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If Rona went bankrupt, should Quebec save it?

A photo taken on Aug. 5 shows a new Rona outlet in Edmonton.

Canadian Press

In a recent column, Andre Pratte supports Quebec government involvement in a proposed Lowe's-Rona merger and takes issue with those who would lampoon the idea that a store selling "hammers, two-by-fours and barbecues" is a strategic asset. Mr. Pratte makes two arguments on why Quebec should intervene on this deal.

The first argument is that the deal is a bad for shareholders and would destroy, rather than create, value. A merged firm would not perform as well as an independent Rona, we are told, since "Lowe's is particularly ill-suited to integrate and manage such an original company."

Furthermore, customers themselves may avoid the new store, as suggested by the title of the piece, "Would you shop at American Tire?".

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It may well be true that this merger is not in the interest of shareholders. But shareholders have a vote – they can vote against this merger or they can vote for the merger as they believe it is good for the future of the company. Is there any reason why the government should be protecting shareholders against themselves? Why on earth should we think the government of Quebec knows more about what is in the shareholders interests than the shareholders do?

The second argument is that a merger would do damage to Quebec, as Rona plays "a unique role in Quebec's economy because of its history and strong local roots." But exactly how far is Mr. Pratte willing to push this argument? If the continued existence of Rona as a Quebec company is vital to Quebec's interests, then the government must also protect Rona from going out of business. Given, as Mr. Pratte points out, that Rona's share value has fallen more than 50 per cent over the past five years, this is more than a hypothetical situation. This is a very dangerous road to travel down; hasn't the idea that some organizations are too big to fail gotten us in enough trouble over the past decade?

Neither argument holds up to scrutiny. Government interfering in this merger may be good politics, but it's lousy economics.

Mike Moffatt is an Assistant Professor in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business – Western University

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About the Author

Mike Moffatt is an Assistant Professor in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business – Western University. Mike also does private sector consulting for the chemical industry. More

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