When the CRTC gave the green light on Dec. 20 to the purchase of Alliance Atlantis Communications by CanWest Global Communications and New York-based investment firm GS Capital Partners, an affiliate of Goldman Sachs & Co., it was only the latest example in a buying spree of Canadian businesses involving foreign private-equity firms, with media companies prominent on their shopping lists.

Under the original terms of the $2.3-billion deal – which still requires the buyers to meet various conditions – CanWest was to contribute $132 million – for an initial 17% stake in a combined entity of Global Television and AAC – while Goldman Sachs, which specializes in worldwide corporate equity investments, was to contribute the lion’s share of the purchase price. Although CanWest subsequently increased its stake to $262 million, significant questions linger regarding how much control Goldman Sachs will ultimately wield over AAC. The transaction also raises broader concerns about foreign ownership and control of Canada’s broadcasting assets.

Goldman Sachs, one of the U.S.’s largest and most powerful investment banks, was founded in 1869 by Bavarian immigrant Marcus Goldman. In 1881, Samuel Sachs joined the firm as a partner, and several years later, the firm adopted its present-day name, Goldman Sachs & Company. The firm’s development paralleled the ascent of U.S. industrial power both at home and abroad.

Throughout its 138-year history, Goldman Sachs has participated in myriad transactions involving U.S. and foreign enterprises of all sizes and types, including many within the media realm. It played a pivotal role in the historic 1927 Hollywood consolidation of Warner Brothers Pictures, Vitaphone Corporation, Stanley Company of America and First National Pictures. Goldman Sachs, the bankers for Warner Bros. at the time, conducted the merger negotiations between the firms. Following the merger, Waddill Catchings, a Goldman Sachs executive, joined the board of directors of the newly consolidated company.

Goldman Sachs’ active involvement in the amalgamation process and its aftermath was not without controversy. The disquiet primarily focused on the new company’s directors’ practice of supposedly bestowing ‘gift’ blocks of stock in the company to themselves and Goldman Sachs.

The practice prompted Harry Koplar to file a stockholders’ suit against Warner Bros. in the U.S. District Court – District of Delaware. In the suit, Koplar alleged mismanagement by the company’s directors Harry, Albert and Jack Warner. Koplar also asked the court to order the recipients to return their alleged gifts of stocks, worth approximately US$14 million.

Although the court subsequently dismissed Koplar’s suit against Warner Bros., the case afforded the general public a rare glimpse into Goldman Sachs’ actions in an acquired company.

The sheer number and magnitude of its transactions distinguish Goldman Sachs, as do its multifarious global business and political ties, which add an aura of intrigue to the firm’s operations. In a Nov. 19, 2007 article, New York Times reporters Jenny Anderson and Landon Thomas, Jr. cite a number of Goldman Sachs executives who have subsequently become high-ranking government officials after their departure from the firm. The Goldman Sachs alumni roll includes: Henry M. Paulson, Jr. and Robert Rubin, the respective present and past U.S. secretaries of the treasury; New Jersey Governor Jon S. Corzine; World Bank president Robert B. Zoellick; and incoming Bank of Canada governor Mark Carney.

The enigmatic nature of private-equity transactions also contributes to public wariness about GS Capital Partners and other firms’ activities and overarching motivations.

Beyond the Buyouts: Inside the World of Private Equity, an April 2007 report prepared by the Service Employees International Union, cites the lack of transparency as a major drawback of private-equity firms: ‘Unlike publicly traded companies that are subject to federal securities laws and regulations, private-equity buyout firms operate virtually free of oversight and public accountability, their profits and practices largely hidden from view.’

The SEIU report also points out that private-equity firms ‘engineer financial deals that together are larger than the annual budgets of most of the world’s countries.’

With respect to the AAC deal, Canada’s foreign-ownership limits prevent Goldman Sachs or its affiliates from assuming majority control of AAC, although the firm has been granted representation on AAC’s board of directors. Moreover, the terms of sale also include a number of measures to further guarantee that AAC remains under Canadian control (see story, p.4).

While foreign-ownership limits and other regulatory measures remain the first line of defense against foreign private-equity firms’ domination of Canadian broadcasting and other sectors, their effectiveness is diminished in a globalizing business milieu awash in private-equity funds that pool together investments from an eclectic array of domestic and foreign sources.

For its part, GS Capital Partners readily acknowledges that it plays an active role in acquired companies. According to the firm’s investment philosophy from its website, it ‘creates value through meaningful involvement with the company’s strategic decision making and operating philosophy.’ Although the statement is open to broad interpretation, it certainly indicates that GS Capital Partners is not merely a bystander in the operations of acquired enterprises.

A December 1995 report, The Economics of the Private Equity Market, published by the board of governors of the U.S. Federal Reserve System, further bolsters the notion of activist private-equity firms: ‘Private equity managers…take an active role in monitoring and advising portfolio companies. In many cases they exercise as much control as company insiders, or more.’

The vast majority of private-equity firms undoubtedly lack any nefarious intentions in their dealings. Nonetheless, given the inherent nature of private-equity transactions, combined with private-equity firms’ ever-expanding corporate portfolios and their extensive formal and informal governmental ties, transactions undoubtedly justify ongoing regulatory and public scrutiny of the firms, as well as their activities within Canada’s cultural industries and other sectors of the Canadian economy.