One of the policy responses to address COVID-19 has been to place moratoriums on certain financial transactions. Many provinces have announced moratoriums on residential rental evictions and on foreclosures for homeowners. There is a current push from advocates to extend this moratorium to commercial rents to help save small businesses.
There is no question that small and medium-sized businesses, which comprise approximately 90 per cent of private-sector employment in Canada, are being harmed by the pandemic. April’s Statistics Canada survey on the effects of COVID-19 on Canadian businesses found that small and medium-sized businesses (defined as those employing less than 100 employees and less than 500 employees, respectively) are significantly more likely to report a higher level of disruption than larger businesses. As the federal government continues to announce additional support for small and large businesses, it should also consider placing a moratorium on corporate mergers and acquisitions (M&A).
The current state of Canada’s M&A activity
Last year, PWC reported that Canada had 1,816 mergers and acquisition deals, totalling $160 billion in deal value. Until COVID-19 hit, Canada was on track to outperform 2019’s M&A activity: there were 797 documented M&As with a total deal size of $47.1 billion in the first quarter, with 309 of those deals being cross-border deals valued at $26.3 billion, according to investment firm Crosbie & Company.
COVID-19 has injected volatility into the market that could slow down M&A activity. At the same time, however, the uncertain business environment could also usher in a wave of corporate M&A activity as financially distressed companies, especially small and medium-sized businesses, become targets of acquisition by larger businesses and private equity. Shortly before the outbreak, Torys released an outlook analysis of the past decade of M&A activity that suggests private equity firms are taking on a bigger share of total deal sizes, with the average private equity M&A deal rising from $208 million in 2010 to $605 million in 2019. With private equity in a relatively strong financial position, Crosbie & Company predicts that as a result of COVID-19, “Private equity will be chomping at the bit to take advantage of potential buying opportunities at a ‘discount’ to previous valuation levels.” The report also predicts growing consolidation across a number of industries, and says: “Stronger players will lead the charge.”
A temporary moratorium on corporate M&A activity will discourage opportunistic investments that can potentially lead to further market concentration. Concentrated markets have been associated with lower productivity, lower worker wages resulting from depressed bargaining power, higher consumer prices, and higher inequality. A similar proposal has been tabled in the United States by two prominent Democrats, Rep. Alexandria Ocasio-Cortez and Sen. Elizabeth Warren. Canada is no stranger to market concentration and it, too, is vulnerable to accelerated market concentration by powerful business interests during COVID-19. Failure to consider this and act in response would risk a post-COVID-19 economy dominated by the few.
How it hurts the consumer
One of the mechanisms for fertilizing a healthy economy that can spur a quick economic recovery is healthy market competition. However, in spite of Canada’s large share of employment in small and medium-sized businesses, there is evidence that Canada is undergoing increasing market concentration.
Most people are familiar with the monopoly/oligopoly dynamic, where one or a small number of firms are the only suppliers of goods or services. Without market competition, these few firms accrue significant market power and are in a position to be price-setters. Mergers and acquisitions will inevitably trend toward market concentration. Often, the rationale for pursuing M&A is that it will help businesses reach economies of scale and new markets, achieve operational efficiencies, and eliminate redundancies that will then in turn lower prices for consumers. However, evidence from M&A activity does not support this claim, with countless studies showing M&A activity has no effect in enhancing business productivity or lowering consumer prices.
As Denise Hearn, co-author of The Myth of Capitalism, points out, Canadians will be familiar with some of the oligopolies dominating key industry sectors, such as telecommunications, airlines and banking. In wireless communication, the big three (Rogers, Bell and Telus) collectively capture 88.7 per cent of the market and Canadians pay among the highest prices for phone service, according to a 2017 price comparison study commissioned by Innovation, Science and Economic Development Canada. The same study shows that prices are lower in places like Saskatchewan where there is a regional competitor.
However, fewer Canadians are aware of other sectors where market concentration is a problem, such as eyeglass retailers, pharmacies or funeral services. Park Lawn Corporation, Canada’s largest publicly traded funeral service provider, went from owning nine funeral facilities in 2013 to 262 locations that include cemeteries, crematoriums and funeral homes, through M&A as of 2020. In light of COVID-19, large funeral service companies could be positioned to profit from Canadians’ personal tragedies and continue on their M&A sprees.
The disparity in resources between large businesses and struggling small and medium-sized businesses could lead to opportunistic and possibly predatory acquisitions that will only accelerate the problem of market concentration. Furthermore, private equity investors can also use this period of volatility to swoop in and buy distressed companies, and history suggests they will prioritize shareholder profits over the long-term sustainability and welfare of a company and its employees. With private equity making up a higher share of M&A deals over the past decade, this should be cause for concern.
How it hurts Canadian workers
Along with the monopoly/oligopoly dynamic, we also need to pay attention to the monopsony/oligopsony dynamic, where one or a small number of businesses are the sole buyers of goods or services, specifically as it relates to labour. In such a scenario, workers have limited choice in where they work and hence less bargaining power for wages and working conditions.
Nowhere is this better demonstrated than in the tragic COVID-19 outbreaks occurring in our meat-packing plants. Two multinational slaughterhouses, U.S.-based Cargill and Brazilian JBS SA, account for 85 per cent of Canada’s meat-packing capacity across three plants. A Cargill plant in High River, Alta., has had about 950 cases of COVID-19 and two deaths among its workers — the largest COVID-19 outbreak linked to a single site in Canada. The JBS facility in Brooks, Alta. — which was acquired from a Canadian firm, XL Foods, for approximately $145 million in 2013 — reported the second-highest number of COVID-19 cases, with 650 workers testing positive and one death. The Globe and Mail reported that although Cargill workers were given additional hazard pay, they were pressured to stay on the job and not provided personal protective equipment, in spite of union concerns. In such a scenario, workers lack the bargaining power to obtain better working conditions. Where else is a meat-packer going to work as a meat-packer when there are no competitors they can take their skills to?
There is rather limited research investigating the empirical effects of private monopsonies or oligopsonies on employee wages in Canada. However, American evidence from a Roosevelt Institute study suggests that regions with labour monopsonies can depress worker wages anywhere from 15 to 25 per cent. One can expect similar impacts here in Canada.
What next?
Last month, the federal government announced that it would subject foreign investments to enhanced scrutiny under the Investment Canada Act. According to the government’s news release: “Canadian businesses have recently seen their valuations decline as a result of the pandemic, consistent with patterns in other major economies. These sudden declines in valuations could lead to opportunistic investment behaviour.”
Scrutinizing foreign investments is necessary but insufficient. There are plenty of private equity firms and large businesses that could use this opportunity to acquire competitors at a bargain price due to financial distress caused by COVID-19. This can accelerate the concentration of market power in the hands of a few, which would have lasting impacts for a post-COVID-19 economy.
Although no surveys have been conducted in Canada on this question, a Data for Progress survey conducted in the U.S. last month found that 72 per cent of respondents would support a moratorium on corporate M&As by companies that receive federal assistance. There’s broad support for the idea that businesses should not use tax dollars to acquire their competitors.
Large businesses seeking federal assistance through the new Large Employer Emergency Financing Facility (LEEFF) will need to adhere to conditions such as respect for collective bargaining agreements, protection of workers, and limits to stock buybacks. Another condition the federal government should impose is banning large companies from using LEEFF funds for M&A. The Ocasio-Cortez/Warren proposal for an M&A moratorium would apply to companies with more than $100 million USD in revenue. Canada can explore an appropriate revenue target for our context.
A temporary moratorium will not fundamentally solve the problem of market concentration in Canada’s economy. However, it would help to prevent consolidation from accelerating at a moment when we can least afford it. Without restrictions on large corporate mergers, we will worsen the trajectory of an uncompetitive and stagnant economy that will harm consumers and workers. If we desire a resilient, just and productive economy post-COVID-19, we need to ensure that our economic and political power is not concentrated in the hands of a few wealthy and powerful companies and preserve ground for Canadian consumers and workers. The first step to achieve this is to put the brakes on megafirm and private-equity mergers and acquisitions that could make the biggest companies even bigger, wealthier and more powerful at the expense of small and medium businesses.
Special thanks to Denise Hearn for her comments and review
Andrew Do is an independent civic service designer currently based in Austin, Texas. He formerly was a policy researcher with the Brookfield Institute for Innovation & Entrepreneurship.
