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Hollowing Out Corporate Canada
High corporate profits help drive the surge in foreign takeovers
OTTAWA - Booming corporate profitability and low U.S. and Canadian interest rates are the key reasons for the high-profile mergers and acquisitions (M&As) of Canadian companies over the past two years, according to a new Conference Board of Canada study.
"Recent mega-deals are exceptions to the long-term investment trend in
M&A activity in Canada," said Louis Thériault, Director, International Trade
and Investment Centre. "Based on the aggregate data over the past 15 years, it
is difficult to conclude that Canada is being "hollowed out."
"The current debate about foreign acquisitions needs to be shifted to
developing policies that could increase foreign direct investment in Canada,
as well as promoting globally competitive Canadian companies."
Over the past 15 years, Canadian companies have been more active in
acquiring foreign companies than have foreigners purchasing Canadian entities.
Between 1994 and 2007, the total number of deals for both inward and outward
M&As was virtually identical for transactions greater than $1 billion. For
transactions of less than $1 billion, the number of deals since 1994 in which
Canadians purchased foreign assets was higher than the number of deals
involving foreign acquisitions of Canadian companies, and the total value of
deals was shared almost equally.
For each percentage-point increase in U.S. profits, foreigners'
acquisitions in Canada increased by 1.6 per cent. Similarly, for each
percentage-point increase in Canadian profits, acquisitions abroad by
Canadians increased by 1 per cent. With U.S. profitability expected to weaken,
M&A activity between Canada and the United States could slow down in the next
two years. Also for each percentage-point decrease in long-term Canadian
interest rates, outward foreign direct investment (FDI) by Canadian firms
increased by 1.3 per cent. For each percentage-point decrease in long-term
U.S. interest rates, FDI in Canada grew by 0.8 per cent.
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