By Tom Bradley

In the Globe and Mail today, Derek DeCloet wrote an article about the aftermath of Canada’s great ‘hollowing out’ that took place from 2005 to 2007 - the period when foreigners were swooping in to buy our companies.  There was a great hue and cry about how us passive Canadians were missing the boat.  Eminent people were speaking out and the government was being pressured to do something about it.

Derek’s piece resonated with me because I wrote a ‘lone voice’ article in the Globe on the same topic in April 2007 (The Flip-side of the Foreign Takeover Binge) and because there are some enduring lessons to be learned from it.

  • We are too cavalier with our hero worship.  We’re too quick to put executives, money managers and athletes up on a pedestal.  The poster boy for the binge period, Xstrata’s CEO Mick Davis, should have been lionized after his acquisition strategy generated great long-term returns, not during the feeding frenzy.
  • There are no certainties.  During 2005-07 it was a ‘given’ that China would grow forever and the commodity cycle would be ‘different this time’.  That was the overwhelming consensus because the arguments supporting the theory were well reasoned and the trend had been going on for a long time.  When an ‘uncertainty’ becomes a ‘given’, it’s time to step back and think it through.
  • It is all about price.  For the most part, the foreign predators bought good companies.  They just paid too much – ‘takeover’ price-earnings multiples for peak earnings. 

We are living through the other side of the hollowing out period now, but the lessons are still relevant.  Just as it was then, the consensus is overwhelming and the assumptions have turned into givens.

My favourite Peter Bernstein quote is as appropriate as ever:

“...in calmer moments, investors recognize their inability to know what the future holds.  In moments of extreme panic or enthusiasm, however, they become remarkably bold in their predictions: they act as though uncertainty has vanished and the outcome is beyond doubt.”