M&A activity breaks records, future uncertain

While the market has been in turmoil for weeks now, the long-term effects of falling stock prices and vanishing liquidity has yet to be felt. So although Crosbie & Company’s quarterly report on Canadian mergers and acquisitions says M&A activity had its best quarter ever, it’s important to remember that the outlook for the rest of the year might not be so rosy.

“I think it’s fairly safe to say that we’re not going to eclipse the second quarter results next quarter,” says Colin Walker, Crosbie’s managing director. “There’s no evidence yet that the real economy has been impacted, but everyone’s expecting it.”

The impact on Q3 and beyond could be huge, considering how well the M&A market did last quarter. The value of 520 announced deals came to $202 billion, smashing the previous quarterly high of $89 billion in Q3 2006. The report points out that even if the two biggest acquisitions — BCE and Alcan — were removed, the total would still have set a new record, at $114 billion.

“The numbers are extraordinary,” says Walker. “It’s been a continuation of a number of themes that we’ve seen in markets over the last number of quarters.”

It was financial and strategic buyers who helped propel the market to such lofty heights. However, private equity accounted for only four of the 15 biggest deals, which made up 35% of the total quarterly value.

“The deal business is a lumpy business,” says Walker, explaining why private equity did not participate in more high-end deals. “You don’t know what’s in the works. Perhaps there were private equity bidders in a bunch of those transactions and they didn’t win the bids.”

He adds that a lot of the big deals were so huge that only a limited number of private equity firms could participate in the transactions.

A big chunk of last quarter’s M&A activity happened in the mid-level market, which accounted for 477 announcements. “That’s really the engine that fuels the broader market,” says Walker. “It’s driven by broad macroeconomic forces that are causing companies to do M&A deals.”

Mega-deals, or transactions over $1 billion, also had a record-breaking quarter, with 25 announcements worth a total of $174 billion.

Cross-border transactions fared exceptionally well, making up most of the market’s value. There were 196 transactions with a combined value of $138.3 billion, or 68% of the announced deal value.

Like the previous quarter, there were more Canadian acquisitions than foreign buyouts of Canadian companies, but the value was higher for the latter category, at $97.5 billion. American purchases accounted for 46% of all foreign acquisitions.

“People are looking at business in a very international way,” says Walker. “It’s all about global positioning. The cost of capital is lower, consolidation is happening across every sector of economy and it’s happening in most countries in the world.”

While the frenzy around global investing is unlikely to change anytime soon, record-breaking M&A activity might. Walker says the three things that drive the market — business confidence, economic fundamentals and market liquidity — are in jeopardy because of the unstable markets.

“Business confidence has probably been impacted to some degree,” he says. “Liquidity is very real, and we just don’t know how long it’s going to take to sort itself out.”

He says when it comes to large deals like BCE, a large amount of paper has not yet been placed. “Markets were different when that paper was priced. People holding that paper have taken a hit.”

So what does the future, beyond Q3’s likely hit, look like? Not surprisingly, it’s tough to predict. “If markets stay the way they are now and there are major losses, then perhaps that will take a few quarters to work out,” says Walker. “But if it works its way through the pipeline, then it might be a fairly short-lived phenomenon.”

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

(08/29/07)

Bryan Borzykowski