We seem content growing guppies to feed sharks

Nov 18, 2007 04:30 AM

David Crane

The announcement by IBM Corp. that it is purchasing Cognos Inc., Canada's largest software company, for $4.9 billion, brings to 13 the number of Canadian high-tech companies IBM has purchased since 1985. This compares with 12 Canadian high-tech companies acquired by Microsoft Corp. in the same period.

In a way, there's nothing unusual about this. Big corporations innovate and grow by buying smaller companies that have developed new ideas or technologies with growth potential and which the bigger companies, with their production and distributions systems, can grow much faster.

So the purchase of these 25 Canadian high-tech companies by IBM and Microsoft can be seen as typical business transactions.

But this does raise another issue, one that should be of concern. Once acquired, the technology entrepreneur cedes control over the business to the new owner and forgoes independent commercialization of his technology and growth of his enterprise as a potential multinational of his own. He becomes part of someone else's multinational strategy.

Could Cognos have become a much bigger international player? Quite possibly. In September, for example, it announced plans to acquire a U.S. company, Applix Inc., for $339 million (U.S.). Now, Cognos instead will be absorbed into IBM as part of its information management software division.

This is an important issue in the ongoing debate over foreign takeovers because it suggests that, for whatever reason, we are providing seed corn for international business – growing guppies to feed to the sharks – instead of building more strong international businesses of our own.

This past week, Statistics Canada published an interesting report on multinationals in Canada that gave a glowing picture of foreign multinationals in Canada. It found them to have higher productivity, to be more capital intensive, pay higher wages and hire more white-collar workers than Canadian-owned competitors. Foreign investors frequently target Canada's most innovative and best-performing firms for acquisition, such as Cognos, Dofasco, ATI Technologies and Westcoast Energy.

Moreover, it said, fears over "hollowing out" and loss of head offices were misplaced and that foreign multinationals tend to add head-office jobs. What the StatsCan numbers don't show, though, is what kind of head office jobs exist after the takeover. Are they mainly in sales, human resources or routine operations management or do they include high-level activities such as strategic direction, treasury management, product development and export market strategy? In some takeovers, Canadian CEOs just manage employee and government relations and day-to-day operations.

So the concern over "hollowing out" isn't over the number of head office jobs but the kinds of head office jobs. If top strategic and other decision-making functions disappear from Canada, then Canadians will be less connected to the global economy and Canadian policies to stimulate innovation or pursue new markets will be less effective.

There's also a concern with the transfer of strategic functions to the parent company after a takeover, that high-value service suppliers could be affected as well.

If key decision-making is transferred out of the head office, the Canadian subsidiary will still need accounting, legal and other services, but these may be supplied for more routine functions, leaving the highest value services to be supplied by the same firms serving the parent company. The impact of takeovers on head offices deserves much more study.

Yet there is an important policy implication in the StatsCan report: Canadian-owned multinationals perform just as well as foreign-controlled competitors, it says. They are more likely to be innovative and productive.

So Canadian policy should focus on ensuring that more of our promising high-tech companies have alternatives to being acquired by foreign multinationals and on how to grow more of them into Canadian-headquartered multinationals like CAE, Research in Motion and Magna International.

David Crane's column appears Sundays. Email him at crane@interlog.com