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Sellers sup dose of hard reality
Unprecedented global economic conditions are making 2008 a more difficult year for mergers and acquisitions than in the past few years. The U.S.-led credit crunch – which is not yet easing off – has significantly changed business in the past six to 12 months. Changes in government regulation involving the purchase of Canadian businesses by foreign, state-owned enterprises also have the potential to significantly impact transactions as do the strength of commodity prices and the Canadian dollar. The first point to emphasize is that sellers need to be more realistic in the current environment. For the past few years, sellers have had a plethora of buyers for almost any opportunity ranging from financial buyers to strategic buyers to the general public through IPOs or other general public market transactions. Credit was easily attained and financial buyers were almost always at the forefront able to offer the best price for an acquisition. Often, securing financing would not even be a condition of purchase and, in fact, in early 2007, many deals involving bank financing included unconditional (or limited conditional) commitment letters. Now, we are seeing a more limited sphere of buyers and a return of the strategic buyer where competitor buys competitor and economic synergies are the transaction driver rather than simply financial considerations. Sellers need to think long and hard about how they deal with buyers who need to secure financing. Due to a tightening of liquidity from the credit crunch, “deal completion risk” is now, more than ever, a key transaction issue. When an M&A transaction falls through, for example, offers from previously jilted suitors are unlikely to be as high while reactions from a range of stakeholders, including employees and customers, will be negative. More frequently, we are starting to see “reverse break fees” as a means to address such risks. These are the opposite of “standard” break fees which enable a seller to break an agreement (and accept a higher bid) prior to closing provided a fee is paid to reimburse the buyer for effort and inconvenience. Hefty reverse break fees are one measure to protect sellers from buyers unable to complete a transaction. Another trend impacting such transactions is the growing sense of discomfort with the number of large state-owned enterprises or “sovereign wealth funds” roaming the world buying up foreign assets. Recent reports have put the total capital available for investment by these entities at over $2 trillion. Chinese state-owned enterprises, for example, are increasingly active in a variety of commodity related industries while the Libyan government recently announced a plan to join fellow Arab States, Qatar and Dubai, in funding foreign purchases through oil revenues. One of the largest and most high profile of these state-owned enterprises belongs to Norway with one of its objectives being to influence the adoption of its corporate and ethical philosophies through investment. Historically, the federal government, through Investment Canada, reviewed certain acquisitions by foreign entities of Canadian enterprises based on the size of the Canadian target and of the acquiring entity and on whether the intended acquisition was in certain “protected” Canadian industries. Recently, the federal government added guidelines to allow for a review of transactions where there are national security implications or where a foreign state-owned enterprise is the prospective acquiring party. The impact is yet to be determined. High commodity prices have fuelled a great deal of mergers and acquisition activity in the past few years that shows no sign of slowing, particularly with the influence of the growing Indian and Chinese economies. There is a slight sense of unease, however, that there will be a limit to this growth and that a larger economic slowdown will have an impact. On a positive note, however, the strength of our dollar, which has made some Canadian business less attractive from a foreign perspective, should provide opportunities for Canadians to purchase assets abroad. • Deborah Overholt is Vancouver managing partner of Borden Ladner Gervais LLP. This article was written with Nigel Cave, Vancouver leader for BLG’s securities and capital markets group. BLG is a leading full-service, integrated national law firm focusing on business law, litigation and intellectual property solutions with offices in Vancouver, Calgary, Montreal, Ottawa, Toronto and the Waterloo region. Business in Vancouver April 15-21, 2008; issue 964 |
