Conditions set for M&A growth: panel

The right conditions are in place in North America and globally for an increase in mergers and acquisitions in 2011, but some caution from the crisis still lingers, according to a panel of top business and banking executives.
A combination of increased liquidity and higher confidence will make 2011 a better year for M&As than 2010, the panel told an audience at Torys LLP offices in downtown Toronto last week.

Peter Buzzi, managing director and co-head of M&As with RBC Capital Markets, said confidence is an important driving factor in the current M&A markets.

“I would say that confidence right now is pretty good,” he said.

Investors have also been waiting cautiously for the past three years, and are now looking for opportunities, said Simon Brown, head of consumer products and services at international private equity firm Kohlberg Kravis Roberts & Co.

“What’s happened is that you have cash buildup in various parts of the market for years,” said Brown. “Investors have concluded that they can’t sit it out anymore.”

Things have improved in the global perspective, but company management teams remain under pressure to show growth, said Geoff Beattie, president and CEO of The Woodbridge Company Ltd.

“There is no question that the mood is shifting toward a lot more optimism around the world, but I still think there is a little bit of caution out there,” he said.

Frank McKenna, deputy chairman of TD Bank Financial Group and a lead director of Brookfield Asset Management Inc., said some of the M&A growth will come from the fact there has been a lot of pent-up demand in the market.

“A lot of companies that didn’t want to sell during the downturn are now sitting on much more robust valuations,” he said. “And you have so much liquidity around.”

Turning to Canada in particular, McKenna added that M&As in the resource sector would continue to grow because scale is important for resource companies. “You are going to continue to see consolidation take place.”

In Canada, where the resource sector accounts for more than half of total M&A activity, there are also political implications for acquisitions of large Canadian companies following the failed bid for Potash Corp. of Saskatchewan Inc. by Australian company BHP Billiton Ltd., the panel noted.

However, banking executives on the panel said the government intervention against the bid does not signal a policy change by the Canadian government, as long as it does not become a trend in other M&A translations.

McKenna said the PotashCorp deal needs to be placed in the specific political context of provincial and federal politics as being only one of two blocked deals out of 1,600 merger and acquisition agreements approved under the Investment Canada Act.

“I don’t think it represents a terrible signal to the world,” he said.

However, McKenna added that if more deals were blocked under the Investment Canada Act, the perspective of investors could change.

“I think it puts a lot of pressure on the government, knowing that if they block two in a row, it is going to be construed in a different way,” he added, answering a question about the other major deal currently under consideration, the merger of London Stock Exchange Group plc. and TMX Group Inc., the owner of the Toronto Stock Exchange.

Buzzi’s company, RBC Capital Markets, served as advisers for PotashCorp. He agreed with the assessment that the PotashCorp case does not signal a policy change.

“We don’t believe this is the new normal,” he said, adding the PotashCorp case was very specific because it dealt with a large natural resources company that has a tremendous social and political impact in Saskatchewan and Canada.

But the deal faced more issues than just politics. Other actors were against it based on the belief that the price offered per share was too low.

“It was a hostile takeover, and there was antagonism to the deal,” said Buzzi.

Moderated by Torys chairman Robert Prichard, the panel also discussed the perspective of future investments from sovereign wealth funds and issues relating to the corporate governance of public companies.

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