South of the Canadian border, regulatory oversight and scrutiny continues to play a noticeable role in making it more difficult for private companies to raise capital through bank loans. In this climate, could strategic cross-border M&A become a more popular growth strategy for US companies which are unable to access traditional lenders and are unsure about resorting to non-traditional lenders?
M&A may be attractive for various reasons, many of which are common knowledge. Private companies want to grow, increase their market share, or perhaps enter a new market. At the centre of any such aspiration is the "how" question –"how do we raise the capital required to achieve the envisioned level of growth"? Private companies don't have the benefit of the public, ready-to go stock market, so their most popular resort is to seek private investment (including private lending firms) or turn to traditional lenders. However, this has become more difficult in the past decade.
The post-2008 environment of regulatory oversight and scrutiny has led many traditional banks to be more and more selective to whom they lend. Even if one is an existing client, banks are equally selective when deciding whether to make a leveraged loan. While non-traditional lenders have offered a flexible alternative, they typically have much higher interest rates. Consequently, even if a private company could resort to non-traditional lenders, it has to be strategic about the growth-strategy it adopts –and that is where a the risk factor in M&A may, in some situations, appear to be a better alternative to a do-it-on-our-own growth strategy.
Looking from above, private companies have good reason to consider cross-border M&A transactions as an alternative to a do-it-on-our-own growth strategy. With the currently deflated Canadian dollar, and many experienced and established companies in multiple Canadian sectors, there's a lot of substance to the phrase "the price is right", especially north of the border. The recent spike in equity financing in the Canadian energy sector, is a signpost for that sector's growth, but why limit ourselves to one sector? With proper legal advice and due diligence, private companies may find that a cross-border M&A to provide a better bargain for their capital in many other industries.
The author would like to thank Blanchart Arun, summer student, for his assistance in preparing this legal update.
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