First published in The Globe and Mail
By: Anita Anand
Departure of a corporate crown jewel would have dire consequences.
The market has responded well to BCE Inc.'s announcement that it plans to distribute its 40-per-cent stake in Nortel Networks Corp. to its shareholders.
On the date of the announcement, BCE shares closed at $142.45, up $6.55 on the Toronto Stock Exchange. BCE stock has continued to rise since then, closing yesterday at $178, up $1.50. The question in the minds of market watchers now is whether Nortel will be the target of a hostile takeover bid. Now that BCE no longer holds a significant interest in Nortel, the possibility exists for a hostile bidder to scoop up Nortel. But it is in the best interests of the economy to ensure that the crown jewel of Canadian business remains in Canada.
Of course, Nortel wouldn't be approached by just any hostile bidder. The company had 1999 revenue of $21.3-billion (U.S.). Its market capitalization is upwards of $250-billion (Canadian), the largest company by market cap in Canada ever. The potential suitor would need to be of some similar magnitude, such as Siemens AG, Cisco Systems Inc., perhaps even Ericsson Inc.
The possibility that Nortel might leave Canada has cropped up before. In mid-1999, Nortel's CEO John Roth told shareholders, "Taxation is testing the allegiance of some of Canada's best and brightest high-tech talent." As Mr. Roth explained, Nortel was losing between 300 and 500 engineers a year to U.S. competitors.
"We have to follow our people," he said. For weeks after this story hit the press, speculation was high as to whether Nortel would remain in Canada in the long term.
The possibility that Nortel might be taken over should strike fear into those who agree that its presence in Canada makes a difference. It spent $3-billion (U.S.) on R&D in 1999, a significant percentage of which benefited its Canada-based R&D centres. It accounts for 25 per cent of all industrial R&D in Canada. It hires a quarter of Canada's graduate engineers each year. Nortel's success has aided in the development of the Silicon Valley of the North, and has spawned a number of high-tech companies in this country, including Entrust Technologies Inc. which Nortel spun off in 1996 and which now has a market capitalization of approximately $4.3-billion.
With merger and acquisition activity in the high-tech sector at an all-time high (witness the takeover of Newbridge Networks Corp. by Alcatel SA), we must ask ourselves whether we are willing to simply watch and wait for the day when a hostile bidder launches a bid for Nortel. The crucial question is what, if anything, can be done to deter it?
Nortel may take steps to adopt a shareholder rights plan, or poison pill, that could be used to fend off or at least deter a hostile bidder. The pill would have to be ratified by shareholders following board approval. But implementation of a poison pill does not ensure that a hostile bidder will in fact be kept at bay. Rather, the pill simply buys directors time to search for another bidder or white knight. Once a hostile bid is made, securities regulators may require the removal of the pill, if its does not lead the company making the offer to raise its bid or to attract new suitors. The bottom line is that a poison pill would at best have limited usefulness in staving off a hostile bidder.
Quite apart from any internal steps that Nortel may take, should the federal government do anything to prevent Nortel from being taken over? In the past, the government has exhibited a willingness to protect certain Canadian industries. For instance, in 1987, in order to ensure that Air Canada would not be subject to control by any particular group, the federal government passed the Air Canada Public Participation Act. The Act has a 10-per-cent limit which in effect prevents any one person or associates of that person from holding more than 10 per cent of the voting shares of the corporation.
Would Nortel be open to becoming a so-called special-act corporation? Nortel would likely be opposed to legislation that would restrict foreign ownership. As we can see from Nortel's merger last year with Bay Networks, voluntary mergers may be beneficial; without question, Nortel would want to retain an ability to enter into such transactions. Both its access to capital and the ability to complete large M&A transactions must not be impaired by any federal legislation.
Another option would be to rely on the Investment Canada Act (ICA). Under the Act, acquisitions of Canadian businesses by so-called "WTO investors" -- that is, individuals other than Canadians who are citizens of a World Trade Organization member country -- are reviewable only if they are valued at $160-million (Canadian) or more. Any acquisition of Nortel would exceed this amount and would therefore be subject to review.
Upon review, the investor must demonstrate that the investment is likely to be of net benefit to Canada. The ICA stipulates that a variety of factors are important in assessing net benefit, including: the effect on economic activity in the country (including employment); the degree and significance of participation by Canadians in the Canadian business; and the effect of the investment on productivity, industrial efficiency, technological development and product innovation in Canada.
Relying on the ICA to prevent the takeover of a Canadian company would mark a significant shift in policy given the practice of the federal government during the Mulroney and Chrétien eras. Nevertheless, a takeover of Nortel by a foreign investor would never be of net benefit to Canada. Of course, much would depend on the interpretation of the term "net benefit," as well as on the offering company's intentions to maintain Nortel's business activities in Canada. However, if Nortel's business and operations were to be moved out of Canada, private sector contributions to R&D in this country would decrease significantly, a number of engineers and other professionals would lose their jobs, would move with Nortel or would leave the country to work in similar positions south of the border. It is plausible that other high-tech companies would follow Nortel's lead and leave the country also. The economy of this country would be significantly disadvantaged.
We must be conscious of the overwhelming impact that one company can have on the nation's economy and future prosperity. Nortel is a Canadian crown jewel. One way or another, the government should do what it can to make sure that this jewel stays put.