"We’ve seen an unprecedented degree of dissident shareholder activity in recent years, and in the current economic environment, it will inevitably increase..."
--Glenn G. Keeling, Partner, Laurel Hill Advisory Group
THE CHANGING DYNAMICS OF THE DEAL
Only a year ago, the M&A market was setting records for both dollar and deal activity. Today, credit concerns and economic uncertainty have contributed to a markedly different environment, but new opportunities are emerging.
Robert Yalden, partner and co-chair of Osler’s Mergers and Acquisitions Group, says, “Activity accelerated from 2005 until August of 2007, an upward trajectory becoming more and more dramatic both globally and in Canada. Then it started to move on a rapid downward trajectory, to the point where we’re now back to activity levels similar to those at the beginning of 2005.”
According to Crosbie’s First Quarter 2008 M&A Activity Report, announced Canadian transactions totalled $24 billion, a decline from $53 billion in the previous quarter. However, the report also noted significant activity in some sectors: 161 transactions in the industrial products and oil and gas sectors, for example, collectively worth $10.3 billion.
To understand the state of the mergers and acquisitions market today, says David Cohen, partner in Gowlings’ Toronto office, it’s essential to first differentiate between large and mid-sized deals, and look south. “The Canadian M&A market is closely tied to the U.S. market, and the buying opportunities may in fact be in the United States right now. If Canadian business pays attention, they will see buying opportunities.”
There has been a significant cooling, says Mr. Cohen, of large corporate transactions, mainly because of the very limited availability of low-interest, covenant-light debt. “The amount of available liquidity declined first for the large corporate deals, which means the debt-reliant private equity deals became less competitive.”
Private equity was the primary engine of the M&A boom of 2005 to mid-2007, but the credit market crisis has left the field open for other participants, including strategic and industry acquirers. “Companies are still looking at each other, and there is consolidation going on in sectors where it makes sense,” says Mr. Yalden.
“For corporate executives trying to get acquisitions done, it may be that much more appealing because you don’t have to deal with the spectre of private equity coming in and potentially offering purchase prices at much greater multiples than you might feel comfortable with.
“We are still seeing companies that have solid balance sheets looking for deals that allow them to consolidate or to grow into areas that they think represent strategic opportunities or priorities.”
Activity today, agrees Mr. Cohen, stems from increased activity by different types of buyers. “Strategic buyers looking to expand their business vertically, or horizontally, or through diversification – that know how to run and get more money out of the businesses – have become more competitive. They’re not buying to flip in three, four or five years under an investment mandate. They’re buying to incorporate the target into their business, cut out unnecessary management, accounting and systems – to get the best part of the businesses. They have the management skills to do that, (and they have) the capital, the war chest.
“They’ve been waiting for the multiples to drop, and now they will very selectively pick competitors, other geographic regions where they want to expand, other sections of their industry that are complimentary, or client bases that they don’t have – and they will begin to acquire them.”
Credit woes and a slowing economy are also generating another kind of M&A activity: “There are companies that don’t have strong balance sheets, operating in challenged sectors, that are hitting turbulent times economically,” says Mr. Yalden. “They’re confronting the prospect of having to file for Canada’s CCAA (Companies’ Creditors Arrangement Act) protection and restructure, which can give rise to the sale of some or all of their business.”
Distressed companies are fuelling another trend – a growing number of “distressed funds” being created in the U.S. – and opportunities.
“We’re hearing about investment bankers and fund managers leaving major firms to create a distressed fund. They are saying distressed funds are raising a billion dollars a week in the U.S.,” says Mr. Cohen. But even companies with sound balance sheets can become targets as profit growth slows. “It’s been said that Canada is the easiest country in the world to buy a company in,” says Laurel Hill Advisory Group partner Glenn Keeling.
“We’ve seen an unprecedented degree of dissident shareholder activity in recent years, and in the current economic environment, it will inevitably increase.
Companies must be prepared — when a potential acquirer appears, it’s vital that you know your shareholders, and that your shareholders know what you’re doing to create value.
“Issuers should have a strategic game plan, with all the necessary advisors on their side, well before an action occurs in order to ensure maximum shareholder value is attained.”
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Also appearing in this report:
Page 1
In the wake of a study that found Canadian companies to be more vulnerable to unsolicited takeovers than their U.S. and European counterparts, we survey some of the experts in the field, including Boris Novansky, director, Mergers & Acquisitions, Cormark Securities Inc.
Page 3
Times have changed – with financial buyers on the sidelines because of a dysfunctional debt market, industry buyers are seeing new opportunities says Alan Bell, a senior M&A
partner at Bennett Jones LLP.
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