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When Long Trends Can be Your Friends

Times and circumstances change, often setting the stage for new investment opportunities. They may not be a new company in a new industry, or an established company in a proven industry or any of the alternatives in between. Sometimes evolving economic, social and political influences carry the day.

Fifty or so years ago these factors shaped how Canadian companies were incorporated and financed. Politically it was advantageous to have local ownership. Governments were pleased and access to domestic capital markets was a plus. The “Made in Canada by Canadians” sticker assisted the image makers.

The outcome was a number of Canadian public companies with minority domestic ownership.

Canadian Industries Ltd. was one, with majority ownership by UK-based Imperial Chemical. A well diversified cadre of products included fertilizer, ammunition, paint, synthetic fiber, dynamite and polyethylene.

Controlled companies established by Americans were DuPont, Ford, Westinghouse, Canadian Celanese and Imperial Oil. The Dutch held majority ownership in Shell Canada. The industries varied from autos to oil and gas, to consumer and industrial products and to textiles.

The Canadian investor profited by owning shares of these companies.

Conditions changed. Political influence waned, access to capital in Canada became redundant, the cost of maintaining public ownership increased and economies of scale all had an influence. Minority ownership lost much of its appeal.

Investors soon recognized the opportunity in owning equity that was destined to be bought by the parent companies at a substantial premium to market.

The result was most of the minority positions were eventually acquired. A notable exception is Imperial Oil. At least once the acquisition process escalated as the minority shareholders held out for more money, the adrenalin flowed and one offer was withdrawn, to be tabled again sometime later.

The likelihood of an investor participating when the minority positions were established in anticipation of an eventual acquisition is very remote. However as the environment changed and the purchase of minority positions materialized the investor, was able to take advantage of these opportunities.

On a cautionary note, make sure any investment stands on its own feet without relying on a speculative acquisition premium. Money has been lost in anticipation of an external event that failed to materialize. Your barber with the hot tip might better stick to cutting hair.

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