A buyer's market with few buyers

The $35-billion BCE Inc. takeover was disconnected by fine print. A Russian oligarch's $1.4-billion minority stake in Magna International Inc. was killed by a margin call. And Teck Cominco's $14-billion takeover of a coal company - on the eve of a commodity bust - was followed by a sickening 90 per cent plunge in its stock price.

Welcome to the great unravelling.

After years of easy money and soaring takeover volumes, last year ushered in a grim era of regret. Deal volumes fell off a cliff. Once-powerful buyers such as private equity funds and sovereign wealth investors have retreated. And the ranks of acquirers with serious deal remorse are growing as a deepening global recession threatens their ability to pay off takeover debts struck in headier times.

Last year, only $120-billion of Canadian mergers and acquisitions were announced, according to Thomson Reuters, a shadow of the $370-billion reported in 2007. Deals are so scarce that only $1.4-billion of transactions were unveiled in the first month of 2009, the lowest monthly level since 1995.

With so few acquirers and such steeply discounted stock prices, the current environment is shaping up as the buying opportunity of a lifetime. But few have the financial capacity or fortitude to wager money on takeovers in such uncertain times.

"Yes, it's a buyer's market," said Sharon Geraghty, a Torys LLP mergers specialist, "but it's a buyer's market with no money."

Bank loans, debt instruments and equity offerings, the fuel that stoked the hot takeover boom for more than three years, are now so elusive or so pricey that even bankers have a sense of gallows humour about the prohibitive cost of borrowing. "I'm not going to say it's extortion," Royal Bank of Canada's Blair Fleming quipped at a recent M&A conference.

Against this unsettling backdrop, the deal world is moving into uncharted territory.

"Anything is possible in this kind of environment," said Brian Pukier, a lawyer with Stikeman Elliott LLP who had the thorny task of advising Magna on the sale of a 20-per-cent stake in the auto parts maker to Russia's Oleg Deripaska in 2007, only to see it come unglued 18 months later after banks forced the struggling oligarch to sell the shares.

Traditional takeover rules no longer make sense in this environment.

"There is no playbook," said Pat Meneley, head of investment banking at TD Securities. "You can't fall back on conventional solutions."

Complicating matters, top Wall Street advisers that distressed companies historically turned to for innovative solutions have seen their reputations bruised by the spreading banking crisis. Canadian banks are on a much stronger footing, but the credit crunch has frayed relations.

"We are working very hard to deliver for clients at a time when, in some cases, they feel let down by the financial system," Mr. Meneley said.

For all the gloom, there are still strategic and cash-rich foreign buyers out there that deal makers predict will soon start pouncing on undervalued Canadian companies, particularly in the cash-rich oil and gas and mining sectors. Most of these takeover bids will likely be hostile because no thinking board is eager to sell companies at a time when share values have plunged between 20 and 30 per cent.

The problem for directors facing unsolicited bids is that most of the defences they traditionally employed to thwart low-ball bids are no longer available. Auctions are mostly out, because well-financed buyers are so rare they usually have the field to themselves.

That leaves one practical option for target companies that want to push up the bidding price: litigation. Last month, Certicom Corp. successfully deflected a low-ball bid from Research In Motion Ltd. by diving into the fine print of a confidentiality agreement that an Ontario Superior Court judge agreed restricted the BlackBerry maker from launching a hostile bid. The court victory gave Certicom time to attract a competing bidder, ultimately prompting RIM to double its original offer.

Certicom's victory, and a similarly successful challenge this week by mining takeover target Gold Reserve Inc., suggests that messy takeover brawls may become the new norm.

"In this economic climate, litigation is becoming a very important tactic that target companies can employ," said Seumas Woods of Blake Cassels & Graydon LLP.

All the litigation in the world, however, isn't much help for the growing number of companies that are running out of cash and access to financing to keep their businesses alive.

"There are an increasing number of companies who are forced to do something because of the liquidity situation, where basically they no longer have access to funds," said Peter Buzzi, head of mergers and acquisitions for RBC Dominion Securities.

Those companies left with no option but to put themselves up for sale are facing a much more aggressive breed of buyers. Acquirers are only willing to pay bargain prices - and they are winning unusual protections. Many suitors are demanding the right to negotiate exclusively with targets. Others insist on the right to walk away from takeover agreements if the company can't maintain its credit rating or other indicators of financial health.

Even with these protections, Andre Hidi, the head of mergers and acquisitions at BMO Nesbitt Burns Inc., said it can be extraordinarily hard to keep negotiations alive at a time when stock prices are so volatile.

"It's so difficult to negotiate a transaction," Mr. Hidi said, "and then once you've negotiated it, keep it on track through closing."

Top deals 2008