January 12, 2009
While deals are still flowing, buyers now have the advantage, predicts Torys in its annual Top 10 M&A Trends for 2009.
During the height of the easy lending markets, says Aaron Emes, a target company would conduct an auction process and play bidders off one another to get the best possible offer, with the buyer taking on the bulk of the financing risk. But the recent financial downturn has seen a deterioration of credit markets, says Aaron, making it more difficult for private equity firms—which previously fuelled deals and squeezed out strategic buyers—to borrow money. That has caused many purchases, like the now-defunct $32 billion BCE deal, to cave in.
"As people started seeing these deals shifting, and realized they couldn't get easy financing anymore, there started to be a shift in the M&A market," says Aaron. "Certainly the pendulum is now shifting to a market that is favourable to buyers now as opposed to sellers."
Necessity is the reason for selling in these markets, says Sharon Geraghty. "The sellers will be sellers that have to sell. That could be companies in distress, and distress could come about in a number of ways. One way I think we will see is with companies with debt that they have to refinance, for example, that want to restructure their debt and just aren't able to get refinancing."
There will also be an influx of income trusts for sale nearing the end of 2009, says Sharon, with tax breaks for such entities ending in 2011. M&A activity will also arise as governments spend public funds on infrastructure projects to prop up the ailing economy, and sell off assets to replenish coffers.
The shift to a buyers' market will force lawyers to change their approach. An immediate consequence of parties trying to back out of deals has been a heightened attention to the wording of agreements. "I think lawyers will find clients are going to be asking a lot more questions about 'what if,' and wanting their lawyers to be sure that they are protected in the way that they thought they would be if the deal goes a certain way," says Sharon. "Nobody wants to be involved in litigation, so I think that avoiding the courtroom, it was always in our mindset, but I think now clients have seen that deals have ended up in the courtroom and they don't want to be one of those deals. They want us to really make sure their documents are much tighter."
Sharon is optimistic that the market will recover in time for 2010, while Aaron suggests that it will be a lot longer—if ever—before things return to the 2007 levels.
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