May 01, 2008
M&A activity throughout Canada soared to record levels in early 2007. Credit became readily available in ever-increasing amounts, at aggressive leverage levels and historically low credit spreads, and on covenant terms that reflected the negotiating leverage of borrowers.
But the frenetic pace of M&A activity has come to a crawl, as the formerly white-hot U.S. economy falls into a recession and the subprime mortgage mess continues to freeze the liquidity of easy credit from banks.
With so much uncertainty among financial institutions and concern about how deep the American recession will be, Canadian M&A work is cooling off. But corporate lawyers across the country agree that Canadian law firms should still be able to weather the storm.
Krista Hill notes that "we aren’t seeing the mega-deals as we did in 2006 and 2007, but I do think there will still be plenty of M&A activity. We do expect to see a flight to quality, where borrowers with solid fundamentals will still have a ready market for their debt requirements, but on terms that better reflect historical norms."
Krista predicts a more cautious approach by lenders throughout 2008, coupled with tighter credit terms: "Credit has become more restrictive, [not only] in terms of the actual covenant terms and conditions, but also in terms of availability of the liquidity. We certainly have seen the Canadian M&A markets affected by that."
With the credit crunch, certain strategy shifts can be expected in the M&A market. Torys’ Top 10 M&A Trends for 2008 says that strategic bidders are expected to do well in the upcoming year, since they can structure offers that are less subject to credit market deterioration. Bidders can offer shares; might have access to their own stream of cash flow; and might have greater access to credit if they have a strong balance sheet. But they also have different considerations in making acquisitions, including transaction synergies and competitive factors that make them less likely to re-evaluate a transaction on the basis of short-term market developments.
Other upcoming trends are that we will see M&A lawyers retooling as the market bears more restructurings and reorganizations; and more international strategic buyers will be involved in M&A transactions—countries like India, the Gulf States, China and Russia have booming domestic economies and are not as affected by the credit issues; and sovereign wealth funds, with staggeringly huge reserves, will be more involved.