Predicting the Future: Will the boom in insurance M&A continue?

In a 2015 article, we reported that global M&A in the insurance sector was on the rise again after a number of quiet years in the aftermath of the financial crisis. Deal activity in the European market was hit particularly hard by the financial crisis, but a steady stream of transactions in the United States helped the Americas’ deal activity remain stable and eventually showed signs of recovery in 2013.

Earlier this year, we followed up to discuss a report which stated that 2015 had been a record year for North American insurance agency M&A. The question we are asking now is whether we can expect the good news – or, perhaps more specifically, growth – to continue?

In a 2013 report Insurance 2020: A quiet revolution – The future of insurance M&A, PwC answered that question with a soft, but confident yes. The report predicts several factors that will drive insurance M&A over the next five to ten years:

  • Weak profitability tied with low investment yields: Which may encourage insurers in mature markets to plan international expansions and domestic deals.
  • The power of technology: Acquiring or developing technological expertise will become an increasingly important goal for insurance M&A.
  • Demographic effects: Aging populations are straining markets and social security programs. This may accelerate the demand for insurance in different market levels.
  • Changing hurdle rates: Transactions will be assessed against changing expectations for rates of return which will result in possible regional shifts in bidding power.

This growth-oriented prediction is echoed by others, such as Towers Watson and Willis whose latest report found that there was little data to suggest that the recent strength in insurance M&A activity would not continue into the future. 82% of companies surveyed plan to acquire in the next three years and over 90% in emerging markets, while only a third of all companies had plans to divest. Also, more than 40% of those who have completed three or more deals over the past two years stated that they had plans for at least three deals in the next three years.

North America has recently been a key driver of global M&A activity, particularly in the insurance industry and Canadian insurance providers have been involved in a number of these transactions.   Looking forward, Ernst & Young sees further scope for Canadian insurance M&A activity, identifying the property & casualty insurance sector as a potential space for further consolidation its 2016 EY Canadian property and casualty insurance outlook.

While only time will tell for sure how the predictions for continued strength in insurance M&A activity will bear out, both in Canada and more broadly, it will be interesting to watch in the coming months to see how the fluctuating Canadian dollar, the call of international markets, foreign players and the changing competitive landscape combine to affect M&A activity this sector.

The author would like to thank summer student Justine Smith for her assistance in preparing this article.

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Tighter credit may turn cross-border M&A into a more popular growth strategy for many private-companies.


South of the Canadian border, regulatory oversight and scrutiny continues to play a noticeable role in making it more difficult for private companies to raise capital through bank loans. In this climate, could strategic cross-border M&A become a more popular “growth” strategy for US companies which are unable to access traditional lenders and are unsure about resorting to non-traditional lenders?

M&A may be attractive for various reasons, many of which are common knowledge. Private companies want to grow, increase their market share, or perhaps enter a new market. At the centre of any such aspiration is the “how” question –“how do we raise the capital required to achieve the envisioned level of growth”? Private companies don’t have the benefit of the public, ready-to go stock market, so their most popular resort is to seek private investment (including private lending firms) or turn to traditional lenders. However, this has become more difficult in the past decade.

The post-2008 environment of regulatory oversight and scrutiny has led many traditional banks to be more and more selective to whom they lend. Even if one is an existing client, banks are equally selective when deciding whether to make a “leveraged loan”. [1] While non-traditional lenders have offered a flexible alternative, they typically have much higher interest rates. Consequently, even if a private company could resort to non-traditional lenders, it has to be strategic about the growth-strategy it adopts –and that is where a the risk factor in M&A may, in some situations, appear to be a better alternative to a “do-it-on-our-own” growth strategy.

Looking from above, private companies have good reason to consider cross-border M&A transactions as an alternative to a “do-it-on-our-own” growth strategy. With the currently deflated Canadian dollar, and many experienced and established companies in multiple Canadian sectors, there’s a lot of substance to the phrase “the price is right”, especially north of the border. The recent spike in equity financing in the Canadian energy sector, is a signpost for that sector’s growth, [2] but why limit ourselves to one sector? With proper legal advice and due diligence, private companies may find that a cross-border M&A to provide a better bargain for their capital in many other industries.

The author wishes to acknowledge the assistance of Arun Blanchart, Summer Student, in preparing this posting.

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Global M&A continues decline through May 2016

According to MergerMarket’s Monthly M&A Insider Report, global M&A activity continued to wane throughout May 2016, maintaining the trend reported on earlier this year. May 2016 resulted in a total of 1,054 deals worth an aggregate of US$224.5 billion, down from the 1,410 deals valued at US$372.5 billion in May 2015. Energy, Mining & Utilities, the sector with the strongest showing, lead with 80 deals worth US$40.5 billion, representing a 66.8% increase in value (but a 17% drop in the number) from deals in this sector in May 2015.

The report highlighted the following regarding global M&A activity:

  • The 350 North American deals in May 2016 were worth an aggregate of US$108 billion, representing a 49.4% decrease in value compared to May 2015. The Business Services sector led the way with 48 deals valued at US$31.0 billion, representing a 400.1% increase in value from the same period in 2015. The sharp decline in cross-border M&A (which saw an 80.4% decrease in in-bound activity as compared to May 2015), however, indicate that 2016 is on pace to be the lowest-value year for M&A activity in North America since 2013.
  • M&A activity in Central & South America continues to struggle. Energy, Mining and Utilities was the top performing sector in this region, with three deals valued at $1 billion (representing a decrease of 27.1% from May 2015). Earlier this year, we reported on the political turmoil and faltering economy in Brazil that have helped depress M&A activity in this country, ordinarily a top performing economy in the Latin American region. These factors, in addition to worldwide commodity prices and currency devaluations, continue to influence M&A activity in Brazil and negatively impact the region as a whole, and foreign investments in particular, where in-bound activity fell 99.5% from May 2015 levels.
  • The decline of M&A activity in Europe in May 2016 was not as steep compared to other regions around the world. May 2016 resulted in 377 deals worth US$44.3 billion, representing a decrease of 4.7% in value from the same period in 2015. In-bound interest and investments from Chinese firms continued to be strong. The top performing sector, Industrial and Chemicals, lead the way with 89 deals valued at US$10.2 billion, one of the largest of which was the acquisition of robotics maker KUKA AG by Midea (a Chinese-based manufacturer). The high levels of interest from Chinese investors in German automation, semiconductor and chemical companies is expected to continue throughout 2016.
  • Deal value in the Middle East and Africa peaked in May 2016 with 20 deals valued at US$4.4 billion, representing a 127% increase in value from May 2015. The four deals in the Energy, Mining and Utilities sector had a combined value of US $4.0 billion (an 806.5% increase from May 2015) and it is predicted that the oil and gas and gold spaces in this region will continue to attract interest throughout 2016.
  • In Asia-Pacific (excluding Japan), a total of 234 deals with a value of $52.6 billion was announced, representing a 45.3% decrease in value from May 2015. China was the top-performing country in this region, accounting for 112 transactions worth US$35.7 billion. Japan had a strong beginning to the year, however, where the 168 deals valued at US$29.8 billion represented a 67.2% increase year to date from the same point in May 2015.

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M&A update in the global technology industry for Q1 2016

According to a report recently published by Ernst &Young (EY) entitled “Global technology M&A report: 1Q16 final look – Digital disruption, slow organic growth drive tech deals”, mergers & acquisitions in the global technology industry remained strong in Q1 2016, despite macroeconomic uncertainty particularly in the equity and debt markets.

Interestingly, the deal volume in Q1 2016 (at 1002 deals) was up 8% sequentially from Q4 2015 and 2% year-over-year (YOY); meanwhile, the Q1 2016 aggregate value of disclosed-value deals (at USD$66.7 billion) was down 14% YOY and 65% sequentially. There were also 14 big-ticket deals that were over USD$1 billion in value, which included 3 deals at over USD$5 billion. Moreover, Q1 2016 saw the second-highest deal volume for private equity buyers (at 92 deals).

A few highlights of the report:

  • Analytics technologies (such as big data, up 72% YOY) led the growth of 7 of 10 disruptive deal-driving trends: Internet of things (IoT), cybersecurity, health care information technology (HIT), cloud/SaaS, connected cars , and advertising and marketing all experienced an increase in deal volume
  • Chinese buyers dominated Q1 2016 cross-border deal flow: US tech companies were once again the major targets in 2016 cross-border deal-making. China, the biggest buyer by deal value, acquired 7 US tech companies at an aggregate value of USD$7 billion, which included one USD$6 billion deal that was the largest deal by value of Q1 2016
  • Non-tech-buyer deal volume rose 26% YOY to 147 deals: deals which involved a non-tech company acquiring a tech company made up 25% of Q1 2016 total deal value, which was well above 2015’s quarterly average. This trend further drives up cross-industry blur.

The report concluded that tech deals in Q1  2016 were driven mainly by accelerating digital disruption and slowing organic growth in various technology markets and geographies. Despite the fact that there were falling values for global technology M&A in Q1 2016 due to a record-setting 2015, it was nevertheless the ninth-highest-value quarter ever. Going forward, tech dealmakers will continue to seek disruptive technologies such as cloud, mobile, social and big data analytics technologies to reshape and transform the global technology industry.

The author wishes to acknowledge the contribution of Coco Chen, Summer Student, in preparing this blog post.

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Post Brexit Effects

On June 23, 2016, Britain voted to leave the European Union. Financial analysts throughout the globe are bracing themselves for the potentially wide ranging ramifications of the Brexit referendum, many calling Brexit one of the most extraordinary financial events in history.  As stated in our last post regarding this subject, Britain’s exit is creating a further drag on mergers and acquisitions. KPMG has noted that six (6) M&A deals that the firm was working on have been put on hold. Moreover, inbound deals into Britain have dropped by more than 50% since the first quarter, amounting to a bleak $13.1 Billion ( However, despite this short-term wobble in deal-making, there is some indication that M&A activity will pick up. The British pound has dipped to a 31-year low, causing some to speculate whether British companies will become prey to foreign investor ( Also, Lloyds has just appointed a new senior executive to head its mergers and acquisitions strategy and aggressively pursue deals ( Early indications post-Brexit suggest a varied approach to M&A opportunities in the immediate future.  Time will tell but rest assured, we will be monitoring closely the fallout of Brexit.

Visit our website for further reading, regarding Brexit.

The author wishes to acknowledge the assistance of Fahad Diwan, Summer Student, in the preparation of this blog post.

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Ontario’s Bulk Sales Act: Repeal at last?

Last year we reported on Ontario’s distinction as the only Canadian province that has not repealed its century-old Bulk Sales Act (the Act).  With its goal of creditor protection now served by more modern legislation, the Act is generally viewed as a nuisance, adding time and cost to transactions.  However, the wait may soon be over, as Ontario recently introduced legislation that would repeal the Act.

The aim of the Act is to protect creditors from a vendor selling its assets without first paying its debts owed to creditors.  The Act achieves this aim by imposing certain duties on the purchaser of the assets. A failure to comply by the purchaser can render the sale voidable and the purchaser liable for the value of the purchased assets.  The Act broadly applies to every “sale in bulk”.  This includes a sale of goods made outside the vendor’s usual course of business, making the Act a necessary consideration in the context of any M&A transaction structured as an asset deal.

Bill 218, the Burden Reduction Act, 2016 (the Bill) is a recent package of proposed legislative amendments advanced by the Ministry of Economic Development, Employment and Infrastructure.  The Bill proposes to amend more than 50 different statutes and is intended to reduce various regulatory roadblocks for business.  The Bill would repeal the antiquated Act, thereby bringing Ontario in line with all other Canadian jurisdictions, and recognizing that other, more effective avenues are now available to creditors to protect their interests in the context of a “bulk sale” transaction.

The Bill is still in the early stages, having passed first reading in the Ontario legislature on June 8, 2016.  Dealmakers now wait with bated breath for the Bill to make its way through the remainder of the legislative process and bring the repeal of Ontario’s bulk sales legislation at long last.

The author would like to thank Peter Valente, summer student, for his assistance in preparing this legal update.

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Are private placements the next poison pill?

The recent amendments to Canada’s takeover bid regime may have rendered the shareholder rights plan or “poison pill” – traditionally the most powerful weapon in a board’s arsenal of defensive tactics – obsolete. The new amendments, which became effective on May 9, 2016, require a majority of shareholders to tender their shares before an unsolicited offer can be successful, thereby giving shareholders an effective veto over any hostile bid. The amendments also greatly extend the time a bid must remain open, eliminating the standard rationale for adopting a rights plan. With the poison pill out of play, could the tactical private placement take its place?

When defending against a hostile takeover bid, a board can use a tactical private placement to unilaterally assign a significant percentage of a company’s outstanding equity to a party or parties that will not tender to the bidder. A recent article for The M&A Lawyer titled “The Role of Private Placements in Canada’s New Takeover Bid Regime” canvassed the available case law on the issue, concluding that regulators express far more hesitation to intervene in private placements on public interest grounds. While poison pills are used only as a takeover defence, a private placement can be pursued for any number of reasons and may not be “tactical.”

The tactical private placement can take advantage of the long lead time offered by the minimum tender period enshrined by the new amendments. It takes time to find interested investors, negotiate terms, and seek approval from the stock exchanges (in the case of any sale of listed securities).

Now that bidders have to keep their offer open for at least 105 days, target companies have the leeway to pursue a private placement as an alternative. Furthermore, the considerable length of the minimum tender period creates a degree of uncertainty that might make more readily available options attractive to boards.

For a private placement to be a viable defensive tactic, a target company must have or be able to find investors  willing to accept such a deal on reasonable terms. On a separate but related note, the tactic will be most effective when a relatively small proportion of the total outstanding equity is required to block the hostile bid. If neither of these conditions are present, a target company might end up striking a bargain that would be deleterious for the company and thus a breach of their legal duty.

Companies considering or negotiating merger transactions should inform themselves of appropriate defensive tactics once they are in play. Now that the poison pill has far more limited utility, new mechanisms such as the tactical private placement must fill the void to counteract unwanted and unattractive bids.

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Cultural compatibility: predictor of a transaction’s potential success

We have previously reported on human capital considerations in M&A transactions; in this post we consider how corporate culture affects a deal’s possibility of success. While qualitative considerations often sit on the backburner in the lead up to a deal, compatibility of corporate cultures can be an important factor in determining whether a merger or acquisition will be successful. According to a survey by Bain & Co., executives have indicated that the number one cause for a deal’s failure to achieve promised value is due to clashes in corporate culture.

Corporate culture is multifaceted and can include behavioural norms and characteristics, the operating model of the company, including the organization’s structure and governance mechanism, the method by which employees are incentivized and rewarded, and the workflow process.

A proper, in-depth assessment of the compatibility of the corporate cultures should be conducted before an M&A deal is finalized. Depending on the stage of the transaction, different methods can be used to assess the corporate culture of the two businesses. At early stages, public information may provide a general overview of a potential target’s business strategy and business model. At more advanced stages, methods for obtaining the required information can include interviews with management, customer and employee interviews and surveys regarding behaviours, attitudes, and priorities.

Depending on differences in corporate culture, a transaction can be structured in a way to take advantage of differences and maximize synergies. Perhaps complete assimilation in an acquisition is not the best approach; a better approach may be to allow the target company to operate independently. Each transaction will be unique, in some cases implementing structured strategies across both companies will drive growth; in other cases, structure may actually hinder growth by limiting the entrepreneurial spirit of one company.

While traditional considerations in an M&A deal are important, another factor companies need to consider when structuring a transaction is cultural compatibility. In some cases culture may trump strategy.

The author would like to thank Rayomond Dinshaw, articling student, for his assistance in preparing this legal update.

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Corporate residency for tax purposes

A corporation that is resident in Canada for Canadian income tax purposes is subject to Canadian income tax on its worldwide income. On the other hand, corporations that are not resident in Canada are only subject to Canadian income tax on their Canadian-source income. Accordingly, residency is an important factor in determining which Canadian income tax regime applies.

Generally, a corporation will be deemed to be a resident in Canada if it has been incorporated in Canada. Absent a deeming provision, a corporation can also be resident in Canada based on common law principles. The common law test for corporate tax residency is the place where the corporation’s central management and control is exercised. This test is a question of fact. Some of the factors that courts have looked to in concluding the tax residency of a corporation include:

  • the place where directors meet (this has been a particularly important factor);
  • the principal place where business is conducted;
  • the residency of the directors;
  • the influence that foreign directors have in comparison with Canadian directors;
  • the location of corporate books and records; and
  • the location of the corporation’s bank accounts.

The application of income tax treaties may also affect the residency of a corporation for Canadian income tax purposes. Businesses should keep these factors in mind when selecting corporate directors and developing policies that govern how a corporation’s management should be undertaken (for example, maintaining a majority of Canadian resident directors if Canadian residency is desired). With increased business travel, ensuring that the desired corporate residency is maintained has become more difficult, but it can still be effectively managed with the appropriate protocols.

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M&A update in the global metals industry

In the past, we reported on PwC’s ongoing analysis on M&A activity in the global metals industry. PwC released its most recent report in the series, entitled “Forging Ahead: First-quarter 2016 global metals industry mergers and acquisitions analysis” which breaks down the latest trends in the global metals industry, and provides insights into what the industry may expect going forward.

The major news coming out of the report is that deal volume declined to 14 deals valued at $50 million or more in the first quarter of 2016; however, deal value increased to $8.7 billion. The report concludes that the primary cause of this trend is the increase in megadeals, which are deals valued at $1 billion or more. Specifically, two Chinese based transactions made up 66% of the total deal value: CRED Holdings’ plans to acquire the share capital of Liaoning Zhongwang Group, a manufacturer and wholesaler of aluminum products for $4.7 billion; and the acquisition of Shandong Yili Electric Power by Shandong Nanshan Aluminum for $1.1 billion.

The deals in Q1 of 2016 were driven mainly by the steel and aluminum segments of the metals industry. Aluminum deals increased, and accounted for 36% of the quarter’s deal volume, compared to just 12% in the last quarter of 2015. Additionally, both of the megadeals mentioned above were in the aluminum segment of the industry. The report provides that producers are using consolidation to increase efficiencies, which in turn lower average costs, in order to compete more effectively on the basis of cost, an advantage the report cites as being traditionally needed by commodity producers.

In terms of the geography of the deals, the report found that Asia and Oceania were the two leading acquirer regions with 86% of the deals being located there. In particular China was a strong driver of deals, with it making up 8 of the 12 deals in the region. The 8 deals in China were local-market based, as producers are trying to increase scale and decrease pollution by closing inefficient plants.

The authors of the report see room to be optimistic about the industry going forward. The report states that continued growth in the United States’ economy, coupled with improvements for the automotive and construction industries should lead to an increase in demand for metals. Additionally, the report believes that commodity prices will see an increase in 2016, and that there will be an increase in demand from the Chinese and Indian economies for metals such as steel and aluminum. As a result, the report concludes that there will likely be a modest increase in deal activity in the short term.

The author would like to thank Scott Pollock, articling student, for his assistance in preparing this legal update.

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