M&A activity hot, but can Canada cash in?

(January 14, 2005) The past year proved to be a hot one for mergers and acquisitions in Canada, according to a report from the IDA. While the number of transactions edged higher by 6% in the first three quarters, the value of these deals jumped by 38%.

There were 19 of these large transactions in the first nine months of 2004, with a combined value over $39 billion. That’s more than double the number in 2003 and a value increase of 27%.

The primary driver of this growth was a resurgence of cross-border deals worth in excess of $1 billion — so-called megadeals. The number of Canadian acquisitions of foreign firms picked up, with U.S. targets preferred over others by a three to one margin.

American acquisitions of Canadian firms have also increased, with the number of deals up 38% and the value of transactions rising 47% from the same period in 2003.

But there is a downside to these massive transnational deals. Canada’s large integrated firms, such as the big banks, are failing to fully capitalize on the market. As M&A transactions increase in value, there is a tendency for those making the deal to turn to Wall Street’s top firms. In fact, Merrill Lynch held the largest market share of the Canadian M&A market, at 19.3%, with the value of their deals reaching US$15.3 billion.

Among the top eight dealmakers, four were American (Merrill, JP Morgan, Goldman Sachs and Citigroup) and one was German (Deutsche Bank). While the number of mega-deals jumped 27%, Canadian integrated firms saw a 7% decline in advisory fees.

“With billion dollar-plus, cross-border deals in vogue, the potential to rack up hefty advisory fees is huge. However, industry numbers so far tell a different story,” reads the report, entitled Canada’s M&A Activity: Headin’ South, Eh? Advisory fees for the industry and institutional group are up, but down for the integrated firms.

On the upside, institutional firms have gained ground in the less competitive — and less lucrative — smaller and mid-market deals. These smaller firms have seen an increase of 19% in investment banking revenues.

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