When the proposed mergers of Royal Bank RY-T unchno change
and Bank of Montreal BMO-T +0.14% increase, and Canadian Imperial Bank of Commerce CM-T +0.34% increase and Toronto-Dominion Bank TD-T +0.64% increase, were finally turned down by the federal government in 1998, the merger proponents at Canada’s major banks were probably relieved. The cost, in corporate distraction and from the slippery slope of concessions made to respond to the deal critics, was becoming too high, threatening the “efficiency gains” touted to shareholders to justify the mergers.
As the bank-merger saga dragged on, Canadians (millions of them bank shareholders through their pension plans), were reminded of their hatred for the banks. One bank chair remarked: “I must be the only corporate chairman whose shareholders hate him.”
A possible condition of approval of the bank deals, the acquisition by a foreign financial institution of the lone bank that would be left out (Bank of Nova Scotia BNS-T +0.86% increase), was being mooted. Permitting a foreign bank to acquire control of Scotiabank would have upended sector dominance, which was a goal of the mergers in the first place.
Several large foreign banks were discretely sounded out on their appetite to enter Canada to offset the market power of the merged banks. In the face of public outcry over market dominance postmerger, the government might have been open to relaxing the prohibition on any one party owning more than 10 per cent of a Canadian bank like Scotiabank.
The coup de grace to the mergers was delivered by none other than the big man himself, retired U.S. Fed chair Paul Volcker who mysteriously weighed in against the deals. In financial and media circles, losing Mr. Volcker was the equivalent of losing Walter Cronkite over the Vietnam War. Mr. Volcker gave the government the cover it needed to say no.
When it was over, the banks had been saved from themselves – saved from a “be careful what you wish for moment.”
The proposed acquisition of Shaw Communications SJR-B-T +0.35% increase by Rogers Communications RCI-B-T -0.49% decrease
may fulfill national and even rational dreams of Rogers executives, but the deal may follow the same sad trajectory of the bank mergers. When it ends, the proponents may wish they hadn’t started down the road at all.
For all their herculean efforts, the deal won’t proceed quickly. The concessions required for regulatory approval may severely constrain the merged entity and further favour new entrants and smaller players. The current Canadian government strategy to stimulate new domestic telecom competition may be a failed and foolish one in a vast but small country like Canada. However, that strategy will not be abandoned in the face of the deal. On the contrary, many will argue this is the very moment when the dream can be fulfilled.
By lopping off this from Rogers and that from Shaw, the government may be convinced that it could paste together a viable new competitor. (That process is more likely to result in a Frankenstein than a Prince Charming, but no matter.)
There is ominous talk about welcoming a large U.S. telecom player into the Canadian market to restore competition if the acquisition goes through. This is mostly idle talk because a U.S. entrant couldn’t start from scratch. It would need to acquire or partner with a Canadian player with a large footprint. There are few likely dance partners, but there are some.
There will be little public support for the transaction. The only thing Canadians hate more than bank charges is what they (over) pay for their cellular and related services. Canadians are not exactly primed to believe any promises of increased service or lower costs from a corporate executive.
There will be no appetite among the political class to jump in and promote the deal, even if any of them should believe the deal to be in the national interest.
To be sure, the matter rests primarily with the Competition Bureau, which will be beyond political sway. The analysis by the bureau will look at many factors – resulting concentration ratios, impact on competition etc. – and the bureau will demand certain divestitures, likely already anticipated by the companies.
However, at the end of the day, the government controls the licensing of frequencies or reallocation of frequencies (the lifeblood of communications) and it’s never a good idea to annoy or embarrass your regulator.
The federal government is going to be in the political hot seat and may pay a price with voters in an election year if the deal goes forward. “What,” an astute politician will ask, “do I lose if I speak out against the deal?” “Nothing,” will be the answer. Once said, that’s hard to take back.
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