January 04, 2006
In merger and acquisition circles, 2005 will go down as the year that takeovers got nasty.
Canadian markets saw a record number of hostile acquisitions. The targets ranged from corporate icons to obscure income trusts. In each case, potential buyers opted for what investment bankers call “friendly unsolicited offers” after initial takeover overtures were turned down.
Torys, at the heart of the action, noted that there have been an average of ten hostile bids annually through the last seven years; then in the last four months of 2005, the number exploded to eight.
Going hostile works in Canada. “American lawyers joke that we Canadians have taken all the fun out of takeover defences,” says Phil Brown. “Once a takeover is launched at a Canadian company, it tends to be sold. In the United States, companies have far more options to fend off bidders.”
The trend in Canada was that deals that started hostile ended up friendly once the initial bid was raised. Takeovers, no matter how hostile their origin, are hard to resist in Canada for several reasons. Firstly, regulators tend to favour open auctions, and have usually denied boards' attempts to “just say no” or roll out a poison pill. Secondly, activist investors, such as hedge funds, have used hostile bids to put a company in play. Thirdly, the maturing income trust sector has created opportunities for funds with deep pockets and solid valuations to take out smaller rivals with lower valuations and slumping unit prices.
According to merchant bank Crosbie & Co., there were 816 takeovers worth C$103-billion announced through Q3 of 2005—up 20 percent over 2004 in deal number and value. Corporate financiers expect the frenzied pace to continue due to favourable underlying economic conditions: low interest rates, surging commodity prices, confident CEOs and strong balance sheets.
Another other major factor in Canadian takeovers promises to be the growth of private equity funds. There are more of them, and they're larger, so the size of buyouts is likely to jump. Players are also looking to deploy money on bigger deals, as we saw in the 2005 US$15 billion purchase of Hertz by a private equity consortium.