After an abrupt halt in mergers and acquisitions caused by the global credit crunch, a much-changed market is expected to regain some of its steam this year, according to law firm Torys LLP.
Gone will be the Wild West-style deal making of early 2007, which was fuelled by cheap and easy debt. In its place - a return to caution and greater quality regarding both assets and their prospective buyers, according to Torys' report, the Top 10 M&A Trends for 2008.
"I think in big picture terms we do see somewhat of a slowdown in 2008 compared to 2007, and there won't be as many deals and there certainly won't be as many large deals," said Phil Brown, co-head of the M&A group at Torys. "However, I didn't see the frenzied part of the cycle as the norm. A normal market is a sustainable one."
A midyear collapse in the market for high-risk U.S. mortgages rocked Canada.
Nervous lenders tightened credit and put a halt to the merger spree.
Mr. Brown said the M&A market should gain balance now that lenders have tightened up their covenants, are doing more due diligence and are increasing the cost of debt to better reflect risk.
But while high-quality buyers and companies will still have access to credit, takeover deals will become more difficult and take longer to complete, he said.
One of the other notable differences in 2008 is likely to be the near-absence of private equity-led mega-deals, at least in the near term, Mr. Brown said.
"I think we've seen a halt, at least, in the very, very large deals led by private equity," he said.
"I think they will come back, but I can't say whether that will happen in this cycle," Mr. Brown said.
The immediate impact of the credit crisis was evident in third quarter M&A data compiled by investment bank Crosbie & Co., and released in November.
Total deal values came in at $91-billion compared with $166-billion the previous quarter.
The participation of leveraged buyers, including private equity firms, in deals exceeding $100-million fell to 9 per cent of the total deal value compared with 42 per cent in the second quarter.
Despite this late-year decline, the total deal value for the first nine months of 2007 had already reached $319-billion, surpassing a record $275-billion for all of 2006. In 2008, deal levels should be closer to those of 2006, Mr. Brown said.
After a couple of lean months, M&A activity had started to pick up again in November.
Since then, the impact of the credit crisis has become evident in the terms being sought by both buyers and sellers, said Sharon Geraghty, co-head of the M&A group at Torys.
"Given all the circumstances that have happened there's going to be a real shift in the way transactions take place," she said.
Sellers, for example, want more guarantees their deals will go through. They have become more likely to sign on with a buyer and then look for other potential bidders through a "go-shop" provision rather than encourage a more risky auction process, she said.
Buyers have also become more inclined towards caution, wanting to avoid paying upfront costs for a deal that might not go through, Mr. Brown said.
Other trends for 2008 include a shift back in favour of strategic buyers, who had previously found themselves trumped by financial buyers at every turn.
There's also likely to be a pickup in the acquisition of foreign assets by Canadian companies whose buying power has been bolstered by the high dollar, according to Torys. Canadian pension funds have the added benefit of a long-term investment horizon and less reliance on debt, and are expected to be significant deal makers this year.
Foreign buyers from booming economic regions including China, India, Russia and the Gulf states will also be active this year, according to Torys.
A hot area will likely be the infrastructure market, where governments are becoming increasingly receptive to tapping the private sector to help replace aging assets such as roads, ports and power lines, said Krista Hill, co-ordinator of Torys' infrastructure and energy group.
"I think with the tightening of the credit market ... a flight to quality is happening right now. Strong infrastructure businesses are characterized by stable cash flows and long-term inflation indexed returns ... all the stuff that banks like to see."
Merger trends for 2008
- Credit party stays quiet
- Cautious lenders and pricier debt leave little hope of a return to the frothy debt markets of early 2007.
- Sellers seek protection
- Deal clauses should make it tougher for buyers to walk away due to major adverse changes such as the global credit crunch.
- Lines blur between private equity and hedge funds
- Asset managers jostle for alternative ways to put money to work.
- Market for distressed
- M&A picks up
- Overleveraged companies and those facing pricier refinancings could be ripe for the picking.
- Sellers lose some leverage
- Less competition could give buyers an edge, leading to fewer auctions and more friendly deal terms.
- Strategic bidders back in the running
- After being outgunned by highly leveraged financial players, the days of companies buying their competitors is back.
- Canadian buyers gain clout
- The high dollar, strong pension funds and economic strength versus the U.S. should boost Canadian takeovers of foreign targets.
- Foreign buyers bring it on
- Global takeovers and investments by buyers from booming India, Gulf states, Russia and China will continue
- Politics in play
- As governments assess foreign takeovers by sovereign wealth funds, sometimes suspected of putting politics above investment merits.
- Infrastructure leads the way
- Governments continue to turn to the private sector for help fixing sagging infrastructure such as roads, ports and power lines.