Mergers and acquisitions activity has exploded. Here’s why – and the reasons it will continue for the foreseeable future

A Canadian Pacific Railway employee walks by the side of a locomotive in a marshalling yard in Calgary, 2012.

Jeff McIntosh / The Canadian Press

Many Canadians are banned. However, Canadian companies are on the move in the pandemic, launching record-high acquisitions and creating a deal-making boom that sees local businesses become international players.

There have never been more mergers and acquisitions – or more than $ 1 billion worth of mega-deals – and the fast pace of mergers and acquisitions is expected to continue for the foreseeable future. As CEOs, bankers, and lawyers prepare for the next big thing, interest in one of Bay Street’s favorite games – spotting the next takeover target – also grows. Hedge funds and analysts are working flat out, investing in companies whose stocks could rise in the event of a buyout.

The M&A surge began late last year when company executives realized that increasing vaccination programs for COVID-19 would lead to strong economic growth. Toronto-based insurer Intact Financial Corp. was one of the first, along with a Danish partner, to secure a friendly takeover of US $ 12.4 billion for UK rival RSA Insurance Group PLC. “Market sentiment changed last fall,” said John Emanoilidis, co-head of the M&A group at law firm Torys LLP. “The confidence of CEOs and boards of directors has increased, and that is always a good sign of transformative business.”

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That year M&A activity exploded. Globally, companies started acquisitions worth $ 1.3 trillion in the first three months of 2021 [is] The strongest deals openings on record, ”said Matt Toole, director of Refinitiv data services. Two of the five largest acquisitions in the world were initiated by domestic companies. Canadian Pacific Railway Ltd. ran for an American railroad with an enterprise value of $ 28.7 billion, and Rogers Communications Inc. submitted Shaw Communications Inc. with an enterprise value of $ 26 billion. “Many of the deals you see now reflect CEOs and boards rethinking plans that were already in the works before the pandemic,” Emanoilidis said.

The takeover madness is fueled by low interest rates, banks’ willingness to lend and rising valuations on the stock markets. There is also confidence in buyers’ boardrooms and realism in smaller business executives who are typically takeover targets. “Potential sellers are realizing that valuations are high and M&A are cyclical, so if a board is considering selling in the next five years, they are now open to offers,” said investment banker Ian Macdonell of Crosbie & Co. The competitive landscape is changing and it is more difficult to be a regional player in North America or worldwide. So if they can’t be consolidators, then they are sellers. “

The M&A party is expected to last until banks or investors take the punch bowl away. “Acquisition activity will continue until the credit market tightens, the economic outlook weakens, or we receive a significant correction in the equity markets,” Macdonell said. For hedge funds making acquisitions and investment banking analysts targeting this audience, the question is: who is the next target? A lot of data processing and a dose of common sense are used to create lists of potential buyers and sellers in all sectors.

For example, after Brookfield Infrastructure Partners submitted a hostile $ 7.1 billion offer to Inter Pipeline Ltd. in February. had given up, analysts at RBC Capital Markets scoured the energy infrastructure sector looking for CEOs who signaled they are open to offers. In a report last month, analyst Robert Kwan pointed to the management of AltaGas Corp. Hin, a utility company with a market cap of $ 5.9 billion. Mr. Kwan also said that Gibson Energy Inc., a $ 3.2 billion infrastructure company, is home to a “management team and board focused on creating shareholder value, including selling the business” .

In gold mining, an industry widely believed to be ripe for consolidation, Scotia Capital analysts released a report last week that contrasted company forecasts on key metrics such as gold production and costs with actual miners’ results. After a decade of sifting through data, Scotia found that companies that consistently did what their CEOs promised – Barrick Gold Corp. and Endeavor Mining Corp. – Enjoy first-class stock market valuations. Companies that have failed to achieve their stated goals – Yamana Gold Inc., Iamgold Corp. and the Peru-focused Compania de Minas Buenaventura SAA – trade with lower multipliers, making them potential targets.

The forest industry, which is cashless due to rising lumber prices, is expected to consolidate around its major domestic players. At the top of the grocery chain are companies like Canfor Corp., with the management team holding conference calls to discuss their ability to borrow $ 1 billion or more. Probable targets include regional rival Interfor Corp, according to RBC Capital Markets analyst Paul Quinn. or the pulp manufacturer Mercer International Inc.

Another round of deals is also expected in the oil sands, as companies like Suncor Energy Inc. and Canadian Natural Resources Ltd. continue to buy up their partners for Alberta projects. In a recent report, Scotia Capital analyst Jason Bouvier predicted that Suncor would spend up to $ 2.5 billion on minority stakes in Teck Resources Ltd.’s Fort Hills project over the next two years. and the French Total SA will issue. Vancouver-based Teck has signaled that it is open to selling Fort Hills. According to analysts, this would improve the mining company’s valuation by focusing more on copper at a time when the outlook for the commodity is bullish.

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Hedge funds that invest in acquisitions – an approach known as event-driven strategies – have been the top performers in the industry so far this year. They rose 7 percent in 2021, compared to an average total return of 5.5 percent and a 25 percent increase over the past 12 months, according to data service Preqin. Since there is no end in sight to the takeover boom, the fund managers are betting on the next round of big deals.

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