The Transformation of MDA Into a Multinational Player – Part 1

In 2007 MacDonald, Dettwiler and Associates Ltd. (MDA) made the assessment that the domestic space market wasn’t growing and that there was no long-term commitment to space by the Conservative government. As well, access to the U.S. market, critical for growth, was being stymied by the International Traffic in Arms Regulations (ITAR) and security issues. At the same time MDA’s Information Products group was growing nicely year to year. The decision was made to sell its Information Systems and Geospatial Service operations.

In January 2008 MDA announced¹ the sale of these assets to Alliant Techsystems (ATK). MDA was effectively getting out of the space business. The assets would be moved into a new group at ATK to be called ATK Space Systems. Nearly seven years later, MDA is still in the space business and has transformed itself into a multinational player. How did they do it?

The Sale
In 2007, MDA’s operations were grouped into two groups, Information Products and Information Systems. The Information Products group accounted for 70% of revenues and totalled just under $845 million². Revenue compared to 2006 was up 23%, a considerable gain. The Information Systems group, which included most of the companies space assets except for the Geospatial Service operation, had seen revenues decline slightly (2%) from the previous year. Revenues from this group were $359 million. Total revenues for the year were $1.204 billion.

In 2007 MDA described its Information Products group as follows: “The Information Products group provides commercial and residential land and property- related information products, primarily for the financial services sector, and geospatial value- added products and services.”
The Information Products group had been growing fast the past few years. In contrast, the Information Systems growth had gone from 10% in 2005, 5% in 2006 and now -2% in 2007. With the Information Products group growing fast, and belief that there was no long-term commitment to space by the government and ITAR hampering access and growth in the U.S., MDA made the fateful decision to sell its space assets.

At the same time MDA was making the decision to sell its space assets and go “all in” on the Information Products group, the U.S. and U.K. subprime mortgage crisis was just about to hit. A perfect storm was brewing and MDA was about to be right in the middle of it. However, fate of a different kind would intervene and MDA’s path would alter forever.

On January 8, 2008 MDA announced it was going to sell its Information Systems group along with its Geospatial Services operation from the Information Products group to ATK for $1.325 billion. It was stunning move that prompted swift reaction from coast-to-coast, including the federal government.

On January 29 the parliamentary Standing Committee on Industry, Science and Technology held its first meeting of the year³. At the meeting, NDP Member of Parliament Peggy Nash moved a motion that the committee request the Minister of Industry Jim Prentice to appear before the committee to discuss the sale of MDA to ATK. This set in motion a series of hearings which took place on March 5th and 13th, April 1st and 3rd, and included testimony from Prentice, MDA and other interested parties.

At the first hearing on March 5th, witnesses included: Steven Staples, Chair, Rideau Institute on International Affairs; Michael Byers, Professor, University of British Columbia, Canada Research Chair in Global Politics and International Law; And as individuals, Marc Garneau, Former President, Canadian Space Agency; and Hugh Thompson, Spacecraft systems engineer, MacDonald, Dettwiler and Associates Ltd.

Garneau testified that MDA was not an “just another Canadian company”. It was a company that the government had deliberately been helping and receiving funding to create a world-class Canadian company. In particular, MDA was being funded to create capability, specifically “hardware that Canada needs to meet its national strategic objectives in space–monitoring our sovereignty in the Arctic or maritime traffic and fishing activity off our coasts; assessing environmental change; monitoring our many natural resources; helping relief teams in the event of national or international disasters; assisting winter navigation of ships through ice; and so on.”

“For example, the Canadian government agreed to pay about $430 million of the roughly $520 million RADARSAT-2 price tag as part of a public-private partnership aimed at helping MDA develop its commercial market for space-based imagery. In return, MDA would own and operate the satellite, and provide the government with specific imagery. This was a bold move back in the late nineties, aimed at positioning Canada as a leader in this developing international market.”
“I believe the Government of Canada should take into account the fact that MDA is the only space company in Canada capable of building large, complex satellites, and that its sale would mean that from now on, the Canadian government would have to buy future satellites from foreign-owned companies.”

“The bottom line is that space is a critically important strategic tool for the Government of Canada. That importance will continue to grow as more and more countries head for space. Canada will require new and more capable satellites in the future.”

Capability in building large class satellites was one issue. But there was also the robotics capability including the Canadarm, DEXTRE and also ground stations etc.

Garneau wasn’t mincing his words. Neither would others.

As Garneau said, MDA was not “just another Canadian company”. In fact, the government had been building MDA up to become a global leader. And it was becoming a player and leader in several areas. The CSA, which contracts out approximately 65% of its yearly budget to industry and academia, had over the past five years contracted out 50% of that money to MDA alone. From an industry perspective, there was MDA at the top in Canada, and by a wide margin, and then there was everyone else.

From an economic perspective, Canada’s space sector had generated $2.499 billion in revenue in 2007 according to the Canadian Space Agency State of the Canadian Space Sector annual report⁴. MDA’s space revenues in 2007 were $431 million meaning that the company accounted for just over 17% of Canada’s total revenue for the sector that year. That was not a trivial amount.

While MDA contributed a significant amount of revenue to Canada’s space sector there was another issue that was also a key point of debate, intellectual property (IP). And this for ATK was one of the key aspects of the deal.

In a press release by ATK announcing the deal they made a point of discussing the important nature of technology they would be gaining. “It (the sale) will also provide an entry point for MDA’s proven high-performance technology to the U.S. market, creating significant sales growth opportunities.”
While the economic impact was part of the picture, national security was another aspect to the sale.
The primary law the committee had to work with in investigating the sale was the Investment Canada Act. However the sale included assets that presumably fell under national security. However the fate of the deal would have to be judged by the Investment Canada Act. But the security issue, national interest, would continue to dominate the hearings.

For all the money Canada had invested in MDA over the years, the intellectual property would now be owned by a foreign company. And at the time Canada was negotiating with MDA for the follow-on to RADARSAT-2, the RADARSAT Constellation Mission (RCM). Now that the IP might be owned by a U.S. company there was a question which MDA nor ATK would answer. Would the U.S. government step in and for ITAR reasons stop Canada from contracting ATK Space Systems to build RCM?

In 2005 parliament had passed the Remote Sensing Space Systems Act. The purpose of which in part was to protect Canada’s, the governments right, to access remote sensing data from satellites licensed by Canada including RADARSAT-2. If this deal went through then would Canada even be able to access imagery from RADARSAT-2? It was a point of debate.

No one had that answer but one witness, Dr. Lucy Stojak, Faculty Member, International Space University, who testified⁵ on April 3rd. brought up an interesting legal point, “Canada’s Remote Sensing Space Systems Act, the legislation that entered into force in 2005, and the regulations that just entered into force in March 2007 were clearly inspired by the U.S. legislation. The United States has by far the biggest stakes. It has the broadest legislation, and that’s normal because they have the biggest fleet and the biggest stakes.”

“Again, I don’t have an answer; I’d just like to flag this for discussion. But when you read the regulations that apply to the United States’ operators of private land remote sensing space systems, what’s interesting to note is the definition of “person” under this act. The act applies to “any person subject to the jurisdiction or control of the United States who operates or proposes to operate a private remote sensing system, either directly or through an affiliate or subsidiary.”

“Therefore, because it is my understanding, at least from what I’ve read in the press, that the potential sale of MDA to ATK would make MDA a subsidiary, I just raise this point for discussion.”
In essence it seemed that the U.S. government could in fact step in and prohibit Canada from accessing the imagery. And if ATK owned the IP and if the IP was now deemed to be subject to ITAR, well then ATK might not even be allowed to build the RCM for Canada.

Steven Staples, in his testimony on March 5th put Canada’s strategic interest this way “Ironically, in this sale of RADARSAT-2 to the U.S. firm Alliant Techsystems, we may be undermining our own national security. We could be selling off our ability to monitor our coasts and provide our government with the data it needs to make decisions. As well, we could be eroding our industrial base and space industries, which will limit our future capacities.”

In another twist, Hugh Thompson, a spacecraft systems engineer at MDA, was appearing as an individual with support form 12 other MDA employees to argue against the deal!

Some of Thompson’s points included: “ATK has announced that the key to the success of this deal is their ability to win U.S. classified programs. Only U.S. citizens are allowed to access U.S. classified information. Even on non-classified programs, it is very difficult for Canadians to work with U.S. companies on space technology. For example, early in my own career at MDA, we as a company were unable to work with Orbital Sciences⁶, our own parent company, to build part of RADARSAT-2. Why was that? The technology was protected under ITAR, the international trafficking in arms restrictions. That’s a much less severe restriction than classified designations. Jobs will not stay in Canada.”

“Secondly, when ATK buys the systems division of MDA, they will be buying our intellectual property. When ATK bids new technology developed in Canada for U.S. classified projects, it seems highly likely that this technology will also become classified. Canada will lose access to technology that has been developed by Canadians in Canada for the benefit of Canada.”

While MDA’s President and CEO, Daniel E. Friedmann would later refute some of Thompson’s testimony⁷, it and what it meant, were in the record and on people’s mind.

In his testimony Friedmann made of point of saying that although ATK would now own RADARSAT-2, ATK would honour the agreements signed with the Canadian government for access. Not only that but ATK’s subsidiary in Canada would be subject to Canadian law and must honour all the agreements. The company would remain in Canada and continue to do business as usual.

On the matter of RADARSAT-2 access, Friedmann said “I believe the Government of Canada has all the necessary powers and authority to ensure that in future it will continue to exercise full control over RADARSAT-2 as it now does.”

Belief wasn’t legal fact though.

And while the government was having issues with the sale, MDA’s shareholders weren’t. They voted⁸ 99.9% in favour of the sale.

But the question of national security and access to the satellite still remained. Members of the committee and the government didn’t buy into the argument. After all, this was the post 9/11 era. The U.S. was even more stringent with security. ITAR was no longer under the purview of the U.S. Department of Commerce who’s mandate included promoting industry, instead, the State Department, was responsible for ITAR and was enforcing new, tighter rules.

How could Canada be certain that the U.S. government would honour ATK’s Canadian agreements? MDA’s approach was this was strictly business deal. One company taking over another companies assets. It happens all the time across borders. But it wasn’t just another deal.

There were some people, including Liberal Member of Parliament Scott Brison, who viewed this deal in another context. At the hearing Brison said “There’s a real concern that selling MDA to a foreign company is akin to a modern-day Avro Arrow in the impact it will have on the future development of Canada’s space industry.”

And there was a mistake no Canadian government wanted to repeat. In the late 50’s the Americans had pressured the Canadian government to stop work on what was one the most advanced fighter/bomber jet of the era, the Avro Arrow. The Americans wanted Canada to buy U.S. planes which they did. Thousands of Canadians would lose their jobs, and importantly, critical skills in the form of advanced engineering jobs would go to the U.S.

On April 10, 2008 the government made history when it blocked the sale⁹. Citing the Investment Canada Act and that the deal would not be a “net benefit” to Canada, the deal was blocked. It was the first time a Canadian government had used the Act to prevent a sale. Officially, ATK had 30 days to convince the government otherwise, but everyone knew it was unlikely. Politicians from all spectrums were in support of blocking the deal.

Jim Prentice, then the Conservative governments Industry Minister said on the CTV’s Mike Duffy show¹⁰ on April 11, 2008 “This government will continue to foster a vibrant, high tech space industry right here in our country. And to do it we will retain the ownership of the technology and the know-how that goes with it. And when it comes to decisions on whether foreign purchases represent a net benefit to Canada, my bottom line is this, Canada must retain jurisdiction and control of technologies that are vital to the future of our industry and vital to the pursuit of our public policy objectives. We will not accept loss of jurisdictional control to another party or to another country. We must retain the jurisdiction over Canadian assets in space.”

On May 9, 2008 Minister of Industry Jim Prentice confirmed his statement¹¹ of April 10th blocking the sale: “I have confirmed my initial decision that I am not satisfied that ATK’s proposed acquisition of the Information Systems Business of MDA would likely be of net benefit to Canada. I reached this decision after an extensive and rigorous review process. Foreign investment plays an important role in the Canadian economy. Foreign investors bring with them capital, knowledge, capabilities and technology that can increase the productivity, efficiency and competitiveness of Canadian firms. However, where a significant transaction does not demonstrate net benefit to Canada, it cannot be approved under the Investment Canada Act.”

MDA was too important to Canada. The government had made it clear. MDA’s assets, including all the IP and RADARSAT-2, were off limits to foreign companies.

The deal was dead and MDA’s problems were about to get worse.

Notes:
1. “January 8, 2008 – MDA to Divest Information Systems Business for $1.325 Billion.” January 8, 2008 – MDA to Divest Information Systems Business for $1.325 Billion. MacDonald, Dettwiler and Associates Ltd., 8 Jan. 2008. Web. 26 Nov. 2014. http://www.mdacorporation.com/corporate/news/pr/pr2008010806.cfm.

2. “MDA 2007 Annual Report.” MDA 2007 Annual Report. 26 Mar. 2008. Web 26 Nov. 2014. http://www.mdacorporation.com/corporate/Investor/financial_reports/mda_2007_annualreport.pdf.

3. “House of Commons Committees – INDU (39-2) – Evidence – Number 024.” House of Commons Committees – INDU (39-2) – Evidence – Number 024. Standing Committee on Industry, Science and Technology, Parliament of Canada, 5 Mar. 2008. Web. 13 Dec. 2014. http://www.parl.gc.ca/HousePublications/Publication.aspx?DocId=3330167&Language=E&Mode=1.

4. “State of the Canadian Space Sector.” 2007 State of the Canadian Space Sector. SpaceRef, 2008. Web. 14 Dec. 2014. http://images.spaceref.com/docs/2008/State_of_the_Canadian_Space_Sector_2007.pdf.

5. “House of Commons Committees – INDU (39-2) – Evidence – Number 029.” House of Commons Committees – INDU (39-2) – Evidence – Number 029. Standing Committee on Industry, Science and Technology, Parliament of Canada, 3 Apr. 2008. Web. 13 Dec. 2014. http://www.parl.gc.ca/HousePublications/Publication.aspx?DocId=3385860&Mode=1&Language=E.

6. “Orbital to Sell Its Interest in Macdonald, Dettwiler and Associates for $163 Million.” Orbital to Sell Its Interest in Macdonald, Dettwiler and Associates for $163 Million. SpaceRef, 16 Apr. 2001. Web. 13 Dec. 2014. http://www.spaceref.com/news/viewpr.html?pid=4508.

7. “House of Commons Committees – INDU (39-2) – Evidence – Number 028.” House of Commons Committees – INDU (39-2) – Evidence – Number 028. Standing Committee on Industry, Science and Technology, Parliament of Canada, 1 Apr. 2008. Web. 26 Nov. 2014. http://www.parl.gc.ca/HousePublications/Publication.aspx?DocId=3377039&Language=E&Mode=1.

8. “March 11, 2008 – MDA Shareholders Approve Proposed Sale Transaction.” March 11, 2008 – MDA Shareholders Approve Proposed Sale Transaction. MacDonald, Dettwiler and Associates Ltd., 11 Mar. 2008. Web. 14 Dec. 2014. http://www.mdacorporation.com/corporate/news/pr/pr2008031101.cfm.

9. News, CBC. “Federal Government Blocks Sale of MDA Space Division.” CBCnews.
CBC/Radio Canada, 10 Apr. 2008. Web. 28 Nov. 2014. http://www.cbc.ca/news/business/federal-government-blocks-sale-of-mda-space-division-1.703999.
10. “MIKE DUFFY LIVE: Space Agency Sale.” MIKE DUFFY LIVE: Space Agency Sale. Scarborough:

CTV Television, Inc, 11 Apr. 2008. ProQuest. Web. 13 Dec. 2014. https://www-lib-uwo-ca.proxy1.lib.uwo.ca/cgi-bin/ezpauthn.cgi?url=http://search.proquest.com.proxy1.lib.uwo.ca/docview/190785331.

11. “Minister of Industry Confirms Initial Decision on Proposed Sale of Macdonald, Dettwiler and Associates Ltd. to Alliant Techsystems Inc.” Marketwire. Industry Canada, 9 May 2008. Web. 28 Nov. 2014. http://www.marketwired.com/press-release/minister-industry-confirms-initial-decision-on-proposed-sale-macdonald-dettwiler-associates-854398.htm.

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This story is part of a special 2014 Canada in Space Series looking at Canada’s space program. Part 2, The Transformation of MDA Into a Multinational Player, will be published next week.

Also from the 2014 Canada in Space Series:
– The Revolving Door of Canadian Space Agency Presidents
– Would a Liberal Government Reform the Canadian Space Program?
– Canada’s Challenge: Launching Our Own Satellites