The Congress of the United States spent more than two years on ERISA, the Pension Reform Act of 1974, hearing countless witnesses, conducting dozens of studies, and considering a raft of alternative proposals. Yet there is not one mention in those thousands of printed pages of the social or political implications of the pension funds, and very little concern for the economic impacts, on capital market or capital formation… -Peter F. Drucker (1976)1

The Ontario Teachers’ Pension Plan led a successful group of bidders for Bell Canada (BCE)2 on June 30. According to the New York Times (July 1, 2007), ‘The deal for Bell Canada, worth about 51.7 billion Canadian dollars ($48.8 billion), would be the largest leveraged buyout ever.’

The Canadian Pension Plan Investment Board put BCE in play, and a number of other large Canadian plans indicated interest in bidding before withdrawing.

The BCE buyout has social and political implications, as well as impacts on the capital markets globally.

Big Questions

This extraordinary event has attracted relatively little attention in the US and Europe either for itself or for its implications. Perhaps the media have thought of the BCE takeover as a one-off, since Canadian law bars control of its telecoms by non-Canadian firms.

However, I know of no legal bar to American pensions following the Canadian lead.

Indeed, BCE is a portent of the rapidly changing relationship between pensions and operating companies, and more broadly between large aggregations of capital and the societies in which they operate.

Implications for Pensions & Companies

To borrow from that great Yogi, Lawrence Peter Berra, I’m not so good on predictions especially about the future. But here are a few of my thoughts on BCE’s implications for pensions and now publicly-traded companies:

• The competition for publicly-traded operating companies will heat up since the new entrants – the pensions – will not take private-equity size fees off the top.

• Pension ownership of operating companies will make it difficult for stakeholders to lobby the corporation on environmental, social and governance issues because of the anonymity of the pensions’ managers and trustees.

• The ERISA- and Taft-Hartley-based interpretations of the pension trustees’ fiduciary duties to maximize returns will run head-on into conceptions of corporate social responsibility.

• The pool of publicly-traded equities for both defined benefit and defined contribution plans will look very different, and the quality of the companies in it will be worse than it is today.

Implications for Investors

Retail investors hold 60 percent of BCE’s shares. The Times noted:

Those shareholders will receive a healthy premium for their stock but will lose Bell’s dividend payments, the main draw for many individual investors. Long-term shareholders may also face substantial capital gains taxes.

The Times does not note the buyout’s major effect on the market for investment-grade equities in Canada. The Canadian market is constricting. The Toronto Stock Exchange was already largely natural resources companies and banks.

Because of the US equity market’s huge size, few have noted the effect of buyouts on the supply of stock here. But the same thing is happening here as in Canada.

So, it seems likely individual investors will enjoy a run up in share prices as companies are taken private. But what equities will investors put their money into? What will the mutual funds, on which their savings and their defined contribution retirement plans rest, buy?

In the not distant future will they have only a pool of Avis-type companies? A recent Times op ed by Michael Kinsley describes Avis:

Since 1946, Avis has been sold or reorganized 17 or 18 times, depending on how you count. Each time Avis changed hands or structure, there have been fees for bankers and fees for lawyers, bonuses for the top executives and theories about why this was exactly what the company needed.

In a sense, what may remain for equity investors is an ‘after market’ – after much of the value has gone.

Much to Think About

I’ve suggested some issues the BCE buyout raises at least in my mind. As hedge funds, private equity and pensions transform the equity markets, many more questions will arise.

It seems only fitting to leave a last concern to Peter Drucker, that Jeremiah of what he dubbed 31 years ago ‘The Pension Fund Revolution’:

The employees own American business; but they do not know it, do not perceive it, do not experience it. . . . They therefore do not know what measures and policies are in their own interests to protect their most important asset, or what measures and policies endanger it. They cannot act rationally in their own self-interest. They cannot control the business management of pension funds even though they are the owners. In turn, they are rendered incapable of providing the informed support which business management and pension funds need, if only to protect the employees’ future livelihood against depredation and raiding.3

Endnotes

1. Peter F. Drucker, The Pension Fund Revolution [1976] (New Brunswick, N.J.: Transaction Publishers, 1996), p. 35. A hat tip to Keith Ambachtsheer whose memorial appreciation caused me to read Drucker. See Keith Ambachtsheer, “Peter Drucker’s Pension Legacy: A Vision of What Could Be” The Ambachtsheer Letter, No. 285, November, 2005.

2. Not surprisingly, the best coverage of BCE and of the broader issues appeared on BenefitsCanada.com. The best article on the implications of taking a major company private appeared a couple of weeks ago before BCE agreed to the buyout: Caroline Cakebread, ‘The Battle for BCE’. US readers should skim Cake­bread’s analysis of a Canadian tax anomaly’s impact. Her discussion of the public policy issues posed by the pensions’ roles is nuanced and detailed. Translation: she doesn’t make the issues simple or easy, which is good since they are neither.

3. Drucker, op. cit., pp. 97-98.