In recent years, cross-border M&A activity involving Canadian companies has soared, and 2016 gave rise to a record high in cross-border deal value. In Q3 2016 alone, Canadian companies were involved in cross-border transactions worth over CDN$77.7 billion, easily eclipsing the CND$21.7 billion in deal value from the previous quarter and representing 41% of all Canadian announcements. In particular, outbound deal volume continued to outpace inbound deal volume by a ratio of 1.7:1, confirming to Ed Giacomelli, Managing Director at Crosbie & Company, “the strategic importance to Canadian corporations of growth by acquisition.”
In a recent report by Mergermarket in partnership with Citibank Canada (the Mergermarket Report), three experts weighed in on the main drivers of surging cross-border M&A activity, and identified several trends to watch for in the near future. Some highlights from their discussion are below:
Increased activity of Asian buyers
The experts in the Mergermarket Report agreed that Asian acquirers are becoming increasingly active in seeking out Canadian assets, especially in the energy sector. In particular, the relative political and economic stability of Canada and the reduction in domestic growth opportunities (particularly in China) were suggested as key driving factors underlying the desire of Asian buyers to diversify into Canadian markets. However, the Mergermarker Report also suggested a reason to be cautious about the prospects of future deals: a new regulatory framework that imposes certain capital outflow restrictions on Chinese companies may make larger deals more difficult. For a more detailed discussion on rising outbound investments from Chinese companies, see our previous blog post on the subject here.
Increased divestiture by Canadian companies
A February 2016 report from EY noted that 56% of Canadian companies were planning to divest within the next two years, well above the global average of 49%. Mergermarkets’ experts put a spotlight on the energy sector in this regard, observing that companies in this sector are facing pressure to “clean up balance sheets, deal with debt, and find new ways to increase profitability”, and identifying strategic asset and corporate sales as one mechanism to tackle these issues. However, the Mergermarket Report cautioned that large divergences between ask and bid prices can make it difficult for such deals to gain traction.
Geopolitical uncertainty has been a clear theme of 2016, with the Brexit vote and the US election (among other events) leading to widespread global apprehension. As noted, in general, uncertainty is the enemy of deal-making. However, Mergermarkets’ experts largely downplayed the negative effects of these trends, agreeing that the Brexit vote may in fact create investment opportunities for Canadian companies, and noting that historically, US elections have not been a “deciding factor” in levels of trade. You can read more about our take on the US presidential election and its effect on M&A here.
The author would like to thank Geoff Mens, Articling Student, for his assistance in preparing this legal update.
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