A global overview of M&A activity: H1 2016

MergerMarket Group recently published its July edition of Monthly M&A Insider which reported on mergers and acquisitions activity around the world during the first half of 2016, which was marked by a departure from last year’s record highs.

Global M&A

Global deal values fell by 26.8% to US$1.3tn across 7,794 transactions from H1 2015’s US$1.8tn across 8730 transactions. The Industrials & Chemicals sector lead the way with US$244bn in transaction value and 1486 deals, despite New Treasury rules aimed at dissuading tax inversions leading to the termination of the US$183.7bn Pfizer and Allergan transaction. Second most active sector has been Energy, Mining & Utilities with US$165.6bn and 603 deals driven by consolidation in the industry. A close third in deal value is the Pharma, Medical & Biotech sector with US$164.3bn and 626 deals, followed by Technology. Business Services place last with only US$121.9bn of deal value but show a high deal volume with 1107 transactions.

North America

While North America posted the lowest figures since 2013, the region nonetheless represented almost half of global M&A deal value and accounted for 2,495 transactions, 416 fewer than in H1 2015. While the M&A overall trend was downward sloping, private equity buyouts rose by 12% to US$73.9bn spearheaded by Apollo Global Management’s US$12.3bn purchase of home security provider ADT. Despite the cancelled M&A between Pfizer and Allergan, the Pharmaceuticals, Medical & Biotech sector had the highest deal value in H1 2016, with 258 deals worth US$110bn, representing a 23.6% decrease from the same period of 2015. The most notable deals of the first half of the year in North America included Microsoft’s US$25.5bn acquisition of the business social network LinkedIn; Danaher’s US$14.8bn spinoff of Fortive; and medical research provider Quintiles Transnational Holdings’ US$12.9bn merger with healthcare information company, IMS Health Holdings. On the Canadian side, TransCanada merged with Columbia Pipeline in US$12bn deal to create a big player in the midstream oil sector.


Economic uncertainty in the Eurozone and the UK’s decision to “Brexit” caused a slowdown in European M&A activity with deal value dropping 19.3% from US$425bn to US$342bn and a deal count decline of 177 deals to a total of 3,110 deals in 2016. In the UK there was a clear Brexit related slowdown with a decrease of 50.5% of deal value from US$38.2bn in Q1 to US$19.2bn in Q2. By contrast, M&A activity in Germany and France increased by 315.8% and 187.8% respectively in Q2 respective to the Q1 results. China continued to be a major driver of European M&A as Chinese deal activity accounted for 47.6% of total European inbound investment – the highest share of European M&A activity to date. According to MergerMarket intelligence Germany’s Industrial sector, particularly automation, semiconductor, and chemical companies are expected to be the most targeted sector in H2 of 2016.

Asia Pacific

M&A activity in Asia Pacific (excluding Japan) recorded 1588 deals with a total deal value of US$303.2, which is 30,7% downturn in deal value compared to H1 of 2015. While deal flow remained fairly constant, the drop in deal value can be largely explained by fewer mega-deals and a decrease in average deal value from US$290.2m to US$215.8m in H1. Despite the global drop in M&A activity, China posted a Year-on-Year increase of 13.2% to dominate the region with US$35.7bn, comprising 63.6% of total deal value in Asia-Pacific (excl. Japan). In contrast to the global trend, Technology was the dominant sector with 232 deals and US$53bn in value following by the Industrials & Chemical sector with 1362 deals and US$40bn in value benefiting from China’s growing demand to upgrade industrial technologies. Private equity recorded the highest first-half value in MergerMarket record, totaling 158 investments worth US$40.2bn which represents a 42.6% increase in value compared to H1 2015. Outbound activity also remained strong with Europe as the top investment destination with 87 deals worth US78.7.bn.

Contrary to the rest of the world, Japan’s M&A market soared to US$30.7bn over 199 deals representing a 67.8% increase in M&A deal value from H1 2015. This was Japan’s third consecutive year-on-year increase in deal value. While M&A was driven by the Industrials & Chemicals and Pharma, Medical & Biotech industries, performance was strong across the board. Similarly to China, Japan saw an uptick in investment in the European market with deal value increasing to US$4.5bn in Q2 from US$2bn in Q1.

The author would like to thank Hugo Margoc, Articling Student, for his assistance in preparing this legal update.

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Hybrid Entities in Canada

In the context of cross-border business transactions, the term hybrid entity is often mentioned.  Generally, a hybrid entity is considered, for tax purposes, as one type of entity (e.g., a corporation) in one jurisdiction while being considered another type of entity (e.g., a partnership) in another jurisdiction.

One example of a hybrid entity is an unlimited liability corporation (ULC).  These are Canadian corporations that are offered in Alberta, British Columbia and Nova Scotia. Shareholders of ULCs are liable for the debts and liabilities of the company. For Canadian income tax purposes, ULCs are considered corporations and are subject to Canadian income taxation. However, for US tax purposes ULCs may be considered “flow-through entities” (i.e., the ULC is disregarded and the earnings of the ULC are flowed through to the ultimate owners of the ULC).  This tax treatment may be useful since the income of the ULC may be consolidated with that of its US parent for US tax purposes.  This may be more tax efficient.

Another example of a hybrid entity is a limited liability company (LLC).  An LLC is a type of entity that is offered in the US, and for US tax purposes, is a flow through entity.  Again, the earnings of the LLC are flowed through to the ultimate owners of the LLC for US tax purposes.  On the other hand, for Canadian income tax purposes, an LLC is considered a corporation and is subject to Canadian income taxation if it carries on business in Canada.  This is definitely a factor that American businesses need to consider if they want to do business in Canada through an LLC.

Hybrid entities certainly have a place in devising tax-efficient business structures, especially when Americans are considering doing business in Canada.  However, there should be careful consideration of the tax consequences if these vehicles are used as tax treaties may provide for restricted benefits for these types of entities.

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

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Financing with Non-Bank Lenders


Non-bank lenders are increasing their market presence in both acquisition financing and the provision of financial solutions for ongoing operations, including in the asset-based lending context.  The increased presence of non-bank lenders seems to be driven by both the benefits of working with providers of non-regulated alternative capital source funding and the regulatory limitations faced by traditional bank lenders.

Banks are facing increased regulation which in some cases has the effect of restricting their ability to underwrite “riskier” transactions and may require the inclusion of loan covenants which do not suit a borrower.  In the event there is a change in an existing borrower’s business, a bank may be precluded from continuing to provide credit facilities, which would force a borrower to refinance with a non-bank lender at an inopportune time.  Banks are often less willing to provide financing during the early stages of a business, during a downturn or while capital is being actively reinvested.

Conversely, non-bank lenders emphasize the flexibility they offer when formulating covenant packages and the fact that they are not subject to the same stringent regulations as a traditional bank.  Often, borrowers seeking financing from a non-bank lender have been turned down by a traditional bank or are seeking a larger facility than a traditional bank is prepared to offer.

Non-bank lenders often work alongside traditional banks to provide a complete solution for a borrower.  For example, a traditional bank might provide a senior secured revolving facility and a non-bank lender would provide a senior secured term loan, a mezzanine loan or a second lien facility.

When considering the most effective strategy to finance an acquisition or ongoing operations, non-bank lenders may offer worthwhile solutions – on their own or together with a traditional bank.

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With fall around the corner and looming tax changes, certain private companies – Canadian-controlled Private Corporations (generally, private corporations that are controlled by Canadian residents, referred to herein as CCPCs) – may begin to feel pressure to quickly start and/or complete asset sale transactions. On March 22, 2016, the federal Finance Minister released the 2016 Federal budget. The budget includes new measures that will impact tax payable on sales of eligible capital property (ECP), such as goodwill and other intangibles.  The impact of these changes will largely be borne by sellers. The date for implementing these measures is January 1, 2017.

Current and Proposed Tax Rules: From ECP to CCA

The current rules provide a tax advantage that benefits CCPCs that sell ECP in an asset sale. Generally, 50% of the gain from the sale of ECP is taxed as active business income instead of as taxable capital gains. The tax rate on active business income is favourable relative to the rate on taxable capital gains realized by a CCPC because those capital gains are subject to an additional refundable tax that is only refunded upon the payment of dividends. The other 50% of the proceeds can be distributed tax-free to shareholders as capital dividends.

The incoming changes will repeal the ECP regime. In its place, a new capital cost allowance (CCA) class, Class 14.1, will be introduced. Class 14.1 will capture goodwill and other property that would previously have qualified as ECP under the current rules. In accordance with the CCA regime, gains from the sale of CCPCs’ assets belonging to Class 14.1 will be taxed as capital gains and thus subject to investment income tax rates, which include the additional refundable tax. This treatment will apply for any sale occurring after December 31, 2016.  CCPCs with tax years ending in 2017 will have the option to elect to have the old rules apply to any sale of ECP that occurs prior to January 1, 2017.

Projected Implications for Private Company M&A

So what does this all mean for CCPCs? In the short term, if ECP comprises a large proportion of a particular company’s value, it may be worthwhile for that company to take advantage of the current rules and to quickly complete a sale transaction before the new rules are implemented, though the practical difficulty is that many sale transactions take several months to complete.  Sellers should carefully weigh the benefits of the tax treatment under the current rules against the challenges of an abbreviated sale process.

The author would like to thank Samantha Sarkozi, Summer Student, for her assistance in preparing this legal update.

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Social Media and Online Deal Sourcing:  The new tool for your M&A toolbox


Intralinks’ article, Social media is changing M&A, discusses how social media platforms are surpassing their purpose as an easy way to keep in touch to become useful tools in deal-making strategies. Social media can provide an online network for deal sourcing which plays matchmaker between buyers and sellers to improve efficiency, communication, and secure information sharing. In a 2013 survey by Intralinks, more than 55% of dealmakers reported using social media to help plan and execute M&A strategies. Companies using these services also reported closing a deal sourced on an online network: 50% of the service users were on the buy side and 40% were on the sell side.

The 2013 survey has since been followed up with a second survey in 2015: Deal Networks and the Evolution of Getting M&A Deals Done. This survey examines the adoption of these technologies and notable changes over the past two years. The 2015 study has shown that conventional social media platforms are actually being passed over in favour of more “specialized” deal networks that can provide customized functions to its users. The percentage of respondents who agreed that online deal sourcing will eventually revolutionize M&A as an industry had jumped from 23% in 2013 to 36% in 2015. Overall adoption of online deal sourcing has remained consistent with 2013 levels at 30%, but is materially increasing on the buy side. Although adoption remains steady, usage itself has grown since 2013.

The 2015 survey predicts that online deal sourcing adoption will continue to grow into 2016. 65% of respondents who do not yet participate in the practice cited that the key reason for not doing so was waiting for the online deal sourcing space to mature further. For those not yet ready to take the leap into online deal-sourcing, social media platforms can still be useful. They can be used as a sniff test when doing due diligence on a target company to better understand the market sentiment toward a company. They can also be effective post-deal: when companies have merged, a social intranet can improve efficiency and transparency as well as create cultural unity between entities. Social media and social intranets can also be used as an easy way to share knowledge and ideas.

Despite its benefits, using social media in the M&A world has its downsides as well. Companies should have social media policies to help manage the risk that sensitive information may become public. Social media is intended to be used spontaneously as a quick and informal method of communication, but company statements must be closely monitored during transactions or reporting periods. Also, when using social media for due diligence, monitored webpage activity can tip off employees about a potential deal and accidentally reveal confidential information.

The author would like to thank Justine Smith, Summer Student, for her assistance in preparing this legal update.

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What Basel III Means for Escrow Management


Following the financial crisis of 2008, harsher regulations governing financial institutions were implemented to mitigate future economic recessions. As discussed in an article by the Canadian Bankers Association, new financial regulations, such as Basel III, have targeted capital and liquidity because both affect a bank’s ability to “cushion the blow” of any losses and maintain its ability to meet its financial responsibilities. The international regulation, Basel III, is comprised of capital and liquidity rules, which were implemented in Canada in 2013 and 2015 respectively.

Basel III Capital Rules:

The Basel III capital rules were introduced in Canada by national regulators as the Capital Adequacy Requirements (CAR) Guideline. This Guideline requires banks to have an amount of capital that is at least 10.5% of their “risk-weighted assets” before 2019. Also, since January 1, 2016, greater requirements have been placed on the six largest Canadian banks in Canada. These banks now must retain one extra percent of capital, will be monitored more regularly than other banks and have even more reporting obligations.

Another guideline is the Leverage Requirements Guideline, which requires banks to have a leverage ratio that is equal to or greater than 3 %.

Basel III Liquidity Rules

Stemming from the Basel III liquidity rules, banks are required to comply with the following:

  • the Liquidity Coverage Ratio, which has a 30-day time horizon and will be introduced from 2015 to 2018; and
  • the Net Stable Funding Ratio, which has a one-year time horizon and will be in effect sometime before 2018.

Effects of Rules on the Escrow Landscape

Now that banks need to report more regularly on their progress in complying with these rules and are required to retain more of their capital, certain effects on the escrow landscape have been noted by SRS Acquiom:

  • Greater transparency of financial institutions’ abilities to weather adverse economic conditions, which allows M&A parties to consider different options more carefully.
  • Some financial institutions are shifting the extra costs associated with keeping short-term deposits onto consumers through lower yields.
  • Banks are eliminating or modifying certain deposit products as the costs of offering them have increased. This means that there will be fewer escrow products out there for customers, making it more difficult to arrange escrows if the existing products do not align with their needs.
  • Certain banks in the United States have already begun to warn their biggest customers that depositing large amounts of money will now come with an extra cost. Financial institutions are even recommending that these customers go elsewhere to avoid the new expense of making these types of deposits.

As a result of these effects, M&A parties will likely have to be much more cautious when considering escrow management and the different escrow options available.

The author would like to thank Monica Wong, Summer Student, for her assistance in preparing this legal update.

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FinTech M&A: A Wave or Just a Ripple? FinTech M&A: A Wave or Just a Ripple?

While the rapid and exponential growth of Financial Technology (FinTech) companies appear to signal an impending wave of M&A, certain impediments exist that may mitigate these projections. FinTech companies develop and market technologies that facilitate a variety of financial transactions through electronic mediums. Since 2010, over 80 FinTech companies in Canada have garnered about $1 billion in investments. For private FinTech companies worldwide, investments have increased from $1.8 billion USD in 2010 to $19 billion USD in 2015. This unprecedented growth prompted the Competition Bureau to identify FinTech companies as potential disruptors to the Financial Services industry and undertake a study to determine whether there should be regulatory reform as a result.

A Wave of M&A

Predictions of substantial M&A activity among FinTech companies, commonly referred to as a wave of M&A, abound. There are a variety of reasons supporting these predictions. First, the rapid growth and funding of FinTech companies may give rise to companies sufficiently large to acquire other, smaller FinTech companies. Second, the concentration of FinTech companies in particular sectors is unsustainable. Some of these sectors seem to include lending, wealth management and payments. The finance company Difference Capital Financial predicts market consolidation where companies in these sectors will enter into partnerships or merge. Third, FinTech companies constitute a threat to the big banks. To successfully compete in the marketplace, these banks may undertake acquisitions of FinTech companies (or potentially launch their own FinTechs). Fourth, some internet companies seek to enter the FinTech marketplace and may also do so by acquisitions of FinTech companies themselves.

Impediments to FinTech M&A

FinTech companies may overlook regulatory compliance as they often fail to consider themselves financial services businesses subject to regulatory regimes. The regulatory regimes applicable to FinTech companies also appear to be somewhat unclear given their novelty. The effects of this, however, may frustrate the predicted wave of M&A. Consider due diligence. A significant component of the M&A process for both buyers and sellers, undertaking due diligence, requires familiarity with regulatory limitations and requirements. The absence of this familiarity may detrimentally thwart the due diligence process and eventual business transaction. Similarly, compliance with regulatory regimes may impart to FinTech companies the appearance of capacity for future growth and success. Where FinTech companies fail to comply, prospective investors and purchasers may draw adverse inferences. In light of the foregoing, the projected wave of M&A activity may be more of a ripple.


The author would like to thank Samantha Sarkozi, Summer Student, for her assistance in preparing this legal update.

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Positive News for Mining and Metals M&A

Mining Truck 2


According to a recent report by EY, the global deal value for mining and metals M&A increased by 93% in the second quarter of 2016. Global M&A deal value in Q2 2016 was up US$3.7 billion to US$7.8 billion, almost double the US$4.1 billion in deals the mining and metals sector saw in Q1 2016. The sector also saw deal volume rise 27% from Q1 2016 and 13% year-over-year.

This increased activity is good news for a sector that has seen a sustained downward trend in deal activity over the past five years. EY suggests that growing confidence in the mining and metals sector may be the cause of increased activity in Q2 2016 and that mining and metals companies are looking to strengthen their balance sheets and increase flexibility by reducing their portfolios through strategic divestures.

Mining Review Africa quotes Quintin Hobbs, Mining and Metals Transactions Director at EY, as saying, “As we have seen some commodity price stability return, this has resulted in a decline in expectation gaps between buyers and sellers and a reduced price gap is reflected in the rise in numbers for M&A mining and metals deal activity globally and locally. There may be further room to indicate a more positive outlook for the sector.”

Geographically, Asia-Pacific saw the highest M&A deal value in the mining and metals sector in Q2 2016, with a combined deal value of US$3.6 billion, and North America saw the greatest deal volume at 56 deals, coming largely from mid-market consolidation in the gold sector. This continues the 2015 trend in which Asia-Pacific based acquirers were the highest-value dealmakers and North American acquirers were the most prolific.

However, market uncertainty remains. EY implies that the large increase in Q2 2016 may be due to weak numbers in Q1 2016 and points out that year-over-year numbers are down 51% from Q2 2015 (due in part to the 2015 BHP Billiton demerger). It is yet to be seen if the bottom of the market has finally been reached and if Q2 2016 is the beginning of an upward trend in mining and metals M&A deal activity.

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Deal Maker or Deal Breaker? Information Security During Mergers & Acquisitions

The Ontario Securities Commission (OSC) recently published its Statement of Priorities for the Financial Year to End March 31, 2017 (the Statement). The Statement unveils a new area which the OSC intends to focus its key resources and actions on – cyber resilience. For many, this does not come as a surprise, particularly given the high-profile cyber-attacks on organizations ranging from Ashley Madison to J.P. Morgan. It is now well-recognized that in a market where businesses are exponentially increasing their dependency upon technology, the need to understand and mitigate cyber-security risks is proliferated.

The Statement should serve as a call to action for all businesses that bear cyber-security vulnerabilities – especially those involved in M&A. One example which the OSC points to is the growth of technology facilitated financial services. The introduction of new technologies, such as block chain based crypto-currencies and peer-to-peer lending, is influencing large financial institutions to adapt through acquisition. These transactions will unquestionably give rise to cyber-security concerns. However, even a simple corporate transaction which organically alters an entity’s IT infrastructure can present similar risks. Such cyber-security-related perils are present in two forms: (1) risks to the purchaser and the target organization; and, (2) risks in relation to phases of the M&A process.

It is critical to examine the cyber-security practices and technologies of all merging entities during the due diligence phase. Pre-merger planning should consider the risk of an information security breach as well as potential financial and legal liabilities. By gaining a better understanding of the target’s information security-related processes, the purchaser can adequately evaluate legal compliance, identify risks and adjust the purchase agreement accordingly. For instance, the presence of cyber-security issues may justify a provision allowing for a purchase price adjustments or mandate the inclusion of cyber-security specific indemnities.

In addition to enabling a seamless integration, it is important to ensure that both entities have secure IT policies designed to avert cyber-attacks during the M&A process. Companies are already in a vulnerable position when merging and insufficient IT policies can significantly heighten this susceptibility. In the midst of the M&A process, a cyber-attack can leak details of previously undisclosed acquisitions or potential deals. If successful, the attack can damage negotiation positions, cause irreparable reputational damage, or at worse, cause the deal to fail. As such, it is wise to treat the target company as a third party. This may include separating, securing and protecting all critical data systems. Similarly, both entities would be well advised to identify key employees with knowledge of secure information and ensure that sensitive information cannot be accessed by unauthorized persons.

The cyber threat landscape clearly requires information security to be a key factor for companies contemplating a merger or acquisition. With that being said, a company who knows its risks and actively seeks to address them can prevent costly mistakes before signing on the dotted line.

The author would like to thank Joseph Palmieri, Summer Student, for her assistance in preparing this legal update.

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Growing Consumer Demand for Natural and Organic Food Fueling Food Industry M&A

As demand for organic and natural food continues to increase, food industry leaders look for new ways to attract health conscious consumers. The past few years have seen a pattern of food industry giants acquiring natural and organic food manufacturers to appeal to a growing demographic of consumers looking for healthy alternatives to traditional food staples. Since January 2014, the food industry has seen M&A activity totalling over $300 billion in value globally, with a large section involving natural food manufacturers. The most recent deal is Danone’s $10.4 billion takeover of WhiteWave Foods Co, manufacturer of soy and almond beverages. The acquisition comes at a time when almond and soy milk sales are growing rapidly, with sales over $700 million a year in North America, as consumers switch from traditional milk products to lactose free and low calorie alternatives.

Falling sales of food staples may also be a driving force behind the recent string of acquisitions. In recent estimates, cereal sales dropped 5% from 2009 to 2014 and soda consumption has hit a 30-year low. Facing stagnating and falling sales in key products, food industry leaders began to expand their natural and organic offerings, as well as look for strategic M&A opportunities. This strategy appears to be paying off. Hormel Foods Corp. recently posted a 20% increase in profits following its acquisition of Applegate Farms LLC, a manufacturer of organic meat products. While this trend shows no signs of slowing down, it remains to be seen whether consumers of natural and organic brands will embrace the acquisitions by established food manufactures or if they will simply switch to the next up-and-coming natural food brand.

The author would like to thank Olga Lenova, Summer Student, for her assistance in preparing this legal update.

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