Once upon a time, the standard business process was to build a private business and when it reached a certain size, take it public on the stock market. If you performed well, your company thrived. Now hungry predator funds are sizing up B.C. businesses.
Once upon a time, when gigantic lizards roamed the earth, evolution divided all creatures into vegetarians and meat eaters, prey and predator. The vegetarians ate plants and thrived; meat eaters ate the vegetarians and also thrived. Also once upon a time, but much more recently, the standard business process was to build a private business and when it reached a certain size, take it public on the stock market. If you performed well, your company thrived. Not any more. In the evolved financial world, being a public company can easily make you prey for predator funds – or “activist” private investment funds. Usually some form of hedge fund, these financial meat eaters now control over US$1 trillion in investment capital and are said to account for 40 per cent of the volume on the New York Stock Exchange. This evolution has made life far more difficult for any company trying to grow its business in the traditional way. Predator funds swoop in, buy up a chunk of a company’s stock and start agitating for it to “maximize shareholder value,” usually by selling off assets, the entire company, or gutting its treasury to pay out special dividends. More often than not, to thrive, they suck a company dry and end up killing it. PROBLEM In Canada today, almost every public company is at risk of becoming a predator’s lunch. Going public may provide food that helps fuel growth and expansion, but because of these predator funds, it can also mean the beginning of the end. You can’t govern a company or form long-term strategies when a large shareholder is always prodding you to get that stock price up, and do it now. Predator funds don’t care about a business; they care about its stock. Specifically, they care about the price of that stock and what it would be if the company’s assets were liquidated – sold to a bigger company. They slice and dice a company’s financials and inevitably come to the conclusion that if the company was sold, it could command a higher share price. So, if they can force a sale, they’ll turn a handsome profit on their investment – they will have hunted down some game, made a meal of it, and can digest quietly until hunger strikes again. While this is a worldwide phenomenon, it’s particularly acute in Canada, where weak laws limit a company’s power to resist predator funds. And we’re not sheltered from the problem in B.C. Locally, you only have to talk to AnorMed, QLT, Intrawest, Lions Gate Entertainment Corp. or Creo, now owned by Kodak. All have been or are under attack from predator funds. Drugmaker AnorMed went through a brutal proxy battle for control after New-York based Baker Brothers Advisors acquired enough shares to lead a move to replace its board. BBA won and the result was that in May, president and CEO Mike Abrams was shown the door and the company was shown a fourth-quarter net loss of $12.7 million. So now AnorMed is considering – you guessed it – selling off its main asset, the stem-cell transplant drug Mozobil. Meanwhile, the aggressive U.S. hedge fund Jana Partners LLP has been buying shares of venerable biotech QLT Inc. and making it known that it would like the price of those shares to climb by, say, a 100 per cent or so. It can do this, says Jana, by selling off its main asset, the macular degeneration drug Visudyne, or rolling it into an income trust which, from a strategy point of view, amounts to the same thing. Vancouver-based Lions Gate has recently discovered that Carl Icahn, the legendary American corporate raider, has taken a four-per-cent stake in its company. His sometimes-ally Mark Rachesky has taken about 9.6 per cent. Icahn, who’s well known for strong-arming companies into selling off assets, says he has a friendly interest in Lions Gate, but rumours have been circulating that the company is up for sale and would provide a nice meal. Intrawest is under attack from the appropriately named Pirate Capital LLC, an American fund that is closing in on 20-per- cent ownership and wants the long-time real estate and resort development company to sell out. So far, Intrawest is resisting while it considers new growth strategies. Burnaby printing-technology company Creo disappeared last fall after a bruising proxy fight led by a Toronto investment fund that wanted to take over the board and put a well-known printing industry cost-cutter on the company throne. Creo found an alternative in Kodak, which at least cared about the technology and bought the company for close to $1 billion last summer. The common denominator here is that all the companies were publicly listed and their stock prices were either faltering or languishing. Like a lion looks for the sick one in a herd of antelope on the African veldt, the predator fund looks for a company that’s in trouble. Also, all the companies were Canadian, and it’s a lot easier to do this kind of activist technique here because Canadian laws on the issue are anemic. The federal government tends to take a hands-off approach to hostile takeovers, and provincial governments can do very little. And in Canada, securities laws mandate that a “poison pill” defence – a shareholders rights plan allowing a company’s board of directors to say no to a hostile takeover – last a few weeks before it must be dissolved. As a result, foreign investment companies have been having a field day in Canada in recent years. Outside B.C., iconic companies like Fairmont Hotels, Algoma Steel, Geac Computer Corp. and many more have been taken out recently. “The hedge funds are more confident that they can have an impact here and ultimately affect a sale than in any other jurisdiction in the world,” James Kofman, vice-chairman of UBS Securities Canada, told the Financial Post recently. SOLUTION The rise of predator funds has severe implications for the way B.C. and other Canadian companies are managed and governed. When you’re always afraid of risks, you tend to manage differently; you avoid taking certain chances, for example, or you shelve long-term strategies in favour of short-term performance to keep your stock price up and thus avoid the eyes of the predators. But, frankly, there aren’t many options: your solutions are similar to what occurs in the natural world. You can pack together into a herd – planned mediocrity – and hope to remain unnoticed; you can get so big there’s no way a predator can take you down – Microsoft’s stock is in trouble too, but no one’s taking a run at that elephant; or you can stay small or private, in essence cutting off the source of sustenance for a predator. In B.C. we’re already on our way to a solution and only have to coordinate various ways of thinking to use it against the threat of predators. In a sense, this is a version of guerrilla action – where a small coordinated force of purposeful soldiers can hold their own against very large armies. We’re a province of small companies anyway, with lots of small to mid-size firms growing steadily, often under private ownership. So why not encourage that even more? After all, those most concerned about growing Canadian companies into global powerhouses are the investment bankers in Toronto who want to run in the same circles as a world-beating behemoth. What’s wrong with having 50 well-managed innovative $100-million companies supplying the world instead of one $5-billion lumbering giant? Does that diminish us somehow? Hardly. In economic terms, it’s the same, and if policy makers and business leaders can recognize this, and create mechanisms to encourage it, we can build a strong provincial economy without the constant hand-wringing over some predator chowing down on our top companies. Never forget the mammal, which began as a small, agile and intelligent animal surrounded by giant predatory lizards. It took over the earth. The dinosaurs died. LESSONS
- Think collective impact, not size. It’s a new world with new rules, so lose the allegiance to the growth imperative, cut back on the egotism that says you have to be big to be worthwhile, and champion the formation and growth of the small.
- Think new financing systems. Change the private investment system to discourage the big-bang “liquidity event” – going public – and encourage steady returns by helping companies stay private or closely held.
- Think agile, not monstrous. The bigger you are, the slower you are. If we can create an agile, responsive and strong provincial economy we won’t have to worry about
- some corporate predator eating up one of our own.