The deals are back.
After a slow start to 2010, the market for mergers is rolling, with conditions that remind bankers of the golden years of the mid-2000s. The underpinnings for recovery began to line up in summer, after the European sovereign debt scare faded, with cheap and plentiful financing and signs of an improving economy.
All it needed was a spark. It came in August, when BHP Billiton Ltd. BHP-N launched an almost $40-billion hostile bid for Potash Corp. POT-T of Saskatchewan, a proposed transaction that dwarfed anything seen in years.
It was, as one banker put it, the most important deal in Canada since the downturn, even though it was never consummated. The proposal was eventually scotched by the government, in a move that still reverberates with policy implications for deal makers. Still, the mere announcement of a transaction that big, funded with a huge lending commitment, marked a full-on revival of the deal market. For those mulling whether markets were right to launch a transaction, the BHP bid was a giant green light.
“It all really came together with dramatic effect in the summer when we saw the BHP bid for Potash. At that point the whole transaction side of the business got moving,” said Geoff Belsher, head of investment banking at CIBC.
In all, even without the Potash transaction, 2010 mergers and acquisitions totalled $177-billion (U.S.), according to Thomson Reuters, up from $146-billion in 2009. Resources dominated, but there were also large transactions in sectors such as media, infrastructure and banking. Two months into 2011, there are more big deals on the table, including TMX Group Inc.’s plan to combine with London Stock Exchange PLC, and numerous resource deals.
“It’s become an all-systems-go market,” said Tom Milroy, chief executive officer of BMO Nesbitt Burns Inc., which was the busiest adviser on merger deals measured by dollar value in 2010, and the biggest underwriter of stock sales. In addition to the favourable conditions, he said: “There is pent-up demand for deals. A lot of people had been on the sidelines for some time.”
The resurgence coincided with fading concerns about a global double-dip recession, and a realization that while the world economy wasn’t great, it wasn’t likely to fall off another cliff. There was enough stability to start planning for growth. And that means buying.
“There were relatively good values in the market and people were feeling more optimistic about the economic outlook,” said Jack Curtin, CEO of the Canadian arm of Goldman Sachs Group Inc., which was the No. 2 adviser on mergers in Canada last year. “Some of the acquirers wanted to be sure they were on the bus for the rebound.”
But if conditions now resemble the golden years like 2005, when mergers were surging and markets were supportive, some worry about a repeat of the excess that followed those years – and which tipped into the financial crisis.
Already terms on loans are getting much easier, leading Gerry Schwartz, head of buyout firm Onex Corp., to marvel in late 2010 at the remarkable turnaround. He said he was being pitched ideas that many thought had largely disappeared in the wake of the crisis, such as payment-in-kind bonds, where the borrower can pay interest by issuing more debt – the corporate version of a negative amortization mortgage.
“Covenants are getting looser south of the border in the loan market,” said Doug Guzman, head of global investment banking at RBC Dominion Securities Inc. “The pricing isn’t as crazy as it was pre-crisis, but it has come a really long way back.”
On top of that, there remain concerns about mounting government debts and stability in Africa and the Middle East.
“It would be a mistake to overlook the potential risk introduced by factors such as the developments in the Middle East and the overall fiscal debt burdens,” said Pat Meneley, head of investment banking at TD Securities.
