The disconnect is disorienting. Ask the average person on Bay Street how they feel about the current market and the most likely answer is, "business could hardly be worse."
And yet, last year, the total value of Canadian equity deals was close to a record high; the initial public offering market cracked open again; debt financings remained hot and heavy because rates are still so low; and mergers and acquisitions involving Canadian companies nearly touched $300-billion (U.S.).
And 2016 is already showing promise, too. Although equity markets saw a rocky start to the year, M&A deal flow has been steady – sometimes even scorching, as it is for power and utilities – and investor appetite for equity offerings roared back in February. Even shares of resource companies are in demand.
Of course, no one can argue everything's peaches. Independent dealers, in particular, are struggling. But lost in the negative headlines is a move toward largely boom times for bigger dealers.
One of the key drivers: a rise in billion-dollar equity offerings. Last year, Canada had 11 of them, an incredibly high figure. Just two months into 2016, we've already seen three more – for Enbridge Inc., Algonquin Power and Utilities Corp. and Franco-Nevada Corp.
Lately, major deals have comprised a bigger share of total deal values – a trend that is beneficial to the largest dealers with balance sheets capable of absorbing the associated risk. In 2012, the top 20 deals totalled $12.1-billion; in 2015, the top 10 alone raised $15.8-billion. Even more telling: Last year's 20 largest equity deals comprised half the total value of offerings.
Two major themes are behind this. The first is investors' willingness to step up and support financings tied to acquisitions. Some of the biggest equity offerings – for the likes of Element Financial Corp., Emera Inc. and Franco-Nevada – have helped fund corporate purchases. Investors are more likely to support a growth strategy.
The second is a growing preference to backstop select companies investors trust. It's tough to convince shareholders to support a shaky balance sheet or a hypergrowth story. They will, however, line up behind companies they can depend on.
"There has absolutely been a flight to quality and a flight toward proven management teams," said Bruce Rothney, head of Barclays Canada. "The investors know who the smart managers are." Enbridge's $2-billion deal in February, for one, was heavily oversubscribed.
Another simple angle can't be overlooked, either. Canadian companies have become bigger over time, both through organic growth and through acquisitions, and that means their financing needs have also increased, notes Dan Barclay, head of corporate and investment banking at BMO Nesbitt Burns. Raising $1-billion isn't as much of a feat if a company has a $25-billion market value.
Few seem to notice merger and acquisition activity has also been on fire. M&A involving Canadian companies climbed to $279-billion (U.S.) last year, according to data from Thomson Reuters, near a record high.
The reason this isn't getting much attention must have something to do with where the targets are located. Roughly 80 per cent of all M&A last year was outbound, meaning Canadian buyers are doing deals abroad – which, again, benefits the largest investment banks, because Canadian pension funds and Brookfield Asset Management are the most common acquirers in foreign countries, and they are often advised by large lenders who help finance their deals.
M&A deal flow has also been spread across sectors, making it harder to mentally track how much has happened. Already in 2016, there's been billion-dollar acquisitions in retail pharmacy (McKesson buying Rexall), mining (Franco-Nevada buying a gold stream) and waste management (Waste Connections buying Canada's Progressive Waste Solutions).
Because activity is so diversified, both by sector and by geography, it's unlikely the recent policy change affecting the length of time poison pills can stay in place will do much to cool the market. "The reality is that there's a lot of M&A activity in Canada, but hostile M&A is infrequent relative to arrangements and board supported transactions," said Manny Pressman, a partner at Osler Hoskin & Harcourt LLP. "Even if there was a chilling effect, it wouldn't be that noticeable."
So why the negative tone on Bay Street? Mr. Barclay chalks much of it up to broad economic jitters and roller coaster markets. "People are highly influenced by where the TSX is trading today, or where the S&P 500 is trading today," he said. "We've been reading nothing but bear market stories."
If that proves to be the root cause, there's reason to have hope. The market's been rallying – and a sustained rebound will certainly change headlines.