January 2, 2014

Whilst the indices of global bourses have, with a final dash in the second half of 2013, regained or surpassed the levels attained prior to the financial crisis, global M&A activity has remained broadly flat for a fourth year running. This contrasts sharply with the level of mergers and acquisitions in the United States, where activity of this type rose 11% in 2013. Total U.S. deal volume topped a trillion dollars; this testament to a recovering economy, an open business climate and the perceived “safe haven” status of the American Dollar resulted in the United States accounting for 43% of worldwide M&A activity. (All data from Thomson Reuters.)

What is equally noteworthy is the acceleration of U.S. deal-making during the third and fourth quarters. This has fed an environment wherein the two major groups of players in M&A – corporations and private equity firms – are both emanating a sense of stability and consequent optimism regarding deal-making conditions in 2014.

Cheverny expects that this combination of a greater confidence around stability and economic growth will lead U.S. strategic buyers to longer term, and potentially bolder, thinking about corporate portfolios. This context has historically proved to be very positive for deal-making.

In Canada, 2014 may produce a rather more nuanced set of conditions. The recent weakness in the Canadian Dollar will obviously have the effect on making assets less pricey in U.S. dollar terms. That said, enthusiasm for deal-making may fall onto either side of a “resources fault line”, producing a complicated set of interplays.

The boom in U.S. energy production from unconventional oil & gas assets (largely thanks to drilling techniques such as hydraulic fracking) has had an effect on the medium-term strategic value of higher-priced oil in the Western Canadian sedimentary basin and the oil sands. Similarly a cooling of the fever in global mining has had knock-on effects in both Canadian M&A and financing markets (indeed Canada saw only one $1+ billion mining M&A deal in all of 2013). Longer-term these assets will retain their strategic value, but the buoyant market in resources M&A may take some time to revive.

Conversely U.S. strategics may be willing to play rather more actively in non-resources Canadian M&A. Cheverny has been struck by Darling Industries’ (DAR – NYSE) $US645 million bid for Maple Leaf Foods’ (MFI – TMX) rendering operations as well as by the interest of North American strategics in the auction for substantially-larger Canada Bread (a second division being unloaded by Maple Leaf). Canada is viewed as a good market for firms looking for growth in consumer products, industrial goods, technology etc. Telecoms remains a greyer area, as the uncertainty sparked by Ottawa sinking Accelero’s $500 million bid for MTS Allstream on security grounds has raised questions for buyers from markets outside the U.S. and historically close trading partners of Canada.

A trend Cheverny has great enthusiasm for is the growing use of independent M&A advisers. Cheverny advised Cogeco (CCA – TMX) on its $635 million purchase of Peer1 Networks. Independent M&A firms worked on some of the largest transactions during the year including the private equity purchase of H.J. Heinz, G.E.’s sale of its remaining NBCUniversal stake to Comcast, Libery Global buying Virgin Media and the Publicis/Omnicom merger.

A countervailing trend, touched on in another essay we published this week, is the influence of activist funds. These players are more numerous and, based on the successes enjoyed by the likes of Messrs. Ackman and Loeb, able to deploy larger capital pools. Indeed the Maple Leaf Foods processes alluded to above were spurred by Toronto’s West Face Capital assuming control of a significant position (owned by Ontario Teachers Pension Plan) and driving for a programme of asset disposals and portfolio rationalisation.

In 2014 Cheverny will be watching if the presence of larger and more numerous activist funds does not change the M&A weather. Firms with lagging share prices that have, or fear they may soon have, activist funds knocking at the gate may decide that buying (i.e. improving the corporate portfolio for growth) may arouse the ire of activist funds. These companies may well decide that special dividends and/or asset disposals are by far the safer route. Other companies may argue that it is increasingly hard to deliver organic growth from an existing portfolio, and that M&A (especially in an era of low interest rates and a consequent ability to borrow inexpensively) is the best route forward; to date activist funds have by and large dismissed this line of reasoning. Buy-sdie M&A may therefore turn out to be the preserve of those companies that have not attracted the attention of activist-minded investors. Whether boards will now put M&A deals through the filtre of “will this attract the attention of an activist?” is an interesting derivative question.