As a sleepy year for mergers and acquisitions draws to a close, the deal makers at Torys LLP are predicting a rebound in 2010 as Canadian buyers go shopping abroad in search of richer markets for growth, and polluters gobble up emerging green energy companies.
Aside from the megamerger of Suncor Energy Inc. and Petro-Canada, which had been in the works for years, 2009 was a relatively quiet 12 months for corporate combinations. For the first few months of the year, stocks were in the dumps and debt was scarce and expensive, making deals nigh impossible. After markets began to rally in the spring, some predicted a bounce-back in the merger market but it never really came, in part because many boards and executives weren't confident that the market or economic rebounds would last.
For 2010, deal makers are finding creative ways to assuage the concerns of potential buyers that they could end up with a top-of-the-market deal. They are pitching such structures as earnouts, where the final price depends on future profit, to insulate acquirers from a double-dip.
There are also some big priorities for companies that will drive mergers and acquisitions, according to the annual forecast of the top trends in M&A from Torys, one of the country's biggest corporate law firms. Torys predicts a busy year for Canadian buyers, both corporations and pension funds, that will use the stronger dollar to make foreign investments, in large part to find growth outside the mature Canadian market. The firm also expects to see a shuffling of assets in the restructuring media sector and a wave of acquisitions of green energy and renewables companies, similar to the TransAlta Corp. purchase of Canadian Hydro Developers in November, as emitters try to become greener amid pressure from regulators, customers and shareholders.
"We think there's going to be a pickup in mergers and acquisitions in 2010, as players come back to the table as well as we see emerging trends such as shareholder activism and buying green," said Matthew Cockburn, co-head of Torys' M&A group.
The trend to more shareholder activism is creating what some are calling the new M&A - a slew of proxy fights. For those attempting to gain control of smaller companies, throwing out the board and installing a friendlier slate can be cheaper, and as regulators give more power to shareholders, very effective.
"Shareholders are enjoying the new voice they have and the regulatory environment, particularly in the U.S., is just going to push the pendulum even further," said Sharon Geraghty, who is also a co-head of the M&A group at Torys. "When shareholders talk, the message is you have to listen."
In the media business, expect to see assets move, and to see more foreign buyers trying to invest in what until recently had been a very protected sector. However, the cabinet decision to allow Globalive to launch a fourth wireless network in Canada over concerns that it was foreign controlled has created a "template" for other companies looking to get into Canada's media industry, Ms. Geraghty said.
Mr. Cockburn said the country's pension funds, which were among the only active buyers in 2009, will continue to lead the charge when it comes to making deals outside the country.
Canada's demographic situation - an aging population that is consuming less - means that purchasers wanting to keep expanding will have to look to other countries.
The year ahead
1. Buying Green
Emitters will look to go green by buying renewable energy assets
2. Canadians Go Shopping
Canada is aging and older people buy less, meaning slower growth for many companies. Investors and executives are looking abroad, and a strong loonie helps.
3. Messy Carve-Outs
Troubled companies will try to spin off or carve out assets to raise cash, but as the sale of Nortel assets shows, taking parts out of the whole is complicated.
4. Power to the People
Shareholders are becoming more influential as regulators recognize more and more that they are the true owners of companies.
5. Just Saying No
Fending off hostile bids by refusal, rather than by white knight, may get easier in Canada after some recent regulatory decisions.
6. Private Equity Returns
Private equity firms are back looking at buyouts, but their appetites are vastly reduced as debt at reasonable rates is hard to come by.
7. Media Shuffle
With some media companies like CanWest Global Communications Inc. struggling, look for a big shift in assets in the sector.
8. Buying Drugs
Big pharmaceutical companies are losing patents on some of their blockbuster drugs, so look for them to start buying drug developers to find the next best thing.
9. National Security
Will the government use its "national security" powers to clamp down on investment in Canada? Not likely, Torys argues, as the case with Nortel and Teck shows Ottawa defines security narrowly.
10. Bumpy ride on reviews
Merger reviews are going to take longer as new laws give Ottawa more time to look into a combination's effect on competition.
