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M&A boom

Last year's deal making was the most brisk in at least five years and it's expected to continue unabated this year

Globe and Mail Update

Pots of cash, audacious bidders and hungry, new international buyers drove the flow of mergers and acquisitions last year to the highest level since the technology-stoked deal bonanza of 2000.

But this M&A boom is much nastier and more complex than previous frenzies, and it has only just begun. Takeover experts say the deal pipeline is so clogged with potential acquisition proposals that the pace should remain in overdrive for much of the year.

"There is no sign that things are letting up, we are as busy as ever," said Brian Levitt, co-chairman of Osler Hoskin & Harcourt LLP, which was ranked the top legal M&A adviser last year.

Adds Jim Christie, chairman of Blake Cassels & Graydon LLP: "It looks like we are headed for another banner year."

Nearly $160-billion (U.S.) of Canadian takeovers and mergers were unveiled last year, according to Thomson Financial, up 53 per cent from $104-billion in 2004. At the top of the deal charts were Old Economy legends, such as Falconbridge Ltd., Placer Dome Inc. and Dofasco Inc., which are being gobbled up by global consolidators.

What makes the current deal frenzy unique is the global explosion in rich corporate shoppers and the proliferation of assertive shareholders who are either pushing corporate laggards into play or holding up deals for higher prices. The combination of these two powerful forces has triggered an unprecedented wave of hostile bids and forced such unwilling targets as Hudson's Bay Co., Fairmount Hotels, Geac Computer Corp. Ltd. and Creo Inc. to fend off hostile bids, most of them unsuccessfully.

"It was a year of surprises," said Gary Girvan, head of M&A at McCarthy Tétrault LLP, which saw a number of long-standing major clients, such as Falconbridge and CP Ships Ltd., gobbled up by bigger fish. "Boards of directors are faced increasingly with hostile bidders, financial buyers and activist investors who are prepared to take higher risks for higher returns."

The unfriendly moves are putting enormous pressure on boards of directors and their advisers to make snap decisions about deals and alternative strategies. These complexities, coupled with new laws, are changing conventional legal wisdom about corporate disclosure, defence tactics and deal structures.

"It is a much more difficult decision-making environment for boards," said Jon Levin a lawyer with Fasken Martineau DuMoulin LLP, who has been racing with such clients as Hamilton steel maker Dofasco Inc. to keep up with rapid-fire competing bids from ThyssenKrupp AG and Arcelor SA.

Further complicating M&A transactions is the ever expanding global footprint of deals, which is triggering prolonged competition reviews in multiple jurisdictions. Inco Ltd. has seen the closing of its $13.6-billion (U.S.) takeover of Falconbridge stalled twice by competition regulators, each delay giving other suitors more time to consider a competing offer.

What makes this wave of acquisitions different from previous years is the massive chests of cash that buyers are lugging to the deal table.

Junk bonds fuelled takeovers in the late 1980s and frothy technology stock prices fed scores of stock-swap mergers in the sector in the late 1990s.

This time around, there are new breeds of buyers with very deep pockets and urgent agendas. The biggest group is made up of equity funds, which have been given trillions of dollars by pension funds and other investors who are seeking higher returns than the stock market can offer.

Also dominating deal tables are state-owned companies from countries such as China, India, Russia and Brazil who are seeking oil and gas and mining assets to stoke their hot economies. These new buyers play by different rules, forcing M&A legal advisers to travel more frequently to exotic locations and accommodate the unfamiliar pressures of political interference.

While many corporate legends are being eaten up by larger global acquirers, it's not all bad news.

The folks at Ernst & Young Orenda Corporate Finance Inc., who specialize in medium-sized companies, say they have never been busier. Flying below the radar in the private sector is a second tier of private equity funds that have been quietly financing acquisitions and mergers of the next generation of business giants.

"You've got new cash coming into this sector, which means that these businesses now have a chance to move into the big leagues in Canada," said Denis Lemieux, president of Ernst & Young.

Canadian M&A - Top legal advisers*

Canadian firms vied with global firms for the top rankings on Canadian deals in 2005.

LEGAL ADVISER2005 RANK2005 VALUE ($MILLION U.S.)NO. OF DEALS IN 20052004 VALUE ($MILLION U.S.)2004 RANKNO. OF DEALS IN 2004
Osler Hoskin & Harcourt1$50,163.00 7430,076.90176
McCarthy Tetrault234,268.307014,189.10654
Davies328,937.70389,817.6098
Skadden, Arps427,595.0094,144.002610
Fried Frank 525,508.1011896.5552
Stikeman Elliott624,812.007012,809.30757
Blake Cassels & Graydon723,462.70516,545.80176
Sullivan & Cromwell822,189.30717,420.5038
Torys919,664.60447,810.601144
Herbert Smith/Gleiss Lutz/Stibbe1014,940.6051,483.20473
Allens Arthur Robinson1114,083.1064.51102
Simpson Thacher & Bartlett1213,561.10515,918.1048
Cravath, Swaine & Moore1313,449.9063,391.10304
Paul Weiss 1413,020.3077,075.801413
Fasken Martineau 1512,634.20107,591.90124
Borden Ladner 1612,305.90485,027.102312
Fraser Milner 1711,530.80201,949.60441
Freehills1810,996.90751.40979
Ogilvy Renault1910,810.60156,888.401516
Dorsey & Whitney2010,669.10402,763.403224
Clayton Utz2110,666.2032,045.60423
Goodmans228,831.90235,440.502014
Freshfields237,583.0062,371.60383
Clifford Chance246,661.207177.00852
Lovells256,260.0042,168.60412

*Announced Canadian deals including PetroKazakhstan, CP Ships and Nelson Resources. Excludes equity carveouts and withdrawal deals.

SOURCE: THOMSON FINANCIAL

© The Globe and Mail

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