An increase in cross-border deals has enabled more foreign firms to creep up the deal-making tables.
Where once Canada's Big Six banks and Seven Sisters law firms dominated, global players have flourished in M&A advisory work as companies looking for bargains, or buyers for niche assets, turn to firms with larger footprints in international markets.
In 2014, cross-border M&A deal-making by dollar value rose 53 per cent to a seven-year high, according to data compiled by Thompson Reuters. In dollar terms as a percentage of all Canadian deals, it's the highest level since 2006.
Amid this shift, firms on both sides of the border are peacefully co-existing. U.S. and foreign firms say although they want to broaden their Canadian businesses, they aren't trying to conquer the domestic players. At the same time, the largest Canadian investment banks point out they still dominate in other tables for deal financing, even when they're not getting M&A advisory credit.
The largest merger of 2014 exemplified the kind of cross-border deals that have almost become commonplace: Canadian coffee chain Tim Hortons gets digested by U.S. chain Burger King and Brazilian private equity group for $12.5-billion. The deal was the product of work from investment banks and law firms from Canada and the U.S.
A slow-down in oil and a falling loonie won't deter foreign firms buying domestic companies, they say. Nor will Canadian pension funds, insurers and asset managers refrain from actively looking abroad for acquisitions. In January, Royal Bank of Canada said it would buy Los Angeles-based City National Corp., a bank with a meaty wealth management business, for $5.4-billion (U.S.) after more than a year of pursuit. And insurer and investment manager Fairfax Financial Holdings Corp. recently said it would acquire U.K. insurer Brit Plc for $2.3-billion (Canadian).
"Pension funds aren't slowing down and the consumer side has been very active," added Peter Enns, chief executive of Goldman Sachs Group Inc.'s Canadian business. "In fact, the overall dialogue level feels like the momentum is continuing with the exception of oil and gas … and the Canadian dollar."
The trend of cross-border deal-making has extended internationally, as these transactions doubled in 2014 to $1.3-trillion. And 2015 is off to an even stronger start than last year with cross-border seals making up a larger percentage of overall activity.
Goldman Sachs was the top investment bank for M&A involving Canadian companies last year, with bankers working on deals worth about $60-billion. (RBC Dominion Securities placed second with $47.7-billion worth of deals, making it the only Canadian firm to crack the top five.)
Goldman runs its Canadian offices with a mix of bankers working domestically as well as those focused on the global business. The U.S.-based firm has expanded its energy business in Canada over the last few years. "There's a pretty large amount of seats filled on flights between Calgary and Houston on a weekly basis, going back and forth between the two," Mr. Enns said.
Elite U.S. legal shops blanket the top 25 firms for M&A, taking 13 of the top spots on the chart. New York's Skadden Arps Slate Meagher & Flom LLP placed second in Canadian deals, with rival Paul Weiss Rifkind Wharton & Garrison LLP ranking fourth. (British "Magic Circle" firm Allen & Overy and Australian firm Minter Ellison also claimed spots.)
Top New York firms have clearly been watching Canada closely, opening new satellite offices in recent years – offices that in most cases practise only U.S. law and do not compete with Canadian firms for business here. And the recently-created, globe-straddling Norton Rose Fulbright LLP has also put an emphasis on international exposure.
Firms such as Barclays PLC have also expanded their operations in Canada of late. "It's been a hard four years of building the business, but we've grown from about 40 people to 90 people," said Bruce Rothney, chief executive of Barclays Canada.
And David Rawlings, chief executive of JPMorgan Chase & Co.'s Canadian business, says his firm's expansion is set to continue in the next two years, with growth in its commercial banking presence. "We're also building out some of our capabilities around Canadian equity and debt," he said. The firm placed a close third to RBC in the 2014 league tables, with $47.7-billion worth of M&A activity.
Still, the strengthening of these foreign banks doesn't necessarily indicate ambitions to elbow aside established players in the Canadian deal market.
If history is any indication, it isn't easy for foreign firms that decide to move into Canadian banking in a big way. "The last 30 years is replete with examples of American investment banks that come in and say, 'Yeah, we're in the Canadian market.' And then – boom – they're gone a few years later," said Peter Routledge, analyst at National Bank Financial.
"The Canadian banks are among our most important clients," said Mr. Rothney. "We're not trying to break a bunch of glass and make people unhappy with us," he added, saying he sees his firm as complimentary to the strengths of local players. The bank advised on $44.4-billion worth of M&A deals in 2014.
The law firms also say they're just following the deals. "We're not here to compete with the Canadian firms," said Adam Givertz, a Toronto-based partner with Paul Weiss.
Lawyer Emmanuel Pressman, co-chairman of Osler's corporate department, said that large deals involving U.S. companies or financial institutions usually see those clients engage U.S. lawyers as well as Canadian advisors. In the Tim Hortons deal, the doughnut maker had elite New York firm Wachtell Lipton Rosen & Katz LLP on its roster as well as Osler, because the company had a longstanding relationship with the law firm and there were U.S. legal issues to sort out.
Investment banks from abroad would need to invest more, go after domestic bankers and try to steal market share to pose a threat to the big Canadian investment banks, said Peter Routledge, analyst at National Bank Financial.
"The last 30 years is replete with examples of American investment banks that come in and say 'yeah, we're in the Canadian market' and then – boom—they're gone a few years later," he said. Red flags that they are advancing would include hiring more peoples, moving up the domestic league tables for underwriting, or advancing in commercial syndicated lending.
Still, with the low Canadian dollar, Mr. Pressman said, big U.S. buyers may continue to shop north of the border for corporate bargains, resulting in more U.S. law firms on the Canadian league tables this year.