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Bank towers are shown from Bay Street in Toronto's financial district, on Wednesday, June 16, 2010.Adrien Vecz

Canadian companies spent a good deal less money swallowing up foreign firms last year, but there are early hints they will be hungrier to do cross-border deals in 2018.

The value of Canadian buyers' outbound mergers and acquisitions dropped by half in 2017, totalling US$63.8-billion including debt, following two record years in 2015 and 2016 when outbound deal values topped US$130-billion each year.

Although the deals were smaller last year, the total number still increased by 132 to 768, according to data from Thomson Reuters.

The brisk cross-border activity of recent years has bolstered competition between the largest Canadian and U.S. banks to advise on the biggest transactions. American banks – with their long-standing ties to U.S. clients and broad global reach – are reaping a larger share of the spoils as a result.

Four of the five banks at the top of the league tables for advising on M&A involving Canadian companies last year were U.S. giants of financial services: Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Citigroup Inc. The lone Canadian bank to crack the top five was TD Securities Inc., which finished fourth, with involvement in 49 deals worth just shy of US$45-billion.

Yet, when the buyer is foreign and the target is Canadian, the tables tell a rather different story. Four of the eight leading banks in that case were Canadian when measured by the total value of deals. Bank of Montreal and Royal Bank of Canada worked on the largest numbers of inbound mergers and acquisitions.

Out of 1,616 inbound mergers and acquisitions worth a combined $36.2-billion – up from $21.2-billion in 2016 – BMO and RBC worked on more deals than any other banks.

"The structural change within that Canadian environment [is that] a lot of Canadian companies have now become North American companies," said David Rawlings, JPMorgan's senior company officer for Canada, who is based in Toronto.

The M&A league tables are typically skewed by the largest deals. In 2017, those included Cenovus Energy Inc. spending $17.7-billion to buy oil sands and other assets from ConocoPhillips Co., and Canadian Natural Resources Ltd. paying US$8.5-billion in cash and shares for a controlling stake in the Athabasca oil sands project. A mix of Canadian and U.S. banks advised on both deals.

But when a Canadian buyer pursued an American target, top U.S. banks were more dominant. When Ontario utility Hydro One Ltd. paid $4.4-billion to buy Washington-based Avista Corp., Canadian banks were shut out of the advisory business altogether, in favour of Merrill Lynch and boutique adviser Moelis & Co. Canadian banks did participate in financing the deal.

For years, Canadian banks have added muscle to their U.S. capital-markets operations, building expertise in key sectors and making the case to clients that they can grasp the cross-border dynamics as well as, or better than, large U.S. banks.

"What we've been doing – and it takes time to build those relationships – is bringing those U.S. and sometimes European bankers and putting them in front of our Canadian clients," said Peter Buzzi, co-head of M&A at RBC Dominion Securities Inc.

While there weren't as many megadeals in 2017, one trend that hasn't changed is that there's a cross-border element to the majority of Canadian deals, said Geoff Barsky, head of Canadian and international M&A at BMO Nesbitt Burns Inc. "When we talk to our clients, we can tell you that they're continuing to look abroad into the U.S. for M&A growth opportunities."

The smaller size and slower pace of cross-border activity in 2017 may have been partly due to that fact that some of the firms that have made multibillion-dollar deals in 2016 or earlier – Enbridge Inc. and TransCanada Corp., for instance – are still digesting those acquisitions, Mr. Buzzi said.

But as they begin to emerge from two-year to three-year integration plans, some heavy hitters could come back to the negotiating table. Pension funds and private-equity firms also still have huge pools of capital that need to be deployed.

"I would characterize [2017's slowdown] more as a normalization of the amount of outbound activity – [it was] still the third-highest level that we've seen historically," said Bill Quinn, head of M&A at TD Securities.

With solid growth rates among the world's major economies, clarity about the magnitude of U.S. tax cuts and oil prices climbing back above US$60 a barrel, the stage is set for a strong year for M&A, particularly in the latter half of 2018. Last year, as U.S. lawmakers wrangled over the details of a sweeping package of tax cuts, some companies' boards and management teams were "hitting the pause button" while they waited for clarity on the outcome, Mr. Barsky said.

Now that the tax bill is law, many U.S. companies are more expensive, but their valuations and future cash flows are easier to pinpoint. And the sudden drop in U.S. corporate taxes, combined with a push to relax regulations, have shifted the competitive balance for Canadian companies that are looking south.

"I think that tax reform has been a near-term headwind, but could turn out to be a long-term tailwind for Canadians investing in the U.S.," Mr. Rawlings said.

This is part of the Report on Business annual Big Deals package of stories and tables about financing and investment banking, including the winners of the 2017 Canadian Dealmakers awards.

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