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Tuesday, November 30, 2010

Chinese Selloff Intensifies As Traders Expect Imminent Rate Hike Following China State Council Comments

Next Stop On Shanghai Composite: 2719; Subsequent Supports At 2574 And 2320

Guest Post: Some Observations on Austerity

The Footnote On The Irish Bailout Plan

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Foreign Takeovers: Free Enterprise Versus the National Interest

Posted: Nov 30 2010 By: David Duval Post Edited: November 30, 2010 at 12:34 am
Filed under: David Duval
Dear CIGAs,
BHP Billiton’s attempted takeover of Potash Corporation of Saskatchewan presents an interesting dilemma for Canada’s free enterprise government and its provincial counterpart in Saskatchewan.
While politically supporting the concept of open markets, the Harper administration caved in to a backlash from the Premiers of the Western provinces – and from other Canadians for that matter – who felt the country’s natural resources are being plundered by large multi-nationals.
Any objective observer could probably find some justification for concluding that the takeover activity relating to several large Canadian corporations in recent years has also been happening on a not-so-level playing field – a sentiment that is hardly new in Canada or anywhere else for that matter.
Other countries with bountiful natural resources have found themselves in a similar ideological dilemma – most notably Australia which has vast quantities of strategic mineral resources. The United States has also been somewhat guarded with respect to foreign investment in its economy, especially from the Middle East.
Whatever ideological camp you find yourself in you have to admire BHP for its moxie. Offering a paltry 16% premium to the market price for a world class asset like PotashCorp takes a lot of it. No doubt BHP recognized it was the only company in the world with the capacity to fund a $40 billion acquisition in the minerals sector – a virtually unassailable position for any company. That realization alone probably figured in the premium it offered above market.
Criticism concerning the Canadian government’s rejection of the takeover bid has been relatively mute and understandably so. For one thing, the takeover attempt is hardly an anomaly in the North American market which is becoming increasingly sensitive to merger and acquisitions activity in critical market segments.
Several years ago, the American government prevented Dubai Ports from purchasing port management businesses in six major U.S. seaports under the premise that it represented a national security risk. The government’s reasoning seemed somewhat contradictory at the time given the fact port security would have remained a Federal government responsibility. In addition, Dubai is a key middle-east ally in the War on Terror and the U.S. has military access to its land, ports and airspace for operations in Iraq and Afghanistan.
An attempt the previous year by Chinese oil company, CNOOC to acquire Unocal Corp. was vetoed by the U.S. government for national security reasons. CNOOC subsequently withdrew its $18.4 billion bid for Unocal, ending a politically charged takeover battle that brought to the forefront U.S. concern over China’s growing economic clout. Chevron Corp., the second-largest U.S. oil company, subsequently completed the acquisition of Unocal even though its cash-and-stock offer was about $700 million less.
Canada’s Sudbury nickel camp and the rich Voisey’s Bay nickel deposit in Labrador fell under foreign control in 2005 and 2006 when Brazilian iron ore producer, Vale, acquired Inco Limited and Xstrata acquired Falconbridge, the number two nickel producer in the Sudbury camp. Critics of the Inco takeover noted, perhaps justifiably, that the Brazilian government would never allow the takeover of Vale by a foreign entity, meaning the international playing field for takeovers was hardly level.
In Africa, the situation is notably different in several respects, especially in emerging economies. Few of these countries have home grown corporations that are attractive takeover targets. However, many African countries are seeking a greater share of the wealth produced by foreign companies which is fair game as long as their fiscal regimes remain competitive with foreign jurisdictions. Nonetheless, some radical elements within African nations (most notably South Africa) want their governments to expropriate assets from companies and run them for the benefit of the state. Anyone who’s taken the time to read George Orwell’s “Animal Farm” knows what type of society (and economy) that would create.
It’s difficult to envision the government’s decision on PotashCorp having a major impact on foreign investment in the Canadian minerals industry. In fact, the government did not intervene when Sinopec – China’s largest refiner –offered $US4.65 billion to acquire the 9% stake owned by ConocoPhillips in the Syncrude oil sands. Under the Syncrude partnership agreement, all the owners have the right to market their share of production for their own account. However, the Globe & Mail reported recently that the Federal government will use its regulatory power to stop Sinopec from exporting raw oil sands bitumen and refining it abroad to take advantage of looser environmental rules.
Clearly, every county has a vested interest in protecting industries that are vital to its national economy- especially in the case where control passes to a foreign power. On the other hand, smaller bites might be more palatable to most governments.
PotashCorp was unique because it would have seen control of the world’s largest fertilizer enterprise fall into the hands of a huge multi-national conglomerate. This probably guarantees that you won’t see takeover interest in Canadian companies with dominant positions in critical metal markets anytime soon – world class uranium producer Cameco Corporation being one of the better examples.

Indirect Versus Direct Stimulus