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Corporate mergers to remain slow as uncertainty clouds economy

A look at Toronto's Bay Street, in the heart of the city's financial district.


A nagging lack of overall confidence in the economy coupled with concern about wobbly world prices for metals is expected to keep the pace of corporate mergers in Canada over the next year slow, Bay Street lawyers say.

That doesn't mean veteran deal makers at some of the country's most prestigious business law firms say they have been left idle.

They point to activity outside the dominant resources sector, such as the recent spate of retail deals.

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And they say that many potential deals, particularly in the resource sector, are worked on for months, only to be put on hold by nervous buyers – a situation few see improving until commodities prices stabilize. This despite companies with ample supplies of cash and credit.

"There are a lot of deals that are looked at very closely and that ultimately don't see the light of day," said lawyer Jeff Lloyd of Blake Cassels & Graydon LLP. "Buyers do remain cautious."

What is to blame in the resources sector is the so-called "value gap," as buyers are reluctant to pull the trigger on deals based on commodity prices that could sink suddenly, and sellers are unwilling to let their assets go at steep discounts.

Getting around this problem is one key focus of a report from Torys LLP on mergers-and-acquisitions trends for the next year.

It says the tough environment has been spurring "innovative deal practices," such as a more widespread use of what are known as "contingent value rights" – or provisions that try to bridge the gap between what buyers are willing to pay and sellers are willing to accept.

John Emanoilidis of Torys LLP says the idea, commonly called "earnouts" in the acquisition of private companies, allows sellers to receive additional payments if the company hits certain performance benchmarks.

With public companies, shares in the new company can be handed over, but with arrangements called "collars," which entitle shareholders to compensate them if the shares sink below a certain price.

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"On transactions that we've been involved in, it has come up as a possible bridge," Mr. Emanoilidis said, adding that they are common in pharmaceutical deals where the effectiveness of a promising drug is not yet known, but could be used in other sectors such as resources.

The M&A report from his firm also highlights other trends, including increasing shareholder activism.

And it punctures the idea that the federal Competition Bureau, seen to have more aggression in recent years, has been slowing down deals. According to the Torys report, the watchdog's reviews have been taking less time on average, not more.

Lawyers also say new, but unconventional, potential buyers are also showing interest Canadian mining companies: U.S. private equity funds.

"They are all kicking the tires, they are looking at operating assets," said lawyer Shea Small of McCarthy Tétrault LLP, who adds that private equity funds are hiring mining experts and looking at mines that have been put up for sale as the sector retrenches.

But without a change in commodity markets, few Bay Street lawyers expect dramatically more merger activity in Canada overall over the next year, given the dominance of the resource sector.

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Still, David Woollcombe, a colleague of Mr. Small's at McCarthy, expects activity across a wide variety of industries, and cites banking as a potential bright spot: "There's lots of signs of life beyond resources."

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About the Author
Toronto City Hall Reporter

Jeff Gray is The Globe and Mail’s Toronto City Hall reporter. He has worked at The Globe since 1998. He spent six years as the law reporter in The Globe’s Report on Business, covering Bay Street law firms and writing about fraud, insider trading and corporate tax avoidance. More


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