Is the Macdonald Dettwiler/Alliant Space Deal Dead?

When Macdonald Dettwiler (MDDWF.PK) finally admitted that it wanted to sell its space and satellite systems division to Alliant Techsystems (ATK) for C$1.3 billion (having originally denied the rumour, see post “Canadarm to wind up in U.S. hands?” June 14-07), my first reaction was typically nationalist: “Would the Americans let their key military or space supplier be sold to anyone, even a NATO ally?” Of course not.

So why would we? Have we not learned the industrial policy lesson of the Avro Arrow?

Although I was tempted to blog about it, and there were days that I was even short material (who knew?), I didn’t think that it would be all that appropriate for a federal board appointee to be calling out a very talented Minister of the Crown on one of the most difficult decisions he’ll ever make at Industry Canada.

With the cat out of the bag, I can say that I’m delighted to see that Minister Prentice wound up at the right place on the issue. Canada was to gain nothing from the proposed deal, other than a modest lift for MDA shareholders. Turning the topic on its head, what’s the commercial argument to approve it?

The politics of it are quite straightforward if you believe there is still a populist strain (think Reform Party) in the Conservative Party of Canada. Having watched Inco, Falconbridge, Dofasco, et al slip away (see prior post “Schwartz prescription won’t cure patient” May 15-07) on their watch, the current federal government’s reputation as a laisse-faire, free market crew was well burnished. But if you are at all a grassroots politician with a feel for the mood of the Nation, as Minister Prentice certainly is, you understand that there is something discomforting about selling a key element of your space industry to foreigners, even if those foreigners have most of the space contracts to let.

The former Industry Minister, Maxine Bernier, appeared to be about as “free market” as they come - one wonders if he would have given the PMO the same advice. And had Minister Bernier been in favor of the deal, the argument would have been pretty clear: Spar Aeropace already sold the Canadarm to an American firm (Orbital Sciences) once in the late 1990s. MDA just wound up with it thereafter. If a Liberal Government didn’t reject the Orbital/Canadarm deal, why would a Conservative one refuse to pull the trigger this time?

I think it all comes down to a pattern. After a raft of hallmark transactions (mining, steel, etc.) it was time to draw the line.

I don’t doubt that there’s no net benefit to Canada from the Alliant proposal. MDA’s space group has lived off federal contracts grants for the longest time, but its shareholders will still complain that the feds are interfering in a commercial transaction…not that they minded a bit when the federal government interfered at MDA with large projects at great gross margins.

As for MDA management, they’ve got themselves in a pretzel-like position. When the space sale rumour hit the Wall Street Journal last summer, MDA executives spent many months explaining to institutional investors why they weren’t going to sell the division: the spin involved “research synergies” between the software group and the brilliant propeller heads on the space team. Not that anyone on Bay Street actually believes there to be synergies between the two, but that was the story.

Fast forward a few months, and voila. The very same deal is finally announced. Once shareholders get over bitching about a protectionist government (remember the income trust announcement?, they’ll say) MDA management will be left to work with Alliant to cook up a new proposal.

One should not assume that this deal is dead, of course. Just as Boeing (BA) had to find attractive projects for Canadian aircraft and technology suppliers to engage on in exchange for the multi-billion dollar C-5 Galaxy military cargo contract, Alliant can follow those same breadcrumbs if it wants to pull this one out of the fire.

If not, MDA’s broken deal will be the first scalp to adorn Minister Prentice’s office wall. And that’s a good thing for our children and the Canadian research community as a whole.

If he were alive today, the Rt. Hon. John Diefenbaker would be the first to pat Minister Prentice on the back for his courage and foresight. You’ve learned the lesson of the Avro Arrow he’d say.

Comments

[Pilot Guy:]

You know that every time someone pulls that old “Arrow” chestnut out of the fire – I can only thank goodness that Canada never finished the development of that beautiful and over-priced jet with no market potential.

This was a bad decision by Prentice – a populist one no doubt – but a poorly thought out decision.
It merely sends the message to all clever entrepreneurs that Canada is a poor place to develop and nurture businesses. As an owner, you should have the right to sell your business in the marketplace without the government (owning no shares) deciding
that it is not in the “national” interest for you to maximize shareholder value.

The immediate result is much cheering and singing of "Oh Canada" like that shown by the author. The long term effect is the loss of potential new enterprises by clever risk-takers who see a more nurturing environment elsewhere.

2008 Apr 16 10:02 PM

[Mike, South...:]

You seam to forget the sale of Lockheed Martin's Sanders Division to BAE a UK firm. This was one of the first major defense businesses in the US that was sold to a non US company. That said I do agree that it was in Canada's best interest to prevent this sale; however, now they question is what is Canada going to do to maintain and build this "asset" they need to protect their arctic region. The answer is they need to develop the industry; space and aerospace as a whole. In 2006 the Canadian government spent around $386 Million on Space. The US spent 38.6 BILLION in that same year. If RadarSat-2, CanadArm 1 and 2, and Dextre are assets of national pride then what are you doing to build upon that legacy? In the use the Aerospace Industry employes almost 600K people, in Canada about 80K? There is alot of work to be done by the government to stand behind it's words if they are to be see as anything more then just words.

2008 Apr 21 07:22 AM

[Robohogs:]

Is this business part of the old Orbital by chance which is and has been a US corporation?

By the way, the first largescale US sellout to the UK was Tracor to BAE even before Sanders. Tracor had the Tomahawk targeting software algorithms plus some heads up displays, countermeasures, etc.

2008 Apr 22 06:07 AM

[highest tech:]

MDA is an older company than Orbital and was only owned by Orbital for a few years. Most of the work MDA has done, and its key technological capabilities were developed while it was either a private or public Canadian owned firm. MDA today encompasses a large part of Canada's space industry (more than when it was owned by Orbital), as well as capacities in other sectors. Selling it to a US weapons company for intangible claims of improved access to the US market (as these claims have not been substantiated by any evidence I can not even call them speculative) is wrong.

2008 Apr 22 12:05 PM

[synchrotron:]

For more insight into this blog's assertions and other sloppy journalism, have a peek:
communities.canada.com...

The investment community is just starting to grapple with Prentice's knee-jerk reaction to a situation he only poorly understands.

2008 Apr 22 02:36 PM

[x-MDA'er:]

I worked at MDA and on the Radarsat-2 program from 2001-2003, and with 20years of space industry experience in the US it was clear during that time that MDA's management were living fast and free with reality. Building the company up into a "world class space company" is not realistic in Canada as there are simply not enough govenment contracts to support it; contracts which form the foundation of all the successful American and European industry. Try as they might, acquire as much as they did, MDA's business model was doomed and only foolish notions of being players in the international space industry by MDA's senior management kept them going for as long as they did.

Can there be a Canadian space prime contractor? Clearly the answer is no unless the govenment is willing to spend much more on space. The government tried building Spar into one and failed; that company broke up and is no more. Then they threw hordes of money at MDA only to see them give up and looking for a profitable exit. Canada needs smaller, more nimble space companies that can succeed internationally like Comdev rather than ones trying to become the next Lockheed. That is where your success will lie.

2008 Apr 23 04:38 AM

[synchrotron:]

"[...] hordes of money at MDA only to see them [...]"

Do you think that Canada did not get value for the contracts they let to MDA? On Radarsat-2? On Canadarm2? On Dextre? You think MDA's margins are higher than those of Boeing or Lockheed Martin? Even the largest Canadian military-industrial-ae... companies are categorically different than the large U.S. corporations. A better comparison in terms of both line of business and business opportunities are mid-sized companies like AeroAstro, Ball Aerospace, or the former Swales.

Why are we asking about Canadian space policy? Why is it that CSA's budget has stalled? Yet their bureaucratic staff has expanded by 20%? And their space program output has decreased by more than 1/3rd?

There is a dearth of leadership that shows no signs of improving. The same vacuum of vision and leadership set up the conditions from MDA seeking the sale and ironically has stymied it. And the CSA bureacracy will continue to feed itself on its allowance ever-decreasing real dollars while doing little to engage the taxpayers in the very tangible economic and technological benefits inherent in the work.

2008 Apr 23 11:24 AM