If there is anything that Canadian dealmakers are all too familiar with in 2019, it's the concept of uncertainty. Raging trade wars, geopolitical tensions, elections, and a forecasted economic downturn are all pervasive in everyday conversation. Despite this, deal flow has remained robust throughout the first three quarters of 2019, as summarized in a recent post. Fortunately, significant uncertainty in relation to trade with the U.S. and Mexico is hopefully coming to an end.
Representatives from Canada, the U.S. and Mexico met last week to sign what some are calling "NAFTA 2.1" but is formally known as the Canada-United States-Mexico Agreement, or CUSMA. There are still hurdles before CUSMA becomes domestic law as each country must ratify it. Prime Minister Justin Trudeau said that Canada is currently deciding whether his government should reintroduce the bill to ratify the trade deal before or after the holidays. Experts on the topic agree that passing the bill is unlikely to be contentious in Canada.
We discussed the importance of tariff-free entry for goods and services from Canada into the U.S. previously. Canada is often viewed as a gateway to U.S. markets. As such, the prospect of this new agreement should perk up the ears of dealmakers both within and outside Canadian borders. With more certainty regarding U.S. and Mexican duties and tariffs on the horizon, companies will have a greater ability to assess the risks associated with supply chains and to value companies posed to the be their targets with increased confidence.
According to PricewaterhouseCoopers, in the first half of 2019, the number of inbound and outbound deals stayed relatively stable when comparing to the second half of 2018. Commentators reason that trade tensions and uncertainty cause dealmakers to proceed with caution. That being said, Crosbie and Co. reported that foreign acquisitions of Canadian companies increased by 7% in Q3 as compared with Q2, and were the highest quarterly volume since Q2 2017. The introduction of relative trade certainty should further encourage dealmakers to move forward with in-and-outbound acquisitions in 2020.
While the exact content of the amendments accepted by the U.S. House of Representatives are unknown at the date of writing, we do know that if CUSMA is passed by Congress (Congress is expected to vote on CUSMA in early 2020), at least cross-border dealmakers will have a level of certainty about trade relations between the three countries that has not existed in years. Dealmakers can hedge their risk on other areas instead, such as foreign geopolitical tensions and trade wars.
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