Executive summary

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This paper examines the pattern underlying divestitures and acquisitions (plant control change) in the Canadian manufacturing sector over the 1970s, 1980s, and 1990s. Each year, changes in plant ownership effect renewal in a substantial portion of the industrial population. The average annual percentage of employment affected (4.8%) is larger than either plant entry (2.3%) or plant exit (2.7%) over the time period studied. Moreover, the percentage of employment affected by an ownership or control change has been growing over the period.

Examination of patterns in divestitures and acquisitions is used here to discriminate among the various causes that have been posited to lead to a control change. The paper asks whether plants whose performance had deteriorated were more or less likely to be acquired by others; whether plants that were behind the average, in terms of their performance, were more or less likely to be acquired; and whether acquisitions and divestitures were more likely to occur in certain types of industries—those where intangible assets associated with technology or brands were more prevalent.

The paper also focuses on whether the characteristics of plants that are acquired or divested differ by nationality of the owning firm. In particular, we are interested in whether acquiring firms of different nationalities (foreign as opposed to domestic) target different types of plants.

The paper finds the following:

1. Support for the failing-firm argument is found. For the sample as a whole, control changes were more likely to occur if the relative wage rates paid were falling; however, this tendency originated from foreign firms, rather than domestic (Canadian-owned) firms, and from the divestiture, more than the acquisition side of the control-change process. Foreign firms are more likely to divest plants that begin to lose their capability to pay competitive wages, and to lose market share and profitability. Domestic plants are divested when they begin to gain market share.
2. Control changes do not occur only in those plants that are weaker. On average, ownership change is more likely in larger, older plants where more products are produced, with a greater proportion of non-production workers, and in industries with higher wages and greater capital intensity. All of these characteristics are associated with a set of special capabilities, such as managing capital-intensive production processes, employing relatively higher-skilled workers, and having a larger proportion of managers and professionals. These are the conditions that produce a fertile ground into which new ideas can be injected by changes in ownership.
3. Acquisitions and mergers are also more likely to occur when there are fewer plants in the industry—where the industry is more concentrated. Control changes provide an alternative avenue for industry renewal when conditions reduce the amount of renewal that occurs via greenfield entry of new firms. Greenfield entry is effected by the building of a new plant.
4. The probability of divestiture increases for those plants that are not in the core industry of their owning firm. These unrelated plants are 127% more likely to experience a control change than plants that are located in close industrial proximity to their counterparts. Unrelated diversification faces numerous challenges and the higher probability of divestitures here suggests that experimentation— and perhaps failure— is higher in this group.
5. After taking into account differences in industry and plant characteristics, the probability of takeover for a foreign plant is 85% higher than that of a domestic plant. Foreign plants differ substantially from domestic plants in providing a receptive environment for the transmission of knowledge via takeovers.
6. Some similarities exist in the characteristics of plants being shifted from foreign to foreign, and from domestic–to–domestic, firms. Control changes are related in a similar way to age of plant, number of plants per industry, and the distance a plant is from its parent's core business, thereby suggesting that a common set of structural characteristics underlies divestitures across both groups.
7. The importance of the acquired plant's size however, (whether it be the average size before a merger, or the average plant size of the industry, or the number of products produced per plant) matters less in the foreign sector than in the domestic sector. Rationalization motives related to scale and scope economies are less important in the foreign sector, perhaps because the average plant size is already larger, or the skill set that is being sought in a takeover is more idiosyncratic in the foreign sector.
8. There is also a considerable difference in short-run forces influencing divestiture. Foreign plants that begin to lag in several dimensions—market share, wage rates, or profitability—are more likely to be divested. On the other hand, domestic plants use the opportunity of market share gains to shift ownership to new owners.
9. Domestic plants share many characteristics whether they are divested to domestic or foreign firms, —except that foreign firms look for these plants more intensively within sectors whose firms possess intangible innovation and brand assets: the product-differentiated and the science-based sectors. This is consistent with the argument that knowledge is more embedded in firms than in sectors and that multinationals embed certain forms of knowledge, whether they are in sectors where this is more widespread or in sectors where this is less common.
10. It is in the transfers from the foreign to the domestic sector that the largest differences can be found. Few of the characteristics that generally underlie control changes elsewhere are significant for these types of control changes. These types of divestitures occur more frequently in the labour-intensive and natural resource-based sectors, where foreign firms were withdrawing over this time period. In the case of control changes here, many of the significant variables differ in a meaningful way from their counterparts in the other three categories. (Foreign to foreign; domestic to foreign and domestic to domestic).