May 26, 2014

Two recent publications – a set of statistics on Canadian private equity and an academic paper examining the value of “go shop” provisions in M&A transactions – underscore how certain assumptions at the nexus of M&A strategy and private equity may be worth revisiting.

Take Privates Dominate Canadian Private Equity In Q1…

The Canadian Venture Capital Association released its statistics on private equity and venture capital investing for the first quarter of 2014.  The headline numbers were striking. At a cursory level, private equity investing doubled in Q1 2014 to $4.6 billion. The number of deals rose 3% to 77. That being said, two take-private transactions in the broadly defined health / pharmaceutical sector accounted for over half the total deal volume (56%). In both instances foreign private equity launched a take-private of a Canadian public company with limited analyst coverage and investor depth.

In the first deal U.S. buyout firm JLL partnered with Royal DSM NV (a life sciences firm) to pay $1.46 billion for Patheon. The second notable transaction saw European buyout shop Permira, (joined by the Caisse de depot and the Fonds de Solidarite, who added local colour through 12.5% positions) spend $1.1 billion to purchase Atrium Innovations.

Without these two transactions, volume and deal size would have been basically flat. What conclusions can be drawn from the data?

  • Canada is an opportunistic market for private equity funds with large pools of unspent capital.
    • The two, foreign-led take –privates accounted for 56% transaction volume
    • 62% of transaction volume ($2.86 billion) was foreign firms buying a Canadian health/pharma company (US mid-market firm CCMP paid $300 million for vitamin-maker Jamieson)
    • Four of the five largest deals ($3.36 billion of  $3.81 billion – or 88% of the top 5) were foreign private equity buying Canadian companies
    • Canadian private equity remains a lower mid-market opportunity set, as evidenced by the $26 million adjusted average deal size. 76% of transactions by number were made-in-Canada deals: consistent, or indeed above, recent run rates.  43% of dollars invested (on the $4.6 billion) – and over 95% of the total amount of dollars invested adjusting for Atrium and Patheon – were in the sub-$500 million segment.
    • Conversely, Canadian firms are increasingly looking abroad. In Q1 Canadian private equity firms spent $3.1 billion outside of the country, as compared to $2.1 billion in the year prior period.
    • Thomson Reuters and CVCA published a chart the aim of which is to illustrate the “private equity intensity” of the Canadian and US economies. Canadian deal volume is, for the purposes of this chart, multiplied by 10 (a reflection of the approximate ratios of the population masses of the two countries).

26 May blog - PE intensity

Source: Thomson Reuters/CVCA


… Making An Analysis Of “Go Shop” Provisions All The More Relevant

That the headline deals in Q1 were take-private transactions highlights the relevance of a recently published academic research paper on “go shop” provisions (an increasingly common tool in public – and sometimes private – company M&A).

The research paper by Adnis Antoniades of the European Central bank and Charles Calmoiris and Donna Hitscherich of Columbia Business School ( ) begins by noting that “The manner in which firms sell themselves in the market is an important, and little-studied, topic. Firms must decide whether to enter into an agreement with an acquiror as part of a bilateral discussion or as part of a broader “auction” process. Once they have chosen to do one or the other, they must decide how aggressively to continue to market themselves to other would-be acquirors prior to their shareholders’ vote on the acquisition. Firms, unlike commodities, are unique assets and are acquired as part of a costly process of investigation by potential acquirors.”


Boards of directors of a target company have a responsibility to obtain the “best transaction reasonably available to the company”. In the increasingly governance-minded environment of the modern board this often manifests itself in a demand that an acquirer acquiesce in the target firm having a “go shop” provision to see if another, better offer can be solicited from other potentially interested buyers.  In turn this often results in acquirers demanding, and receiving, a termination or “break fee”. These seem to have settled in the 3% – 5% range.

Their research on this arrives at some interesting conclusions:

  • “Go shop” provisions are most commonly seen in deals involving public companies where there is a widely distributed shareholder base (i.e. no dominant shareholder voices on the board). Where a dominant shareholder exists, “go shop” clauses are less common. As the paper notes “the interest of legal counsel may also diverge from that of target shareholders. To the extent that future potential clients evaluate law firms on the basis of their ability to avoid litigation risk in the crafting of merger agreements, lawyers seeking to acquire reputations for negotiating transactions that avoid litigation risk may advise their clients to use go-shops too frequently. Because go-shops may serve to reduce litigation risk, lawyers always benefit when their clients include a go-shop clause, even if adopting a go-shop is not value maximizing for the client.”
  • This state of affairs is seemingly producing growingly perverse outcomes. Buyers, wary of “go shop” provisions, are increasingly shrinking the takeover premia they are willing to pay (perhaps, it might be inferred, to retain dry powder to top a competing bid during the “go shop” period). By the same token, many “go shop” periods do not produce a better, competing offer. As a result deals are being done below where they might have transacted had the “go shop” not been in place. This removes legal risk for the board, but reduces potential returns for shareholders

In light of this, public companies facing an unsolicited offer could benefit from hiring an independent adviser. A first order of business would be to work with an adviser to ascertain whether an offer is full-premium or in fact a bid priced to allow for a tactical flexibility to top a bid solicited during a potential “go shop” period. Put another way, there may be circumstances in which a “go shop” is appropriate and others during which efforts could be better invested in negotiating a trade off between securing a “best and final” offer and restricting or abandoning a go shop period. The goal in either instance would be to ensure that shareholder value is maximised.  The major investment banks – whether bulge bracket or Canadian bank-owned dealers – are rife with conflicts of interest (they may be lenders to, advisers to, investors in or trading counterparties to the other side) and are consequently less well suited to this role than a truly independent firm.