After the record breaking year that was 2015, MergerMarket's 2016 Half-Year Edition reports that M&A activity in the first half of 2016 has fallen by 10% in total deals and 30% in deal value compared to the same time last year. Despite this decline, 2016 should be looked upon favourably so far, considering the worldwide political instability it has faced with the United Kingdom's decision to leave the European Union (Brexit) and the uncertainty surrounding the United States Presidential election. Both of these events have contributed to a decrease in the volume and value of transactions in 2016. Further, this decline can be attributed in part to the megadeals that were abandoned in the first half of 2016. With the Allergan and Pfizer US$160bn deal, the Honeywell and United Technologies US$102bn deal and the Haliburton and Baker Hughes US$38bn deal all failing to close in the first half of 2016, this year was on track to be building upon 2015's success instead of failing to meet expectations. When compared to historical post-crisis years, all of this may be signalling that the M&A market is normalizing rather than plummeting again.
When looking forward to the balance of 2016, with the usual and expected August swoon behind us, there is reason to believe that the final quarter will be strong. Although the megadeals previously mentioned all failed to close due to strict regulatory oversight by the US and other global governments, it is expected that a number of divestures and spin-offs will occur that will mitigate the loss of these deals in 2016. Additionally, with the Canadian Dollar recently dropping and the uncertainty in the EU because of Brexit, this may increase cross-border M&A activity in North America. This may also result in a decrease of friendly offers and an increase in hostile takeovers if the acquirer is better capitalized.
Focusing specifically on Canada, a number of factors appear to be indicate a strong finish to 2016 with historically low interest rates, stabilizing equity markets, relatively high stock prices and highly capitalized companies looking to spend on deals. With shareholder activism on the rise and a decline in the IPO market, "there should be both more divestures and more companies looking to sell rather than go public".[1] Further, the relatively weak Canadian dollar will also make Canadian companies more valuable to foreign acquirers. Although still down, the mining sector is starting to rebound and with gold producers most likely in a restructuring phase, distressed M&A activity may be on the rise as consolidation is a global trend right now.
Although 2016 probably never had a chance to surpass the historically high M&A activity of 2015, it is in its own right a success. Marred by political instability and government regulation, if the projections are accurate, Q4 of 2016 should be able to overcome that uncertainty and further prove that the M&A market has stabilized.
The author would like to thank Robert Corbeil, Articling Student, for his assistance in preparing this legal update.
[1] MergerMarket, Deal Drivers Americas, 2016 Half-Year Edition, at page 6.
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