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Cross-Border Mergers & Acquisitions: The View from Canada

Ian Michael

Bennett Jones LLP

Thursday 13 June 2019


Canadian M&A by the numbers

To understand Canadian M&A market statistics better one should appreciate the relatively small number of large and domestic acquisition targets. To illustrate this feature, compare the headline M&A statistics for 2018 globally against those for Canada. In 2018, worldwide M&A activity totalled US$4 trillion, representing an increase of nearly 20 per cent compared to 2017 global deal value. By number, worldwide deal count actually declined 8 per cent as compared to 2017, a three-year low in fact. These measurements alone highlight the increasing significance of mega and large deals in global M&A activity. When you contrast those global statistics with 2018 deal activity in the Canadian market, a different, and opposite, theme emerges. In 2018, the total announced Canadian deal value decreased slightly by 2 per cent from US$253 billion in 2017 to US$247 billion. However, Canadian M&A transactions by number announced in 2018 rose to a new annual record high of 3,415 transactions, an increase of 14 per cent as compared to Canadian M&A transactions (any Canadian involvement) announced in 2017.

The opposite year over year directional changes in the Canadian M&A market as compared to the global M&A market by way of deal count and deal value should not surprise Canadian M&A market participants. The role of mega and large deals in the global M&A environment and their relative importance for large scale investors and financial and legal advisers alike, contrast with their predictably less common occurrence in the Canadian M&A market, even after taking into consideration Canadian involvement in outbound transactions. Consistent with a generally applicable 1:10 relationship with the US, the Canadian market often still regards US$1 billion or US$2 billion transactions as mega-deals as compared to a US$10 billion threshold (if not greater) in US or global markets. The general observation of note is the relative importance of mid-market deals in Canadian M&A. From a global perspective, Canadian mid-market deals are more likely to be viewed as lower mid-market transactions. Transactions with values below US$250 million routinely makeup an overwhelming majority of the transactions in the Canadian M&A context. For example, in the fourth quarter of 2018, transactions with values less than US$250 million accounted for 90 per cent of total announced Canadian M&A transactions.

Larger transactions do play a role of course in Canadian M&A as well, but recent statistics highlight that they are often more commonly found in Canadian outbound transactions led by Canada’s experienced, direct-investing, pension funds, large infrastructure investors and utilities operators who are looking for large-scale investments beyond their comparatively smaller home markets. In the fourth quarter of 2018 by way of example, the top 10 transactions with Canadian involvement by deal value ranged from US$1.35 billion to US$17.5 billion. Of these top 10 transactions, only two were wholly domestic transactions with both Canadian buyers and sellers of a Canadian asset. Another two of the top 10 were connected to Canada solely by virtue of a buyer or seller being listed on a Canadian-based stock exchange with the principal assets of each of the buyer, seller and target all located outside of Canada. Finally of note, and in keeping with their global reputation, three of the top 10 Canadian M&A transactions, and in fact the three largest, were transactions involving Canadian pension fund acquirers of international assets in the industrial, infrastructure and utilities industries.

The significance of the outbound segment of the Canadian M&A market is highlighted by the fact that in the fourth quarter of 2018, Canadian companies acquired 281 foreign targets representing 41 per cent of total M&A transactions with any Canadian involvement at all. Furthermore, cross-border deals in the same period represented 70 per cent of total Canadian M&A transactions by value.

In terms of country exposure, the US continues to be Canada’s most common cross-border M&A partner with just over 60 per cent of cross-border transactions occurring between Canadian and US parties. Given the significant difference in the size of the Canadian and US markets, it is notable that there is a consistent trend that Canadian–US cross border M&A activity involves far more acquisitions by Canadian companies of US targets, than US acquisitions of Canadian targets – by nearly a 2:1 margin.

Political events

2018 presented Canadian businesses with two cross-border issues of particular significance – Canada’s political relationship with the United States and the United States’ economic tensions with China. With the continued impact of tariffs on steel and aluminium from Canada (imposed on the premise of national security risk) and the public negotiation and settlement (though not yet implemented) of a revised free trade agreement between Canada, the US and Mexico both creating economic and political rifts between Canada and the United States in 2018, cross-border acquisition and business development planning was challenged with uncertainty and political animosity. Though 2019 has so far been comparatively quiet, steel and aluminium tariffs imposed by the US, and the broad range of tariffs introduced by Canada in response remain as inefficient market-place disrupters and also as potential impediments to the implementation of the revised Canada–US–Mexico free trade relationship.

Separately, the significant escalation of economic tensions between the US and China in 2018 has also likely affected the Canadian M&A market. US–China tensions might have normally also created some opportunities for Canada as an alternative market, but the tensions unexpectedly swept into Canada at the end of 2018 with the receipt of an extradition request by Canada from the US for the chief financial officer of Huawei. The status of Huawei’s CFO, as the daughter of the founder of Huawei and a senior officer of national technology champion of China, already the subject of international debate regarding technology security concerns, forced Canada into an international debate that Canada had certainly hoped to avoid. Canadian M&A with Chinese buyers has fluctuated for a variety of reasons (eg, energy prices, currency controls and mineral prices) over the past decade, but it has persisted in its importance and potential. The trade tensions between the US and China, and technology tensions between China and western based technology hubs, has likely contributed to a slowing of inbound M&A transactions to Canada from China as compared to prior years. The reduction in these transactions in the US has been far more dramatic with the tightening up of CFIUS approvals that had already proven to be difficult. Outbound investment by China in 2018 fell generally for the third straight year. With 2018 investment in the US totalling just US$13.2 billion as compared to US$50.9 billion of transactions conducted by Chinese buyers in Europe, Canada is at some risk of being skipped over on the way to Europe. Announced transactions from China and Hong Kong into Canada fell from 34 in number with a value of US$5.65 billion in 2017 to 25 in number with a value of US$2.64 billion in 2018, but even with this reduction deal value between Canada and China remains higher than it was in any year between 2013 and 2016. The ongoing tension over Huawei’s participation in 5G technology in many western countries coupled with the ongoing extradition proceedings in Canada involving Huawei’s CFO will continue to present headwinds, but not barriers, for Canada–China M&A transactions. Canada–China transactions are continuing, and the appetite of Canadian governments to continue to build economic ties continues. While the current tensions and their impact on the Canadian M&A market may not be short lived, they will not be permanent.

New industries

In 2018, the rise of two particular new industries materially affected Canadian M&A – cannabis and artificial intelligence. The legalisation in Canada of cannabis in 2018 stoked the already hot market for cannabis-driven corporate transactions in Canada. Second, and less heralded, was the rise of artificial intelligence (AI) start-ups in a number of technology hubs in Canada. In 2018, building off already considerable momentum in 2017, there were approximately 60 new public companies created in the cannabis industry – most born from reverse takeovers by US businesses finding an opportunity to list on a public market in Canada using another Canadian market feature – the public company mining exploration shell. The Canadian RTO playbook for cannabis businesses was on such a pace in 2018 that market observers noted that the historical availability of public company shells for proposed RTO transactions was starting to become a barrier. Given the continued status of cannabis under the federal laws of the US, Canadian stock exchanges and other financial industry infrastructure in Canada have presented significant opportunities to serve as an M&A catalyst for US and other international businesses in this industry. The rapid rise in the number of new Canadian public companies in this industry will inevitably stock the shelves for future Canadian M&A activity – much of which was already exhibited in 2018.

AI companies have also represented a new segment of the M&A market. The significant investment of government and university research programmes in this space has spawned world-class AI technology companies that are the current subject of venture financing from international sources, with both the US and China at the top of the cross-border list. The cross-border M&A opportunities in AI are beginning to surface and will continue to build in this segment of the market.

Notwithstanding continuing legal challenges to infrastructure developments of national importance such as pipelines and unresolved trade uncertainties with the US and China, the Canadian M&A market has proven to be resilient in the face of similar challenges before and Canadian buyers will continue to be active in the international marketplace.


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