Hostile takeovers could flourish in Canada in the coming years as the impact of COVID-19 shifts the balance of power between prospective buyers and the boards of target companies.
Hard-hit industries are ripe for consolidation, with well-capitalized businesses primed to take out struggling competitors. In this unsettled environment, hostile takeover bids could re-emerge as a popular M&A tactic, according to law firm Davies Ward Phillips & Vineberg LLP, which published a report on hostile takeovers on Monday.
Hostile bids have been in decline in Canada for more than a decade, largely due to weakness in the commodity sectors that dominate Canadian stock exchanges. In 2016, first-mover hostile bids – where would-be buyers bypass negotiations with a target company’s board and go straight to shareholders – became even harder when Canadian regulators introduced new rules that give more power to boards to fend off unwanted suitors.
The minimum bid period was extended to 105 days, up from 35 days, exposing hostile bidders to changing market conditions for longer periods of time. A minimum tender condition was also added to boost the power of shareholders not affiliated with the bidder.
While these changes tilted the scales in favour of boards looking to defend against takeovers, "the COVID era has essentially stripped that away, or rebalanced the tables once again,” said Aaron Atkinson, a Davies partner and author of the report.
“A target board, maybe they have some leverage under these rules, but they may be disinclined to use it because they have other pressures they’re now facing: a restive shareholder base that would like any liquidity at all costs, creditors who may be wanting a stronger balance sheet, even employees who may prefer to work for a larger company," Mr. Atkinson said in an interview.
“On the flip side, the buyer, now knowing that the target has weaker defences, may take the plunge and go after some of these companies," he said.
Of course, for any M&A to happen, friendly or hostile, would-be buyers need to feel confident in their own finances and in the long-term viability of the target. In the short term, many companies will likely focus on shoring up their own balance sheets and right-sizing their businesses to reflect diminished cash flow.
The Davies report suggests that “expectations of significant consolidation activity should be tempered" by the longer-term downward trend in Canadian public M&A.
Hostile bids dropped by 50 per cent in the past four years, compared with the preceding four years, which suggests that the 2016 rule change had an impact. But friendly bids also declined in the same period.
Negotiated public takeover bids dropped by 24 per cent in the past four years, compared with the preceding four years. The trend was even more pronounced for deals involving “strategic” buyers – companies in the same industry as their targets – which declined 30 per cent over the period.
It’s hard to pinpoint a single cause for the decline in public deals, Mr. Atkinson said, but the new hostile bid rules may have had a knock-on effect on friendly transactions by removing a bidder’s “plan B," should friendly negotiations fail. Low commodity prices and an overall decline in the number of listed companies in Canada also likely played a part, he said.
COVID-19 has further unsettled public M&A activity. Many deals that were in the works before March have been put on hold or cancelled as valuations plunged and earnings outlooks darkened. Most notably, Cineplex Inc. announced on Friday that Britain-based Cineworld Group PLC has terminated its $2.2-billion takeover bid for the Toronto-based movie theatre chain.
There are exceptions, such as the mining industry, where strong gold prices have supported robust M&A activity in recent months. On Friday, for instance, Chinese miner Zijin Mining Group Co. Ltd. announced that it would acquire TSX-listed Guyana Goldfields Inc. for $323-million, topping an earlier bid by Silvercorp Metals Inc.
Mr. Atkinson said its too early to say when M&A activity will return to normal for non-mining industries. When deal-making does come back, however, watch for more hostile bids. As the Davies report puts it, “shareholders in weakened companies might be more receptive to any liquidity event over insolvency."
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