What Are We Worth to the U.S.? (About $17-trillion)

by Diane Francis

National Post

In a controversial new book, Diane Francis sets out five models for merging Canada and the United States into the same country

A merger between Canada and the U.S. could take years, or could happen quickly, depending upon circumstances, public opinion and what type of deal was proposed. Would it be like the reunification of Germany, or would it be a targeted economic arrangement? Let’s start with a look at a couple of mega-merger models, then explore some of the other possibilities for Canadians and Americans to consider that would realize synergies and enhance their partnership.

Option 1: A Merger Model, a.k.a. Project Great Lakes

This first option takes an investment-banking approach. The deal would be complex. The United States had 313-million people in 2011, or roughly 90% of the population of the two countries’ total of 347.4-million. Canada had 34.4-million, or roughly 10%. But Canada’s resource wealth exceeded 10% of the total. So Canadians would be making an over-contribution in terms of resources.

I sat down with Craig Kelly, a chartered accountant based in Geneva, Switzerland, who is the chief financial officer for Oryx Petroleum, an international oil company with assets throughout Africa and the Middle East. He has had extensive merger-and-acquisition experience around the world at RBC dominion securities and Addax Petroleum, a leading independent international upstream company that was acquired by Sinopec in 2009 for close to $10-billion.

Diane Francis: The merger of the century

The 9/11 attacks and the financial crisis that started in 2008 damaged the economies of Canada and the United States, and accelerated the decline of most wealthy democracies.

Throughout it all, emerging economies, led by China and India, did not skip a beat. Between 2000 and 2010, they grew by an average of 6% per year, while developed nations posted an average of only 3.6%, according to The Economist’s “Power shift” report.

By 2030, Brazil, Russia, India and China could overtake the U.S., Japan, Germany, Italy, Britain, France and Canada in economic size.

And these seven nations, the original G7, cannot catch up because of debt, demographics, resistance to change and an inability to recognize and counteract the strategies of their rivals.

He and I devised a model to merge the United States and Canada based on standard industry practice, as though the two were companies. We code-named the deal Project Great lakes: Canada would be referred to as “Muskoka” and the U.S. as “Adirondack.” (“Muskoka” refers to the cottage-country playground of the wealthy in Ontario, “Adirondack” to its counterpart in upstate New York.)

For evaluation purposes, we selected key metrics: the revenues of the two countries, or gross domestic product (GDP); land and total area, which also includes rights to resources 200 nautical miles offshore; debts; foreign reserves and gold assets; renewable resources such as water and farmland; and fossil fuel production and proven reserves. We added their totals and determined the percentage of assets and liabilities each country contributed toward the totals (see figure 1, on the page opposite).

The chart was based on 2010 figures taken from the World Factbook, an almanac of facts drawn from many sources and compiled by the U.S. intelligence agency. These figures are for demonstration purposes only, as is the year chosen, 2010. Any deal, commercial or sovereign, would evaluate more metrics from a variety of sources, including industry intelligence.

The light gray bars represent Muskoka’s contribution in the various metrics, while the dark gray bars represent Adirondack’s. The black vertical line through the bar chart is called an “equity line,” which we set at 82% in an attempt to split the equity of the combined entity, or to divide the resources that each country brings to the merger, fairly or equitably. Setting the equity line at 82% is an attempt to divide the contributions fairly without regard to the relative importance, or weight, of any of the 10 metrics. So it is a blunt instrument in terms of valuation, but nonetheless an interesting starting point. (The reasoning behind each metric, and a breakdown of the percentage contributions appears elsewhere in the book).

— Gross Domestic Product (GDP) is the size of a country’s economy. Incorporated into this model is the fact that America would be contributing a proportionately larger economic output. The U.S. GDP represents 92% of the total and Canada’s 8%, meaning that Canada’s contribution is two points smaller than its 10-percent share of the population.

Reposted from National Post.