Rising market values to fuel merger and acquisition deals

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Merger and acquisition activity is set to heat up this year.

High commodity prices have given resource companies the cash to expand through acquisitions, and at the same time made them targets of rivals looking to boost production through deal making. And with corporate valuations soaring, takeover activities are expected to touch all sectors, industry sources say.

With takeovers back on the table, the bankers and lawyers who put these deals together were busy over the holiday break. Nunavut Iron Ore kicked off the new year in takeovers on Saturday by raising its hostile offer for 60 per cent Baffinland, trumping Arcelor's bid by 5 cents a share. The move followed the endorsement of Arcelor's offer by Baffinland's board of directors.

Would-be buyers also need to be prepared to face more than reluctant shareholders and board members, says Sharon Geraghty, co-head of law firm Torys' M&A group. She points to Ottawa's rejection last year of BHP Billiton's $38.6-billion (U.S.) offer for Potash Corp. of Saskatchewan.

However, the government isn't the only player that can turn a deal sour. Shareholders, who typically decide a deal's fate, now have an increasingly wider array of opinions to sift through, such as those from proxy-advisory firms like Institutional Shareholder Services Inc. (ISS). These companies review proposed takeovers and proxy contests and then offer their advice on what they believe is the best way to vote.

ISS grabbed headlines in 2010 when it suggested shareholders vote against Kinross's bid for Red Back Mining. Ultimately the deal was approved, but Kinross waited until ISS's ruling was practically released before it took the proxy-advisory firm's influence seriously, and then had to play catch-up by explaining its reasoning in more detail.

Fuelling the expected surge of deals this year is a 13-per-cent rise in the market value of companies listed on the Toronto Stock Exchange. The resource sector, in particular, is buoyed by a gain of 17 per cent in a global index of commodity prices.

A recent survey from KPMG showed 70 per cent of Canadian miners will pursue acquisitions next year and only 8 per cent said it was not in their plans.

The majority of respondents, 61 per cent, said they expect the next major area of mining consolidation to be in gold and precious metals, while 33 per cent identified base metals and 6 per cent said potash.

Shareholders will also continue to flex their muscles in 2011. Last year, Torys predicted that activism would be on the rise, and some high-profile cases certainly made headlines in 2010, such as West Face Capital's attempt to shake up the board of directors at Maple Leaf Foods Inc.

Torys says the shareholder uprising is rooted in recent Canadian rulings that put more power in these investors' hands. For instance, TSX-listed companies have been required, since about a year ago, to get shareholder approval if they want to fund a takeover by issuing equity worth 25 per cent of existing share capital.

Because shareholders have become much more vocal, acquirers must now think ahead and anticipate what investors may not like about a certain deal, said Patrice Walch-Watson, a senior partner at Torys. Once the prickly topics have been identified, firms will have to address these issues and explain their reasoning before they can expect a takeover to go through unhindered.

With a file from reporter Brenda Bouw

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TOP M&A TRENDS

Politics matter in foreign takeovers

Acquirers should be prepared to negotiate. They must be willing to offer rigorous "net benefit" commitments and to work with political advisers early in the takeover process.

Emerging-market players like alternative structures

Some foreign investors have already acquired minority interests in Canadian resource plays, and these passive investments should flourish - especially given the opaque foreign investment rules.

Shareholders will decide fate of their companies

In 2009 the Supreme Court of Canada ruled that BCE's shareholders shouldn't have final say in a takeover bid. Yet recent rulings, most recently in the Baffinland bid, have argued the opposite. Torys likes the latest trend because it lets owners make the final decision.

Aggressive defence tactics are on the rise

Companies facing hostile bids will try to keep poison pills in place longer, and will also develop innovative defence tactics that can't be struck down by regulators.

Shareholders' voices will be heard

Shareholders are getting accustomed to being given more power and they will continue to consult outside sources, such as proxy advisory firms, to help advise them on how to best use this capacity.

Torys