Private equity to drive 2007 Merger and Acquisition (M&A) activity

Excerpts sourced from Law Times

2006 set a record for mergers and acquisitions worldwide. Deals totaled $3.79 trillion, 38% higher than in 2005, and 55 of the transactions were valued at more than $10 billion each, according to data from Thomson Financial. Europe was one of the big players, registering 39% more deals than in 2005 for a total of $1.43 trillion. The U.S. came in at $1.56 trillion, 36% higher than the year before. Private equity firms were major movers in this trend, responsible for 20% of global M&A activity and 27% of activity in the U.S., according to Thomson.

According to KPMG, the value of all M&A deals in Canada during 2006 hit US$173.6 billion, rising 26 per cent from 2005. The top five deals accounted for one-third of that activity or US$60 billion. They included:
• Xstrata PLC's US$18-billion acquisition of Falconbridge Ltd.
• Cia Vale do Rio Doce SA's US$1- billion acquisition of Inco Ltd.
• Barrick Gold Corp.'s US$10-billion acquisition of Placer Dome Inc.
• Goldcorp Inc.'s US$8.7-billion acquisition of Glamis Gold Ltd.
• Arcelor SA's $5.2-billion acquisition Dofasco Inc.

What will be the situation in 2007
Torys LLP, Blake Cassels & Graydon LLP, and KPMG LLP have all weighed in with studies examining upcoming mergers and acquisitions activity in 2007. They expect activity to increase and predict that private equity deals will play a more prominent role in capital market activity this year.

In the past two years, U.S. private equity firms have raised more than US$357 billion and Canadian firms have raised more than Cdn$7 billion. The markets are awash in private equity waiting to be deployed.

"Private equity firms have already become a bigger player in deals. The Blakes study found that 5.4 per cent of deals in 2005 involved private equity. By the third quarter of 2006, that had grown to 14.1 per cent."

The proliferation of private equity players means there are more bidders at the table. While deals used to attract two or three offers, now there can be as many as 10 parties expressing interest. Each one requires legal representation and for the party selling the asset, it means competitive bids and upward pressure on valuations — a good thing for the seller and a not so good thing for the buyer.

In its study, Torys notes that private equity will have growing impact this year in various areas. The first is going-private transactions. As public companies look to get out from under daunting market regulation, private equity is the savior.

The amount of private equity capital available and the fact many firms are banding together to do "club" deals — where they join forces to bid and pitch deals — means the size of a going-private transaction is almost meaningless.

Torys also expects pension funds to continue to invest more of their assets in private equity. That will spur them to do their own deals and they will also play a more prominent role in club deals.

Demographics are another factor giving rise to private equity deals in the coming decade. The first wave of baby boomers is hitting their 60s and those who have built successful businesses need to start thinking about an exit strategy. They will either have to pass the company down to their kids or sell out to management, a competitor, or an investment bank.

So what industries will be hot in 2007? For that we can look to the Blakes study. Its respondents felt that M&A activity of all types will rise in the coming year. The hottest sector will remain energy, followed by mining, and industrials and manufacturing.

The latter category will be a sweet spot for business law firms of all sizes, as the study notes that transactions in this sector tend to be in the US$20- to $150-million range. One-third of the Canadian investment bankers surveyed predict that deals in the industrial and manufacturing sector will attract more interest from foreign firms.

As for technology and telecom, interestingly, U.S. investment bankers are more optimistic than Canadians about the prospects for technology and telecom companies. Twenty per cent of U.S. bankers expect it will be the sector with the most consolidation, whereas 40 per cent of our investment bankers predict it will be the industry with the least amount of consolidation.