Canada has been very good to Wall Street this year.
A handful of U.S. investment banks, along with London-based Barclays PLC , stand to earn billions of dollars in fees on record-breaking merger-and-acquisition activity over the past 12 months, a string of takeovers capped this week by Bank of Montreal’s $20.9-billion bid for San Francisco-based Bank of the West.
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Large, cross-border takeovers such as Bank of Montreal’s U.S. expansion and the bidding war for Kansas City Southern Railway Co. gave central roles to New York-based dealers such as Morgan Stanley & Co. , Goldman Sachs Group Inc. , BofA Securities and J.P. Morgan.
Goldman Sachs and J.P. Morgan advised BNP Paribas SA on its sale of Bank of the West, while BMO Capital Markets and Morgan Stanley worked for Bank of Montreal.
Global investment banks were also centre stage in large domestic takeovers, territory where they compete directly with Canadian dealers. BofA and Barclays worked with Rogers Communications Inc. on its $26-billion bid for Shaw Communications Inc. , while Barclays and J.P. Morgan, along with BMO Capital Markets and TD Securities, were on opposite sides of Brookfield Infrastructure Partners LP’s $8.5-billion takeover of Inter Pipeline Ltd.
This year will set a new record for the value of M&A involving Canadian companies, with US$325-billion worth of deals announced so far in 2021, according to data service Refinitiv.
The previous high-water mark for domestic M&A activity was set in 2016, with US$249-billion of deals. In 2020, against the backdrop of a global pandemic, Canadian companies were involved in US$148-billion of takeovers, according to Refinitiv.
As a rule, an investment bank’s fee on a large M&A transaction ranges from 1 per cent to 3 per cent of the value of the deal. The fee percentage rises as deals get smaller. Based on that scale, companies will pay a minimum of US$3.25-billion in M&A fees to financial advisers this year; in reality, the total is far higher. However, fees are paid only when deals close, so paydays for the dealers may be months away – for example, Bank of Montreal’s acquisition of Bank of the West is not expected to close until the end of next year.
Refinitiv’s statistics show Canadian financial-services companies, including domestic banks, insurers and pension plans, were involved in a record number of takeovers this year. With 10 days left in 2021, Canadian financial companies were involved in US$39-billion of transactions, exceeding the previous record of US$36-billion in takeover activity that played out in that sector in 2016.
In investment banking circles, a company’s potential to pay fees is known as its “wallet.” Canada is home to a number of businesses that are said to have big wallets, because they do large transactions on a regular basis, including Brookfield Asset Management Inc. , Power Corp. , Alimentation Couche-Tard Inc. and institutional investors such as the Canada Pension Plan Investment Board. Global dealers have offices in Toronto, and often in Montreal and Calgary, where bankers spend their days covering these clients.
Looking ahead, 2022 is expected to see the pace of deal making continue, as the global economy continues to recover from the pandemic and interest rates remain low. In a recent report, Colin Walker, managing director at M&A advisory firm Crosbie & Co., said: “Market conditions generally remain very supportive of continued strong levels of M&A activity in the coming quarters.”
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