Merger and acquisition outlook*

More than 2,000 deals went through in 2007, but what can we expect this year?

By Peter Hatges

*This is an expanded version of a summary originally published in the May 2008 issue of CAmagazine.

In 2007, Canadian businesses were engaged in more merger and acquisition deals than at any other time in our history. Upwards of 2,000 deals went through, resulting in a total deal value of US $268.6 billion. This represents a staggering increase of 50% in value over 2006, and triple the amount completed in 2005, according to an analysis conducted by KPMG Corporate Finance based on data supplied by Thomson Financial.

Despite credit market concerns and a relatively quiet third quarter, the year ended up with some of the biggest deals coming together in the last quarter. Canadians fared well in the biggest deals of the year, being successful acquirers in four of the top 10 Canadian deals. The second-largest transaction of the year was the sale of Thomson Learning (US) to private equity groups OMERS Capital Partners (Canada) and Apax Partners (UK), for $7.75 billion. This was surpassed only by the acquisition of Alcan (Canada) by Rio Tinto (UK) with a deal value of $37.6 billion.

Canadian companies completed 527 foreign acquisitions valued at US $72.4 billion and 1,086 domestic acquisitions valued at US $63.6 billion. The number of foreign takeovers of Canadian companies amounted to 485, about 23% of all Canadian M&A activity by number, but approximately 49% by value or US $132.6 billion.

Large cross-border M&A deals like these are quickly becoming a familiar story for Canadians, because the landscape of competition has changed, drawing participants from all over the world. In 2007, for the first time, the US started importing more goods from China than from Canada. Asian countries such as China have garnered large increases in market share as North American companies seek out cost advantages in by moving manufacturing to low-cost producing countries.

Resource transactions continue to dominate the largest Canadian M&A deals. The rate of urbanization in developing countries is expected to continue to fuel demand for raw materials and resources, making for a relatively vibrant M&A market in resources.

So what lies ahead? Here is what we can expect going forward in Canada:

• There will likely be a drop-off in the number of large leveraged buy-out deals because leverage ratios are down.
• Acquirers may make greater use of subordinated debt as their senior debt ratios decline.
• Strategic buyers will probably find less competition from financial investors for certain transactions.
• Assuming debt capital markets remain conservative, the anticipated volatility in the economy will likely be reflected in lower purchase prices.

Despite the uncertainties in the 2008 M&A environment, increasing global competition means that Canadian companies won’t have the luxury of standing still. The smart money is going to stay active.

The 10 largest completed deals in Canada are summarized below:

Peter Hatges is a corporate finance partner with KPMG in Toronto