The Harper government claims that a free-trade deal with the European Union will result in a “$12-billion annual boost to Canada’s economy.”Paul Darrow/The Globe and Mail
The part of international trade that gets all the attention is goods and services. Canada has negotiated free trade deals with South Korea, the European Union and the Trans-Pacific Partnership, and now there is talk of a deal with China. In every case, the fans of free trade tout the benefits of opening foreign markets to things Canadians make. But as desirable as that is, it may not be the most valuable kind of trade. And the most valuable kind of trade does not necessarily involve the countries with which we have been signing trade deals.
A good case can be made that the international market for corporate assets, otherwise known as mergers and acquisitions (M&A), is the most consequential of foreign trade. Such trade tends to open up important new channels for the sales of goods and services, shakes up management, brings new technologies and new management techniques to companies that might become stale and insular, and gives access to fresh capital to companies judged to have a bright future. Some analysts attribute Japan's poor economic performance in part to its resistance to such transactions compared to, say, Europe, and especially the United States.
Such transactions have no guarantee of success, and many high-profile ones have failed, such as AOL and Time-Warner or eBay and Skype. On the other hand, many mergers and acquisitions have produced good value, especially among the middle-sized companies that have a greater chance of successful integration than mating behemoths. But even the big ones have chalked up impressive successes, such as the ExxonMobil and GlaxoSmithKline matchups.
Rising M&A activity is generally taken as a sign of growing business confidence. If that is the case, the M&A record of the past year or so may help dispel some of the gloom caused by falling stock markets and poorly performing national economies. According to financial journalist Richard Walker, "last year was a record year for global M&A, with deal values rising to $4.6 trillion – just above the previous high of $4.3 trillion for the previous peak year of 2007. And many large companies say there is more to come."
Unlike goods and services, the really big trade flows in M&A do not involve China or the Pacific Rim countries. The most successful two-way trade in M&A occurs between two of the oldest and richest economies in the world: the United States and the United Kingdom. In fact, international M&A activity is starting to look like an anglosphere specialty.
While the data for global M&A are always incomplete (because many such transactions are between private entities that need not disclose the price paid), it seems pretty clear that this trans-Atlantic relationship is leading the world, and the pace is accelerating, especially in high tech. Again, according to Walker, these two economies have had nearly 500 such M&A transactions in the past year, with the Americans buying about twice as many companies as the British, but with each British-led transaction worth twice as much on average as the U.S.-led ones. That suggests a fairly balanced relationship with both countries realizing significant benefits.
Both countries share certain characteristics that make such transactions less anxiety-making than they might otherwise be. Similar business cultures, adherence to the rule of law and respect of contract along with large pools of well-managed capital and lots of well-run companies, strong management and relative transparency compared to much of the rest of the world all create an atmosphere of trust and mutual confidence.
My guess is that the corporate sectors of the United States and Britain will draw even closer in coming years. Whenever the United States and Britain have found it in their mutual interests to collaborate on a broad scale, the results have been of global significance. This balanced transatlantic merging of the corporate sector is likely to be no exception.
There is a lesson here for Canada. In thinking about trade, it is easy to be dazzled by the brash and relatively fast-growing new kids on the block, especially China. But if we want to build global competence in business, we might want to think less about the mere transactional business of trade in merchandise and services and think more about the long-term capacity building that comes from buying and selling high-quality corporate assets in countries that we know and understand well. About two-fifths of the M&A activity in Canada is international, and we tend to buy twice as much internationally as we sell, but we have a way to go before we achieve the kind of strategic focus and scale that is cementing US-UK leadership of the international business world for the foreseeable future.
Brian Lee Crowley (twitter.com/brianleecrowley) is the managing director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.