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This is very much the story of the Bank of Scotland. In 1998, a British banking group, Northern Rock, bought the Bank of Scotland. But within a year, Northern Rock had failed to fix its problems with overseas loans, as well as debt it had already incurred.
It had paid handsomely for those overseas loans in the first place, for loans to poor countries. By the time Northern Rock failed in 2011, it was saddled with $100 billion in foreign loans. That’s the biggest foreign debt load ever taken on by any British bank.
Looking at recent failures of foreign takeovers in Canada, we can see that many bear the same characteristics, including:
Illness in the home country
Deceptive financial reports
Fear of banks buying unwanted rivals
Possessing financial assets in weak foreign countries
Swift expropriation of local management
In sum, such events create enormous advantages for the foreign buyer, if they are committed to continuing the purchase after they’ve won the hostile takeover.
Dealing with the situation
Because of the advantages that a foreign takeover presents to the foreign acquirer, the Canadian government has worked to protect domestic companies against potential takeovers.
In 2012, Canada established a process for assessing foreign takeovers, the Investment Canada Act. The legislation reviews the impact of an investment by foreign companies, whether foreign takeovers of Canadian firms could be potentially destabilizing, and whether the foreign acquirer’s culture might drive down the competitiveness of Canadian businesses.
The legislation is very broad, and foreign investment in certain industries can be highly regulated.
The newly created Foreign Investment Review Board has authority to impose, on its own, additional regulations on foreign takeovers. These regulations might include granting an exemption to the foreign acquirer for job cuts or shareholder buybacks. They could also ban the sale of assets or takeovers if a foreign acquirer were to go bankrupt.
An acquirer that successfully completes a takeover could face severe restrictions.
The federal government set a goal of securing foreign investment in Canada at a level consistent with other governments in Europe.
But with the major threat of takeovers weakened, the government should be trying to deal with the crisis, before it occurs.
Possibly a bankruptcy situation is just what the market wants. In fact, in 2002, it was considered a risky bet to invest in the housing market. A foreign takeover that almost wiped out thousands of mortgage holders may have accelerated the mortgage crisis, rather than lessening it.