Investment bankers have spring fever.
A burst of merger and acquisition activity – including Canadian Pacific Railway Ltd.’s proposed US$25.2-billion purchase of Kansas City Southern and Rogers Communications Inc.’s $20.4-billion offer to acquire Shaw Communications Inc. – is the clearest sign yet that companies of all kinds are eyeing more scale in the postpandemic economy.
Large companies increased their dominance during the COVID-19 crisis. Now megadeals are poised to transform key industries, making this a critical moment for antitrust authorities around the world.
Bigger is better in the business world. So, naturally companies bulk up to position themselves for growth, whether here at home or abroad. But as the deal flow increases, there’s concern this wave of M&A could erode competition in certain industries.
Canada’s Competition Bureau, however, seems ill-prepared to assess the after-effects of market consolidation because it has insufficient power, tools and financial resources compared to antitrust watchdogs in other countries.
The Trudeau government, which plans to unveil the federal budget on April 19, would be wise to use the opportunity to rejuvenate the independent law enforcement agency given a predicted surge in deals this year.
“Competition is more important than ever, given the rapid growth of the digital economy and the role of competitive markets in the economic recovery,” said Sophie Paluck-Bastien, a Competition Bureau spokesperson.
“Many other jurisdictions, including the United States, the United Kingdom, Australia, Germany and New Zealand, are already taking action to ensure they have the right tools to tackle competition issues in the data-driven digital economy.”
Canada cannot afford to lag.
By its own admission, the Competition Bureau lacks both the clout and capacity to keep big companies in check. Commissioner of Competition Matthew Boswell has previously said the Competition Bureau, unlike other antitrust authorities, can’t compel parties to hand over information for market studies. So how can it accurately gauge competition or assess the impact of major deals?
It’s also saddled with outdated legislation. Section 96 of the Competition Act, for instance, provides a loophole for companies doing deals. Known as the efficiencies exception, the provision limits the Competition Bureau’s ability to intercede if companies show that expected efficiencies from a merger would eclipse any potential reduction of competition. That sets a high bar for intervention – a standard that’s reinforced by legal precedent.
The legislation must be changed because the Competition Bureau needs latitude to intervene on deals if they could impair future competition.
Additionally, companies should face stiffer fines if they misuse their market position. Currently, the maximum financial penalties that can be imposed for civil offences, such as abuse of dominance, under the Competition Act is $10-million for a first offence and $15-million for subsequent offences. For large companies, that’s just the cost of doing business.
Ottawa should also increase the Competition Bureau’s allowance. One wonders what kind of penny pinching goes on given its annual budget is a paltry $51.96-million.
“The bureau supports any measure that ensures Canada is equipped with modern legislation and tools that are appropriate for the digital age,” added Ms. Paluck-Bastien.
This M&A deal cycle is crunch time for antitrust authorities. It’s been 13 years since the Competition Policy Review Panel aptly concluded that Canada suffers from “insufficient entrepreneurial ambition.”
That problem has festered for far too long. Not only has there been a decline in the number of publicly traded companies over the years, market consolidation and M&A activity have increased – trends that don’t bode well for competition.
A 2019 study, entitled Are Industries Becoming More Concentrated? The Canadian Perspective, argues that large companies have become “more dominant” in recent decades and that increased market concentration has led to higher profit margins for those businesses.
“We also find that the trend of consolidation is rather widespread and has affected over half of the Canadian industries,” the study said.
Authors Ray Bawania and Yelena Larkin, both of York University in Toronto, also conclude that “weak antitrust legislation and practices” and “increasing barriers to entry” have reduced competition.
There are tentative signs, however, the Trudeau government is mulling corrective action. The bureau’s Mr. Boswell was asked to provide the government with his input on the effectiveness of competition policy tools, marketplace frameworks and investigative and judicial processes.
Separately, the House of Commons standing committee on industry, science and technology plans to study competitiveness in Canada.
It’s problematic that our Competition Bureau has a reputation for largely rubber-stamping large deals. Canada deserves a world-class antitrust authority. The future of competition depends on it.
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Rita Trichur