Editor: Please tell us about your practice?
Barnes : When I last spoke with you, I was the chairman of another large Canadian law firm and was responsible for its New York office. I've since moved over to Heenan Blaikie to head up its National Securities and Corporate Finance Group, which has allowed me to return to full-time practice. That is the part of the legal business that I enjoy. I've been in this business for more than 30 years, mostly working in mergers and acquisitions, corporate governance, corporate finance and project finance.
Editor: Can you compare M&A transactions in Canada with the U.S.?
Barnes: Broadly speaking, our securities laws look familiar to Americans - more so than, say, the UK system. But they are not identical. The comforting similarity can sometimes be a trap.
Bidders in the U.S. are used to seeing antitrust reviews and typically find Canada's reviews similar in form and substance. Many reviews are conducted with a view to the effects of a merger on North American or even worldwide markets.
Our foreign investment review system is unfamiliar to U.S. first-time buyers, but it can be dealt with through careful planning. We saw a period in the late 1970s and early 80s when Investment Canada, then the Foreign Investment Review Agency, felt its job was to repel investment or to make it subject to unreasonable requirements rather than to shape it. Transactions were turned down and people were pushed away. Now we have a friendlier investment climate, although there are tremors about some foreign acquisitions.
Editor: So what are the key differences?
Barnes : There are three main issues that seem to surprise U.S. firms proposing M&A transactions across our border. The first is the Investment Canada Act , which is a set of rules that allow for our federal government to review significant foreign investments in Canada and require the acquiror to make undertakings relating to the post-acquisition business. Investment Canada can affect operations, but not in a material way. I am not an expert in the Investment Canada process, but I can tell you that planning makes it manageable. First, appreciate the significant political component to the approval, requiring input from several levels of government and other potential interest groups. Next, the bidder should consider what undertakings might be requested and where it can offer a package of reasonable undertakings. Finally, a bidder has to budget the time required for consideration and approval, and the senior executive time that will be spent on putting the bidder's best foot forward.
Some Canadian industries, such as telecommunications and broadcasting, cannot fall into foreign control. The recent acquisition of BCE by private equity players demonstrated the need for a Canadian element in any such acquisition.
The second issue is the reality of preparing and filing some materials in both English and French. It's not a problem so much as a timing consideration. Transaction documents typically need to be filed in all 10 provinces and 3 territories, and (with some exceptions) require translation for filing in Quebec. In the context of the overall transaction, translation is not a big cost but it can be a delay. If you have 300 pages of disclosure, you'd better anticipate the translation schedule early in the deal.
The third issue - which comes on the post-deal side - is the difference in Canadian employment laws. As my colleagues Jeff Goodman and Robert Bonhomme discussed with you last month, the U.S. has employment "at will," so companies are able to clean house at a comparatively low cost. Canada is different and the costs are proportionately higher. Quite often companies do the purchase and don't worry about the integration. But it's that stage where many M&A transactions that fail to prove out lose their way in terms of maintaining their economics.
All three of these issues require some expense and planning. None are deal killers.
Editor: Are there different approaches to creating deals in Canada?
Barnes : Yes, there are some structural differences. Recently, European and American advisors have been touting structures for acquisitions using plans of arrangements. Well, we've been doing plans of arrangements for acquisitions in Canada for 25 years. But they weren't used as frequently elsewhere. Also, Canadian securities regulators have a more complex set of rules for transactions involving insiders. The foreign ownership rules I mentioned earlier in some industries also affect deals.
Relative to U.S. markets, there is a greater incidence of controlled public corporations, which creates a different dynamic than a widely held entity. There is also more frequent use of multiple voting shares, which allow entrepreneurs to retain control while selling off equity.
Editor: Have you seen any themes in recent M&A transactions in Canada?
Barnes : In recent months, we've seen significant M&A activity in the mining and oil and gas sectors by foreign and domestic investors. There was the competition to buy Inco and Falconbridge where we represented Phelps Dodge. Teck Cominco completed a friendly takeover of Aur Resources to diversify into copper production. We represented Aur in this C$4.1 billion deal.
Another interesting mining deal was Areva's acquisition of UraMin in a friendly takeover bid. We were UraMin's principal counsel in the U.S.$1.65 billion deal. The acquisition broadens Areva's global uranium interests through UraMin's identified deposits in Africa. This deal wasn't reviewable by Investment Canada because it didn't involve many assets in Canada - yet Canadian law firms were principally responsible for executing the deal.
The Areva deal also speaks to the growing trend of foreign state-owned or directed entities buying Canadian natural resources. The recent TAQA deal also generated attention on this topic. We represented TAQA, an Abu Dhabi investment entity, in its recent acquisition of the PrimeWest Energy Trust in Alberta for C$5.0 billion.
There have been a number of other consolidation acquisitions by Canadian and foreign resource companies in almost every type of industrial and precious metal production. Some bidders are looking for a more diversified portfolio of products and others are looking for a greater market share in a particular product. The boom is also fuelled by corporate treasuries that have been filled by high metals prices.
We notice this activity especially in Canada because of the central role of our markets in assisting resource development companies to develop projects and to raise capital for acquisitions. This means that our markets are one of, if not the , dominant market for mining transactions and oil and gas transactions.
Editor: What is driving the undercurrent of anxiety about foreign investment?
Barnes : Concerns arose when China's MinMetals looked at Noranda and Falconbridge - an iconic Canadian mining operator. Ultimately Xstrata bought that interest. Since that time, the successful acquisition of long-standing Canadian businesses like Inco, Falconbridge, Hudson's Bay Company (our oldest company), BCE and others have raised a concern of "hollowing out." The concern is that Canada will become a country of branch plants with fewer high-paying and influential head office jobs.
When TAQA announced its recent transaction in Alberta, the concern refocused on state-owned or financed companies. To a limited extent, this has focused on questions of national security.
There is a panel reviewing our approach to foreign direct investment. I suspect their results will focus on national security or reciprocity in restrictions on Canadian investments. There is no doubt that they will hear representations calling for higher obstacles for all foreign acquisitions or at least for acquisitions by state-owned or controlled enterprises. However, I do not believe that these representations will succeed.
Editor: Is anyone else doing a good job of managing foreign investment?
Barnes : I'm not sure. Every country wants its entities to be free to deploy capital. Yet everyone also seems inclined to ad hoc protectionism.
Editor: What is your view on the debate over foreign state-owned investors?
Barnes : There is a feeling that state-owned enterprises will do things solely for the good of another country - and that it's bad for Canada. It is not inevitable that non -state owned foreign entities have better governance. Is it somehow better for a company to do bad things for the sake of higher profits? A state-owned company like CVRD could ship all of Inco's nickel mined in Sudbury, Ontario, to Brazil for processing, but that's not a logical business decision. And frankly there are other ways to deal with these issues.
I don't think anyone can tell me whether the majority of Inco shares were owned by non-resident investors three years ago. They could have been - we don't control that except for industries like banks and telecommunications companies. We don't limit the amount of portfolio investment that goes into these companies. We limit the amount of concentrated investment and control. In any case, a lot of Canada's industries - especially mining - have been pretty acquisitive around the world. So I think the fear of foreign ownership is probably a little misplaced.
Editor: Looking forward, do you anticipate a tighter M&A market?
Barnes : We're in it now. Look at the large cash-financed financial deals - the private equity deals - that depend on an excess of liquidity. That market is now at least ill and in some respects may be near-dead. The private equity firms have to refocus on the deals they have out there already and on managing the firms they own to make them more profitable. So they won't be chasing new deals for a while.
So much money was made on starting a deal, chopping up the pieces of the financing and pushing them on. Part of the demand was for deals that produced enough paper. That may be gone for now.
Earlier this year, we (and most other Canadian M&A law firms) worked on the big BCE deal. (BCE is Canada's largest communications company.) The sheer size of the deal - $51.7 billion - made it interesting. But with the market shifts, the BCE deal may stand for a while as the high-water mark in private equity-backed buyouts in Canada.
Editor: Will there be any positive exceptions?
Barnes : In strategic areas - like resources - there's no reason for deals to stop. Companies which are producing resources - essentially any metals, minerals or oil and gas - are generating huge amounts of cash. Public companies can do two things with cash - buy things or give it back to the shareholders. Managers are not inclined to give it back to shareholders. And if they think it can be properly invested, shareholders frankly don't want it back because most of them are ongoing investors. So strategic acquisitions can continue as long as these companies have money to buy more assets.
Editor: Any final thoughts?
Barnes : It is an exciting time for service providers in an international M&A market. For Canadian law firms and other service providers, our deep rooted experience and expertise in areas like mining, oil and gas, forestry and other industries, along with our experience and significant price advantage over American and British advisors, will make it an exciting time.
Published December 1, 2007.
