Canadian M&A stays strong, while IPOs falter

Last year wasn’t all doom and gloom for the financial industry — M&A activity had a record-breaking 2007. A new report by KPMG reveals that the Canadian M&A sector saw more than 2,000 transactions, a first for the industry and an increase of 16% over 2006.

“Canadians got the message that they either have to grow or access institutional capital to grow,” says Peter Hatges, a corporate finance partner with KPMG. “No doubt about it — bigger is better.”

While there was more M&A activity than ever, the market also saw vast fortunes change hands, with deals totalling $268.6 billion, a 50% jump from the year prior. That number was boosted by Rio Tinto’s purchase of Alcan for $37.6 billion.

“If you look at the Rio Tinto and Alcan deal, that’s a huge proportion of the total,” says Hatges. “One or two transactions typically sway the numbers.”

In the foreign equity segment of the market, Canadian companies completed 527 international acquisitions valued at $72.4 billion while foreign businesses bought 485 Canadian companies at a value of $132.6 billion, or 49% of the total M&A value.

With such huge dollar figures, it’s clear that some of the Great White North’s biggest companies are heading south or overseas. Hatges says it’s always a concern when that happens but points to the number of moves Canadians have made on foreign corporations to prove that there’s no reason to panic.

Hatges also says that domestically, Canadians were the most active, acquiring 1,086 businesses for a value of $63.6 billion.

While 2007 was a great year — aside from a soft third quarter — the next 12 months might not be as rosy. “I don’t expect that we’re going to replicate these results,” says Hatges. “But it remains to be seen.”

He says the credit crunch could result in cheaper valuations, which means companies will be available at bargain prices. At the same time, people might be more cautious next year, which Hatges suggests “isn’t a bad thing at all.

“If you look at the sub-prime market, there was too much borrowing of assets that were being borrowed against so when there’s volatility in the economy, right away that shows up in the balance sheets and in economic statements,” he says. “So I think playing it a little more conservative than what we’ve seen in the past is a good way to do things.”

But with the dollar hovering around parity, Canadian companies could also ramp up their foreign M&A activity. “It’s given Canadian businesses a lot of purchasing power,” says Hatges. “Not long ago, Canadians paid a 20% premium to buy American companies. So a strong dollar can only help.”

Going forward, Hatges is looking at the manufacturing sector to announce some big mergers. If companies don’t acquire each other, the sector, which is struggling right now, will face even more problems. “If they’re going to compete, they have to have scale and global reach into economies that manufacture inexpensive products. I don’t see any alternatives to that.”

No matter what happens next year, M&A is one part of the industry that will remain active. Hatges says North American companies can’t afford to stand still. “M&A seems to be at the forefront of companies’ thinking. They will pursue [deals] when they make sense, regardless of what else is going on.”

M&A’s banner year wasn’t replicated when it came to IPOs. According to PricewaterhouseCoopers, in all of 2007, only 90 new issues made it to the TSX and TSX Venture Exchange, for a total value of $3.4 billion, the second lowest level in recent history.

If it wasn’t for an active fourth quarter — there were 19 new issues worth $2.1 billion — then last year could have been the worst ever. For the entire year there were just 36 new issues on the senior exchange, down from 54 in 2006.

“A host of different factors conspired against the IPO market last year,” says Ross Sinclair, national leader of PwC’s IPO and income trust services.

He attributes the poor showing to the October 31, 2006, income trust announcement, which has given a lot less incentive for new trusts to pop up. He also says the unpredictable market made pricing new issues “almost impossible.”

“In many ways, it’s amazing we got to the levels we did,” he says.

As for 2008, it’s too early to predict what the numbers will be like. “Activity in the fourth quarter of 2007 was restricted to very specific areas — commodities, utilities and emerging renewable energy industries,” he explains. “With more of these and other issues in the pipeline, the IPO market in these sectors could find some momentum. But we don’t see much diversity across the market for new issues, so any recovery is unlikely to be broadly based. That makes predictions for 2008 very difficult.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(01/7/08)

Bryan Borzykowski