M&A activity surges in 2005

Low interest rates and strong corporate balance sheets drove an increase in Canadian merger and acquisition activity in 2005, according to a report by KPMG Corporate Finance.

“Last year KPMG Corporate Finance reported a turning point in what had been a declining market,” says Peter Hatges, a corporate finance partner in KPMG’s Canadian advisory services practice. “The continued growth in 2005 proves this was no temporary blip. What is particularly pleasing is the strong upturn in deal numbers which provides the bedrock for a vibrant M&A marketplace.”

While 2005 was marked by a global 19% increase of deal-making, the Canadian M&A volume jumped 22% from 2004. There were 1,064 deals closed involving Canadian companies, compared to 873 in 2004. Total value increased by only 3%, from $55 billion US to $56.9 billion US, pointing to many smaller deals.

The largest deal of the year was the brewing merger between Molson and Adolph Coors, valued at $4.3 billion US. The real estate sector was home to two large transactions in the first half of the year, as Calloway REIT paid $1.2 billion US for a collection of big-box retail centres, and the CPP Investment Board paid $798 million US for a 50% stake in a portfolio of commercial real estate properties held by Oxford Properties.

Large deals continued in the second half of 2005, with Weatherford International paying $2.7 billion US for Precision Drilling. In November, JP Morgan Chase paid $1.9 billion US for the credit card business of Sears Canada.

Strong commodity prices attracted a pair of large transactions in the resource sector, with U.S. based Pogo Producing paying $1.8 billion US for Northrock, and Switzerland’s Xstrata buying a 19.9% stake in Falconbridge for $1.7 billion US.

“The pipeline of deals looks good for 2006 and continued liquidity in the banking market and low interest rates is a catalyst for a number of transactions,” the KPMG report says. The global market is already primed, with 3,015 deals announced in this year which will not close until 2006, with a combined value of $987 billion US.

“This year there has been a great deal more noise in the system, so at first blush a 19% rise over last year may feel below expectations,” says Pierre Berube, a KPMG corporate finance partner in Montreal. “However, the acid test is not the deal you talk about but the one you close. Our analysis, which looks at completed deals, shows the tempo of activity has been increasing through the third quarter suggesting a strong finish to the year and a buoyant start to 2006.”

The attraction of real estate and resources were not unique to Canada, according to Hatges, as this trend in reflected in the overall global market. As the year draws to a close, global M&A activity stands at 24,806 transactions, valued at $2.059 trillion US.

Telecoms, financial services and real estate remain the most popular sectors in the global market, although there has been a decline of 35% in deal value among the financials. Global oil and gas industry saw the value of deals climb by 49% to $141 billion US spread among 943 transactions. The mining sector was home to 593 transactions totaling $36 billion US, marking a rise of 69% in value and 40% in volume.

Private equity deals continue to make up 13% of the overall market, with 1,600 deals worth $265 billion US closed, marking a 19% increase in value, but a 3% drop in volume.

Most deals are taking place between companies in the Americas, Europe and the Middle East, but Asia has seen the highest growth rate of M&A activity, with deal volume increasing 50% and value climbing 39% from 2004. There were 6,921 deals worth $370 billion US in 2005, setting a record for Asia.

Japanese companies were the third most frequent targets of acquirers, after those in the U.S. and the UK, while Japan was second most active among buyers, behind the U.S. alone. Deals involving U.S. companies totaled 6,522, valued at $785 billion US, but there has been no growth in value and volume is down 3%.

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