA Chemicals
• Open Text
• Patheon
• Peerless Clothing
• Potash Corp.
• Quebecor World
• Research in Motion
• Ritchie Bros. Auctioneers
• Scotia Mocatta
• Shawcor Ltd.
• Sierra Wireless
• SNC-Lavalin
• Spectra Premium Industries
• SunGro Horticulture
• TD Waterhouse/Ameritrade
• Teck-Cominco
• Tembec
• Thomson Corp.
• Timminco
• TLC Vision
• Tree Island Industries
• Trimac
• Westcast Industries
• Weston Foods
• Zarlink

Source: Institute for Competitiveness & Prosperity

The following is an excerpt from the Institute for Competitiveness & Prosperity's March 2007 report, Agenda for Canada's Prosperity.

The hollowing out of corporate Canada is a myth

The term "hollowing out" has gained currency in the past few years. The proponents of the hollowing-out "crisis" have created a nearly universal belief that corporate Canada is being eviscerated by the foreign takeover of our corporations and the export of their head office functions with a loss of our autonomy. As a result, they claim, we are heading toward an economy of branch offices, which is one of the depressing future results of foreign control. For them, the only question now on the table is what our government should do to slow this ownership exodus.

To be sure, some significant Canadian firms have recently been taken over by foreign firms — Inco, Falconbridge, Zenon Environmental — to name a few. But do these visible changes really signal a hollowing out of our corporate infrastructure? Or are they just getting noticed more now, just like the attention paid to large-scale layoffs, even though these are being more than offset by the unannounced, unpublicized creation of new jobs?

In the Institute's Working Paper 5, Strengthening Structures, we identified companies that were Canada's global leaders in 2003. We focused on the globally competitive companies, because the most critical firms to Canada's long-term prosperity are those that compete successfully in the global arena. We defined a Canadian global leader as a Canadian-owned corporation ranked in the top five of its particular product or service category globally by sales revenue or assets.

We started with the National Post FP500 and the Report on Business Top 1,000 Companies and identified those public and private companies with sales greater than $100 million that claimed top-five status in a market niche. To do this, we reviewed companies' public filings and checked with company officials, where necessary.

In 2006, the Institute updated this list of global leaders. And to shed light on the hollowing out issue, we went back to 1985 to determine how many companies were global leaders back then, using the same criteria — except to lower the sales revenue hurdle to $50 million to account for inflation.

By our count, we had 33 global leaders in 1985. This list includes such firms as Hiram Walker, McCain's, Northern Telecom, Canada Malting, Alcan, Inco, Abitibi-Price, Bombardier and Laidlaw. The hollowing-out thesis holds that we currently have markedly and worrisomely fewer such firms today because of foreign takeovers, such as those of 1985 leaders Falconbridge, Moore Corp., Seagram's, and Hiram Walker.

The results of our research were surprising. We now have 72 — or more than twice as many global leaders as in 1985. In fact, we are growing globally competitive Canadian firms at a rate that wildly exceeds the rate of foreign acquisition. Net, we simply are not being hollowed out. We are thickening up.

Where are the new global leaders coming from? They come from many sectors: high-tech (e.g., Automation Tooling Systems, CAE, Celestica, Open Text, Research In Motion), retail (e.g., Couche-Tard), manufacturing (Gildan, Husky Injection Molding), financial services (Manulife Financial), information (Thomson), and health care (TLC Vision), to name but a few. And the average size of Canada's global leaders today is nearly twice as large as the 1985 leaders (86 per cent bigger) as defined by sales revenue in constant dollars.

What then are the policy implications? Clearly, we would love both to keep our current globally competitive cor?porations and to build new ones. No committed Canadian wants to see our globally competitive companies taken over. But we should not stand in the way of foreign investors who are prepared to buy Canadian companies that have not aggressively capitalized on opportunities in their own business. Nor should we be afraid to admit that sometimes our Canadian management teams are not up to the challenge of global competition and that new, foreign-based management is needed to face it. And we must recognize, if reluctantly, that anything we do that would have the effect of slowing the creation of new globally competitive corporations in order to staunch the takeover of existing corporations would do real harm to Canada's prosperity.

There is no single silver bullet to prevent the takeover of Canadian companies. Peter Munk, who put Barrick onto the current list of Canada's global leaders, is probably correct when he asserts that Canadian company executives have to show more fortitude in going global. But they need the help of the Canadian capital markets, which systematically underestimate the risk of Canadian firms staying domestic and overesti?mate the risk of Canadian firms going global. And they need the help of pro?vincial and federal governments, whose tax policies make capital investment by businesses among the most heavily taxed in the industrialized world.

For Canadians, it is distressing to see companies like ATI, Masonite, and Zenon bought by foreigners. But that simply raises the stakes for creating the appropriate balance of pressure and support for innovative, growing compa?nies — our global leaders of the future.

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