2004 a strong year for M&A market

(December 13, 2004) Activity in the Canadian mergers and acquisitions (M&A) market increased in 2004, in terms of value, according to an annual report from KPMG. The number of deals completed dropped, however, to 1,051 compared to 1,110 in 2003.

The total value of transactions jumped almost 75%, from US$48 billion in 2003 to US$83 billion, due to a number of massive “mega-deals” — those with a value of more than US$1 billion — more than countering the slump in deal volume.

These mega-deals included the closing of the US$14 billion acquisition of John Hancock Financial Services by Manulife Financial, as well as the US$7 billion acquisition of Labatts-owned Interbrew SA by a Brazilian brewery. All told, the mega-deals accounted for US$33 billion, nearly 40% of the total value of transactions.

“Even if we take away the sizeable effect of the mega-deals, Canadian deal volumes have reached a sustainable level and we’re now primed for an upturn in 2005,” says Peter Hatges, a Toronto-based corporate finance partner in KPMG’s Advisory practice. “Right now, it’s encouraging to see our charts recording increases in deal value and stabilized deal volumes for the first time in four years.”

The trend towards a recovery in the M&A market is reflected around the world, according to the KPMG report, with the value of all transactions reaching US$1.536 trillion globally — an increase of about 47% over 2003. The volume of transactions climbed 10% as well, from 16,808 to 18,481.

A number of massive mega-deals dominated the market. The merger of Sanofi-Synthelabo with Aventis topped the list with a value of US$67 billion. The deal between JP Morgan Chase and Bank One was valued at US$57 billion and Cingular Wireless came together with AT&T Wireless Services in a deal worth US$41 billion.

Deals worth in excess of US$1 billion accounted for 54% of the global total value of mergers and acquisitions, compared to 46% in 2003.

Private equity firms are playing an increasingly important role in the market, with their transactions accounting for 11% by value and 7% by volume. Financial sponsors closed 1,239 deals globally, worth a total of US$162 billion. In 2000, private equity accounted for only 2.5% of value and 3% of volume.

“Private equity deals are becoming more important in the Canadian context,” Hatges says. “Bain Capital’s buyout of Verizon’s SuperPages unit was one of the top 10 deals in Canada last year. We expect to see more emphasis on transactions funded with private equity in 2005.”

Weakness in the U.S. dollar also seems to have played a role, with American firms as the target in eight of the 10 largest deals closed in 2004.

The coming year should see a continuation of M&A strength. The KPMG report identifies 4,433 deals worth US$479 billion, which have already been announced and should close in 2005.

“The statistics give us some very positive signs for Canadian deals going into the new year,” says Hatges. “Whether the trend continues will largely depend on market, geo-political and economic factors.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com