Record insurance industry M&A benefits Canada

We reported last year that global M&A in the insurance sector was rebounding after a decline resulting from the financial crisis. Now, the OPTIS Partners’ M&A database has reported a record high for North American insurance agency M&A in Q1 2016.

OPTIS reveals that an all-time high of 107 deals involving North American agencies were announced in Q1. Many transactions are unreported, meaning that there were likely even more deals.

This comes on the heels of OPTIS’ findings that 2015 was a record year for North American M&A, with 451 transactions.

The majority of transactions were carried out by private-equity backed brokers, which made 242 acquisitions in 2015 and 50 in Q1 of this year. OPTIS reported that insurance brokerages have proven to be a vehicle that can meet investors’ demands even in times of economic uncertainty and stock market volatility.

The majority of the acquisitions in Q1 of this year involved U.S. and Canadian agencies selling primarily property and casualty insurance, with 63 transactions of this type announced. There were 10 announced transactions of agencies selling employee benefits, and 21 transactions involving providers of mixed services. This is consistent with last year’s deals, where agencies focused on property and casualty insurance made up 57% of all sales.

This is good news for Canada, where the Insurance Bureau of Canada reported last year that the property and casualty insurance industry employed 118,800 Canadians as of 2013 and has $106.6 billion in invested assets. Continued interest and investment in property and casualty agencies will benefit Canadian business.

The author would like to thank Jacqueline Byers, articling student, for her assistance in preparing this legal update.

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M&A trends update

Earlier this month, we reported on the slow-down of M&A activity in the first quarter of 2016. Despite this challenging start to the year, a new report from Deloitte & Touche LLP entitled “M&A Trends Report 2016” found that executives remain optimistic about M&A activity going forward. The report provides that 87 percent of the 2,300 U.S. survey respondents said that they expected their deal activity to match or exceed 2015, which was the busiest year ever for mergers and acquisitions.

Respondents in Deloitte & Touche LLP’s survey expected that technology would be the top industry for M&A activity through the rest of 2016, with 26 percent of corporate respondents and 25 percent of private equity investors rating it the most likely sector to see a growth in M&A activity. The authors of the report opined that this may be due to the convergence of technology with traditionally analogs sectors, an evolution that would open a number of new opportunities for deal-making.

The report also found that there was a strong uptick divestiture as an option to build value. 52 percent of people surveyed expected to pursue a divestiture this year, up from 31 percent in 2014. The authors of the report believe that this surge in divestiture interest is underpinned by a desire for conglomerate firms to get back to basics. By divesting non-core assets, businesses can achieve higher value for the remaining assets.

However, the report was not uniformly bullish. 32 percent of corporate respondents and 26 percent of private equity investors cited global economic uncertainty as the top influence on deal activity. Economic concerns overtook a number of other factors, including strategy, planning, valuation, and pricing as the number one factor in influencing deal success. Concern was focused on European markets, such as the UK, France, and Italy, as well as Brazil, where the economic and political upheaval have caused both corporate respondents and private equity investors to indicate that they would be pursuing fewer deals there as compared to 2015.

Deloitte & Touche LLP concludes that M&A activity may pick up after its slow start in 2016. A number of positive factors exist which could come together to feed the pace of M&A activity, including historically low interest rates, stabilizing equity markets, companies that are well stocked with cash, and relatively high stock prices. As long as concern over economic conditions doesn’t continue to overshadow those positive conditions, M&A activity may once again match last year’s record pace.

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

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Aerospace and defense M&A reaches new heights in 2016

jetWe told you in March of last year that aerospace and defense M&A activity had rebounded after a pullback in 2013. In July, we reported that M&A activity in the aviation and aerospace sectors was strong. Now, PwC’s Mission Control report for Q4 2015 has confirmed that 2015 was a record year for aerospace and defense M&A.

Total deal value in this sector in 2015 reached $61.7 billion, more than 50% higher than the previous highest year in 2007. The most recent report by PwC for Q1 2016 indicates that deal volume is down slightly as compared to Q4 2015, but deal value is up.

A key issue for the aerospace and aviation industries going forward involves technological change in the Maintenance, Repair and Overhaul (MRO) segment. PwC reports that the future of “digital aviation” is on the horizon, which will present opportunities for revenue growth in the $60 billion MRO market. Aviation Week similarly reports that investment in civil aviation MRO is up, and deal activity is expected to increase in 2016 as a result.

The increase in aerospace M&A is good news for Canada, where the aerospace industry employs more than 180,000 Canadians according to a 2015 report by the Aerospace Industries Association of Canada. MRO activity in particular represents 27% of the Canadian aviation industry, and grew 37% between 2004 and 2014. Projected M&A activity in this sector may provide an updraft to Canadian businesses.

The author would like to thank Jacqueline Byers, articling student, for her assistance preparing this legal update.

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Looking outward for opportunity: China’s M&A activity swells amidst economic downturn

On January 27, 2016, we posted a blog entry on China’s economic outlook. At that time, newly released figures showed that China’s GDP had fallen below the Chinese government’s target of 7% in the final two quarters of 2015. Since then, the Chinese government released its 13th Five-Year plan, which lowered the economic growth target to 6.5% of GDP. Such a downturn in economic outlook raises the question, how has M&A activity been affected?

On April 25, 2016, PwC released a report that painted a rosy picture of China’s M&A activity that minimized the doom and gloom of China’s decreasing rate of economic growth and presented signs of encouragement for future investment opportunities in the country. This is, in fact, a continuation of the growth in M&A activity that China experienced throughout 2015, again, despite lower than expected rates of economic growth.

These are the key points of the report:

  • There have been 115 outbound M&A deals in the first quarter of 2016
  • These M&A deals had a total value of $82.6 billion – double the value of M&A deals in the first quarter of 2015
  • Over half of all M&A deals were conducted by private companies
  • New rules on overseas investments will facilitate future M&A activity
  • Investments in the Asia region rose by 63% and investments in North America rose by 20% in 2015
  • M&A activity is being used to diversify assets, update technology and improve management skills

This report shows that despite a highly publicized and government-affirmed economic slowdown, M&A deals proliferate unabated. However, it is important to keep in mind that such growth is mainly measured by the number of outbound M&A deals. According to an article in Asia Times, China’s outbound M&A deals exceeded their inbound deals in the second half of 2015. If there is any impact from this economic downturn, perhaps it is that investors will continue to look outward from China to drive its growth.

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

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A buzz of M&A activity in the power industry

The power and utilities industry has seen a surge of M&A activity in the first quarter of 2016, according to a recent PWC report. The following highlights reflect an overall positive start to the year for the power and utilities sector:

  • Increase in total deal value. Total deal value for Q1 2016 hit $41.4 billion. This is up 260% from the previous quarter, where total deal value was $11.5 billion. Additionally, total deal value is up 508% compared to this time last year.
  • Increase in average deal value. The average value per deal reached $1.9 billion in Q1 2016, which is an increase of 93% compared to Q1 2015. The first quarter of 2016 also saw seven deals with a value greater than $1 billion, compared to only two in the previous quarter.
  • Increase in activity from strategic buyers. Strategic buyers were increasingly involved in power and utilities deals this quarter, as they accounted for 92% of the transactions in Q1 2016. This figure is up 6% from the previous quarter.
  • Decrease in deals involving renewable power. The only downward trend identified in the report was a decline in the number of transactions involving renewable power. These transactions accounted for 3% of deals by value in Q1 2016, down from 8% in the previous quarter.

Ultimately, this report showcases the overall upward trends in M&A activity that the power and utilities industry has seen since the start of 2016. In particular, it will be interesting to see whether the large increases in total and average deal value continue to trend upwards in subsequent quarters, and whether the decline in deals involving renewable power reflects any broader concerns (environmental or otherwise).

The author would like to thank Samantha Cass, articling student, for her assistance in preparing this legal update.

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Mixed start to the year for the forest, paper and packaging industry

M&A activity in the global Forest, Paper and Packaging (FPP) industry took a dip in the first quarter of 2016 according to a recently released report (the Report) by Pricewaterhouse Cooper (PwC). PwC put the decrease of deal activity into perspective however with a press release last Wednesday, illustrating that while Q1 2016 was not as active as Q4 2015, 2015 was generally positive for the sector and PwC expects that the encouraging trends will continue this year.

The FPP industry saw an uptick of M&A activity in 2015 from 2014, with 143 deals announced compared to 125 in 2014 and overall deal value being US$31.9 billion as compared to US$9.4 billion. PwC indicates that this improvement is a result of the market stabilizing and major industry players looking to gain a competitive advantage with significant strategic deals. Another factor in the sector’s 2015 numbers appears to be the gradual improvement in the US housing market, with housing starts up 6% in Q4 2015 as compared to 2014.

While 2015 generally told a good story for the FPP industry, volatile prices and demand for commodities continue to affect sector performance. Deals announced in Q1 2016 were down to 22 from 39 in Q4 2015; together with a slide in deal value from US$14.8 billion in Q4 2015 to US$2.5 billion in Q1 2016. Deal value and volume were also down in Q1 2016 as compared to Q1 2015. The main headline out of the Q1 2016 results however was the notable increase in Asia/Pacific M&A deal value. The average deal size for the region clocked in at US$204.3 million in the first quarter of this year as compared to US$87.7 million in Q4 2015. Each of Japan China and Australia have been home to sizeable FPP M&A activity so far this year.

PwC forecasted in its Report that the following trends would continue to influence deal-making in the sector: strength of the US economy, access to Asian markets, security of fibre supply, global trade agreements and the possible impacts on supply from sustainable forest management practices. PwC also highlighted that, predictably, the softwood lumber negotiations between US and Canada has the potential to have a significant impact on the Canadian forestry industry.  It appears that industry players in Asia and the cross-border talks between the US and Canada have the potential to play a big role in dictating industry deal activity in the upcoming quarters.

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Global M&A decline in Q1 2016

According to MergerMarket’s Monthly M&A Insider Report, global M&A activity declined in Q1 2016 after strong levels of activity in 2015. The first few months of 2016 resulted in a total of 3,474 deals worth an aggregate of US$605.5 billion, down from the 4,126 deals worth US$785.5 billion in Q1 2015. The top performing sector, industrial and chemicals, was responsible for 655 deals worth US$145.1 billion,  representing a 71.3% increase in value from deals in this sector in Q1 2015.

The decrease in M&A activity has been particularly noticeable in North America where Q1 2016 resulted in 1,117 deals worth $US257.2 billion compared to 1,396 deals valued at US$370.8 billion in Q1 2015. The pharma, medical & biotech sector led the way in North America with 125 deals worth US$56.2 billion. The report attributed the decline in deal value and activity to wavering confidence in the European and Asian economies, global political concerns and uncertainty with respect to U.S. tax laws and policies.

The political turmoil and faltering economy in Brazil have helped depress M&A activity in this country. Brazil customarily represents a large portion of M&A deals in Central and South America. In Q1 2016, however, Brazil represented 25.9% of deal value and 48% of volume in the region, resulting in a decrease of 27.9% and 11% in value and volume, respectively, from Q1 2015. Overall, Central and South America accounted for 100 deals worth US $10.1 billion during Q1 2016, down from 128 deals valued at US $11.3 billion in Q1 2015. Energy, mining and utilities was the top performing sector in this region in Q1 2016.

The worldwide decline in oil prices and the uncertainties surrounding the South African economy has had an impact on the number of M&A deals in the Middle East and Africa. Q1 2016 saw 48 fewer deals in this region, as compared to Q1 2015.

Although M&A activity in the Asia-Pacific region (excluding Japan) declined in Q1 2016, China announced 339 deals valued at US$82.5 billion, representing a 16.8% increase in value from its activities in Q1 2015, and was responsible for 62.6% of the value of M&A activity in this region. The report notes that of particular importance is the increased level of interest by Chinese bidders on foreign targets. Outbound activity from China represented 26.3% of cross-border deals globally in Q1 2016.

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$40 billion in deals in one day: is “big pharma” getting bigger?

In a single day last week, $40 billion worth of deals were announced in the pharmaceutical industry.  The jaw-dropping, combined value of the announced mergers and acquisitions has turned heads, and has prompted analysts to question the impetus behind these deals.

The increased activity may come as a surprise to some, as recent changes by the Obama administration have been aimed at limiting inversions – a type of merger in which a company (often American) buys a foreign counterpart, and then moves abroad to lower its taxes.  These rules put an end to what would have been the largest inversion to date, a $150 billion takeover in the pharmaceutical industry.

In spite of these changes, which go beyond just targeting inversions but also attempt to dissuade a tactic known as earnings stripping, deals worth nearly $60 billion were announced in the health sector last week.  While not all of these transactions will be successful, and in fact one takeover bid worth nearly $10 billion has already been rejected, the activity suggests pharmaceutical companies see size as a significant factor in their ability to compete – bigger equals better.

Though $40 billion worth of deals in one day may be coincidence, data compiled by Thomson Reuters suggests that Thursday’s deals were part of the busiest period since June 2015. Analysts have suggested that the motivation for these deals may be the need for more bargaining power when negotiating deals with hospitals and insurance companies, which can be achieved when a company merges with another leading producers of the same product line.  There are also new U.S. rules which require bundling health services: smaller less diversified companies simply won’t be able to provide bundled services.  Another possible explanation is that pharmaceutical companies are trying to replace older products whose sales are declining by acquiring growing, specialized firms.  While the exact motivation for last week’s deals may not be known, it does not seem like there will be any shortage of mergers in the pharmaceutical industry in the near future.

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

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Global M&A update: current market factors

Despite a number of challenging economic headwinds, the market’s desire for mergers and acquisitions remains strong, and analysts expect mergers and acquisitions to remain one of the major drivers of corporate growth. Ernst &Young (EY) recently published a report entitled  “Global Capital Confidence Barometer, Buying and bonding: Alliances join M&A as engines of growth” which describes why the appetite for M&A remains strong despite economic stagnation and slow growth rates.

The report identifies a number of market factors which are keeping demand for M&A high, including:

  1. The closing of the valuation gap: The valuation gap (the difference in asset evaluation between purchasers and sellers) is starting to close. In 2015, volatility in prices, particularly among commodities, meant that there was a significant gap between what buyers and sellers thought was a fair price in valuations. In 2016, commodity prices have stabilized, leading a majority of executives to view the valuation gap to be less than 10%. Accordingly, negotiations on price are expected to be less difficult.
  2. An increase in distressed asset sales: Although commodity prices have rebounded from recent lows, the prolonged downturn in that sector has meant that an increasing number of companies have had to sell assets to maintain liquidity.
  3. A shift in private equity firms’ focus: Private equity firms may be finished the net selling of their portfolio investments, a process which has taken several years. Activity on the buy-side of the market may once again be their main focus, which EY predicts would bring between $465 billion and 1.3 trillion dollars to bear on possible mergers or acquisitions.
  4. The rebalancing of the Chinese economy: While the report concludes that the Chinese economy is unlikely to be an engine for global growth, it is in the midst of re-orienting towards consumers. As a result, the number of Chinese outbound acquisitions has surged, as Chinese businesses are looking to acquire western corporations with strong intellectual-property portfolios.

The report ultimately concludes that M&A will remain one of the most potent tools for corporate growth in today’s economy. In an era of sluggish growth, management teams will increasingly need to think about how to grow earnings and gain market advantage. M&A offers one area of diversification for growth, and successful deals can create corporate tailwinds even in the face of torpid market growth.

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

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Spotlight on Ukraine: a promising future for M&A activity

In March 2014, this blog featured an article discussing the effect of the recent crisis in Ukraine on M&A activity. The crisis began in November 2013 when Ukrainians protested en masse after then-president Viktor Yanukovych failed to sign an association agreement with the European Union. Yanukovyvh was ousted in February 2014. During that time and following, violent protest, armed conflict between separatist forces and the Ukrainian government, and the annexation of Crimea by Russia, played a substantial role in the contraction of Ukraine’s economy by 8% in the year 2014. Since this time, Ukraine has undertaken a number of steps that may signal an improvement in the economy. For example, on January 1, 2016, Ukraine officially joined the Deep and Comprehensive Free Trade Area to reduce trade barriers with the EU markets and enhance regulatory standards.

Since Ukraine’s economy is highly dependent on two highly polarized parties – the EU and Russia – any improvements to relations with one trading partner incites tension within the other. A recent report by MergerMarket Group, Open for Business: M&A in Ukraine, highlights the contraction of Ukraine’s M&A activity in recent years. According to the report, M&A deal volume in 2015 decreased to only 26 deals worth a total of USD $150 million. In contrast, there were 34 deals worth a total of USD $831 million in 2014.


On the flipside, the report notes the upward potential for M&A activity in several key industries, including financial services, energy, mining, utilities and telecommunications. One key finding is that although there are only four reported deals in Q1 of 2016, the total value of those deals already surpasses the total value of all deals conducted in 2015.

Although the financial services sector is likely the most viable target for future M&A activity, the improvement of Ukraine’s economy will depend on enhanced privatization of state-owned enterprises. Ukraine’s State Property Fund, its privatisation authority, is planning to sell approximately 88 state enterprises in 2016. The sale of these large assets, encouraged by planned tax reforms, efforts to counter corruption and greater protection for minority shareholders, could help lift Ukraine out of its crisis.

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

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