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Middle Market Business Insights

North American M&A activity in 2014 was exceedingly optimistic as values and volume increased. According to Thomson Reuters, almost $3.5 trillion worth of deals were announced over the year – a strong 47% improvement over the total deal value for 2013. Looking ahead to 2015, this pace should continue as the North American recovery remains underway.

However, other economies around the globe are facing challenges. The Eurozone, the Middle East and many of the emerging markets are teetering as a result of unstable politics and the plunging price of oil and other commodities. Russia, one of the world’s biggest economies, is on the brink of a recession as a result of sanctions related to ongoing conflict in the Ukraine. Russia’s economic ministry halved its 2015 GDP growth forecast from two percent to one percent. Over the summer of 2014, it was reported that Italy, the third-largest economy in the Eurozone, had fallen back into recession. France, the second-biggest economy in the Eurozone, is also in a precarious position as result of political turmoil.

This environment could create a strong climate for American companies with healthy balance sheets looking to take advantage of an appreciating dollar to pursue cross-border M&A deals. On the home front, the outlook is expected to be just as good as private equity groups continue to access cheap capital and strategies continue to be cash rich.

Transactional Overview

M&A activity for North American based target companies in Q4 2014 included 3,553 closed deals, marking a strong close to a blockbuster year for M&A. According to Dealogic, the top deal sector (by value) in 2014 was Telecommunications and Technology, driven by megadeals such as Facebook’s acquisition of messaging platform WhatsApp.

Canadian M&A activity had a total transaction value of $157 billion in 2014. While the number of acquisitions decreased by 0.6 per cent compared to 2013, total value increased 20.9 per cent over the past year as larger transactions were completed. KPMG forecasts this trend to continue through 2015.

The Energy and Power sector retained the top spot on the total transaction value list, with acquisitions totalling $49 billion. The Consumer Staples industry, pushed by Burger King Worldwide’s acquisition of Tim Horton’s Inc ($13 Billion), took second spot with a total transaction value at $21 billion.

Is Cash Still King?

While strategic acquirers are still sitting on record levels of cash ($1.65 trillion) there has been a reluctance to pay all-cash for acquisitions. According to Deloitte, in 2012 all-cash deals accounted for 75% of closed transactions. Since that time, cash-only deals have accounted for just 60% of closed transactions. Many deals over the past 12 months have involved stock, which, based on the stock market climate of 2014, proved lucrative. This trend is expected to continue in 2015 as stock prices continue to rise.

Using Leverage

Data from Dealogic shows that leveraged loans, which are the primary debt instrument used for M&A transactions, stood at $1.35 trillion in 2014 - with $206 billion used for acquisitions, the highest since 2007. With the availability of cheap capital, private equity is able to pay significantly higher multiples. Low interest rates and the easy availability of cash signals a continuing strong M&A market in 2015.

2015 Economic Outlook

According to the OECD, the economic growth forecasts for Canada in 2015 and 2016 have been reduced to 2.2 and 2.1 per cent, respectively. This is a result of a significant drop in prices for oil and other commodities since November of 2014. Previous forecasts estimated Canada’s GDP to grow 2.6 per cent in 2015 and 2.4 per cent in 2016

2015 Canadian M&A Outlook

The rising M&A activity trend is also supported by a recent KPMG survey of over 700 M&A professionals in the US, including investment banks, private equity firms and corporations. This study found that 82% of respondents are planning to make at least one acquisition in 2015, which is a higher number than 2013 and 2014. This US trend is expected to permeate the Canadian M&A market in 2015 as well.

2015 M&A Market Predictions:

Larger transactions will likely ensure the Canadian M&A market will have a higher total annual transaction value in 2015.

The weakening of the Canadian dollar means that there are greater possibilities for international buyers of Canadian companies. It also means that Canadian companies will probably be shifting their focus to more domestic transactions as sectors such as manufacturing enjoy the benefits of a strong US economy.

Key sectors for M&A activity in 2015 should be Real Estate, Energy and Power, Materials, and Retail. Also, as oil companies seek to lower their production costs due to the low oil prices, there could be an increase in Oil & Gas dea

For additional information contact:

Douglas Nix, CA | Vice Chairman
Corporate Finance Associates | Toronto West | 905-845-4340 x211 | info@cfaw.ca