|
  By Sharon Geraghty and Matthew Cockburn, co-leaders of Torys' M&A Practice. Torys LLP is an international business law firm with offices in Toronto and New York. He can be reached at 416.865.7662 and mcockburn@torys.com, and she can be reached at 416.865.8138 and sgeraghty@torys.com. This is an excerpt of a 16-page report, which can be found online at http://www.torys.com/Publications/Documents/Publication%20PDFs/MA2010-1.pdf
We predict that 2010 will be remembered as a comeback year with significant M&A activity. While 2009 was a slow year in the M&A space, in 2010 the pickup in M&A activity will be considerable.
We expect activity to include acquisitions in the "green" and media and telecom sectors. Life sciences will continue to be robust though mid-market focused. Well-run Canadian pension funds and banks will also take advantage of their relative strength to make international acquisitions. Large conglomerates, including financial institutions, will carve out their non-core assets. Private equity is also showing signs of renewed interest in acquisitions.
Although foreign buyers will face some scrutiny from the Canadian government when national security issues are triggered, "national security" will not be viewed as broadly as was once feared. Canadian M&A deals may also face more lengthy and onerous antitrust reviews.
In 2010, shareholders will continue their unprecedented level of activism, which began in 2009. Canadian directors may experiment by trying to “just say no” to unsolicited offers, while recent developments suggest that U.S. directors may tread more cautiously on this front.
Torys’ M&A lawyers are looking ahead to 2010, and this is what we see.
1. “Buying Green” Will Grow
We foresee demand for renewable energy assets continuing to grow in both Canada and the United States in 2010 and beyond for a number of reasons. First, large industrial emitters, such as TransAlta, will be under continuing pressure to reduce their carbon footprint or otherwise to prepare for the impending regulation, in some form, of greenhouse gas emissions. One strategic way for emitters to address the impending regulatory burden in a carbon-constrained environment will be to own renewable energy or other “green” assets. Second, to increase installed capacity of renewable energy, many jurisdictions have introduced programs to assist in the development and financing of renewable energy projects.
2. “Just Saying No” May Get Easier in Canada and Harder in the United States
The decision of the Ontario Securities Commission in Neo Material Technologies and the musings of Vice Chancellor Leo Strine, Jr., of the Delaware Chancery Court, have revived the debate on both sides of the border on whether and when a target board may rely on a poison pill to “just say no” to a hostile takeover bid, pre-empting target shareholders from determining the outcome of the bid. Until the uncertainty created in Canada by Neo is clarified through further decisions, there is the prospect of more contested securities regulatory hearings in Canada on the use of poison pills as a defensive tactic.
Delaware courts, after showing some early hostility to poison pills, have taken a generally deferential approach since the late 1980s to the use of pills to “just say no” to unsolicited offers if the target corporation was not for sale. This deferential approach appears to have been premised, in part, on the ballot box being open to target shareholders, making a proxy fight possible to replace a recalcitrant board.
3. Canadians Will Go Shopping
There is an increasing trend for leading Canadian companies, pension funds and other investors to seek growth opportunities outside Canada. Canadian financial institutions are currently well-positioned to purchase foreign assets. Many Canadian pension funds still collect more than they pay out, so these funds have an inherent need to increase their investment activities.
4. Carving Out Assets Will Get Messy
The financial and economic crisis will continue to feed the spinoff market as distressed companies and oversized conglomerates seek to sell non-core assets and thereby enhance their balance sheets. A spinoff transaction requires that a parent carve out a currently integrated business as a stand-alone. The issues involved in a carve-out include how to split assets and liabilities, how much debt the spun-out entity will take on and how much debt will remain with the parent, and what type of working relationships should be put in place between the parent and the spun-out entity. These issues are more difficult to resolve when, as is often the case in the current crisis, the transaction is born of necessity and little groundwork has been laid to prepare the spun-out entity to operate on a stand-alone basis.
5. Power to the People: Heightened Shareholder Activism Will Continue
Shareholders of all sizes have pushed companies (and their boards) not only to enhance value through strategic transactions but often to unlock value for shareholders by selling non-strategic assets or freeing up cash reserves for dividends. This was done through proactive communications with management that pushed for shareholder votes on significant corporate decisions; proxy contests directed at changing boards, effecting specific approvals or changing control itself; and requisitioned meetings or shareholder proposals to force decisions on special interest matters. At the same time, shareholder advocates used a variety of techniques, some new, to promote maximum shareholder participation and enfranchisement. We see this activism increasing in 2010.
6. Private Equity: Baby-Stepping Its Way Back to the M&A Table
Private equity financial buyers on both sides of the border are poised to emerge from their long slumber. Financial buyers have been forced to the sidelines in the last two years, largely as a result of the scarcity of debt financing. There are strong signs that the Canadian and U.S. debt markets are back, and private equity players have begun to secure loans for their portfolio company acquisitions. Rates are higher and the quantity of debt may be reduced, but debt is now available to facilitate completion of deals. Given the more pronounced easing of credit conditions in Canada, coupled with the relatively stable state of the Canadian economy, we expect that Canadian targets will be of particular interest to both Canadian and U.S. private equity buyers in 2010.
7. Media and Telecom Assets Will Change Hands
The market is ripe for merger and acquisition activity in the media and telecom sectors. The recession, declining advertising revenues and increasing competition from the Internet and other non-traditional media continue to put financial pressure on conventional over-the-air broadcasters. We expect these pressures and ongoing changes in the demand for media to put individual assets or groups of assets into play. We also see these pressures prompting some media companies to streamline their activities and shore up their capital structures by exiting non-core or unprofitable businesses. The recent closures and sales of local television stations may signal this trend.
8. More BioPharma M&A in 2010, but Healthy or Distressed?
As blockbuster drugs began to come off patent, big pharmas – fearing loss of revenue share – rushed to couple with their counterparts in 2009. The big pharmas are hungrily looking for additional products and innovation to fill their sagging pipelines and in 2010, they will refocus and continue to look to small and mid-sized biotech companies for license, partnership and acquisition transactions. The liquidity crunch in the venture capital community and capital markets has created an environment in which small and mid-sized biotech companies need to consider a pharma deal earlier than they may ideally desire. In addition, although licensing deals have traditionally been pharmas’ preferred route of engaging with early-stage biotech companies, depressed valuations of public biotech companies are making acquisitions more attractive and, ironically, even cheaper than licensing deals. At the same time, the licensing deals continue to be increasingly complex financial deals, which are precursors to follow-up acquisition.
9. Not a Pandora’s Box: National Security Reviews of Foreign Investment in Canada Will Be Limited
Recent changes to the Investment Canada Act allow the Canadian government to review foreign investments on national security grounds, regardless of the size of the target or of the investment. Accordingly, foreign buyers potentially face a new hurdle when investing in Canada. However, investments in natural resources will not generally trigger national security reviews. “National security” is not intended to encompass “national interest.” Enforcement staff will not presume that an investment by a state-owned enterprise or sovereign wealth fund will give rise to national security issues.
10. Are We There Yet? Expect a Longer, Bumpier Ride in Canadian Merger Reviews
Canada’s new merger review regime, enacted in March 2009, allows the Commissioner of Competition to “stop the clock” during her review of a merger by issuing a supplemental information request (SIR) before the expiry of an initial 30-day pre-merger waiting period. Since the issuance of an SIR extends the waiting period until 30 days after the parties have complied with its terms, the Commissioner is not under the same pressure to limit the scope of SIRs that she was with production orders under the prior regime.
In recent public statements, the Commissioner has attempted to assure the business community that the application of Canada’s new review process will not mirror the much-criticized U.S. process on which it is based, and that she will be more “surgical” than her American counterparts in targeting document production. Nevertheless, parties to complex mergers should expect to receive broader and more demanding document production orders, which will affect review timing and increase compliance costs. This is a trend we have already begun to see.
|
RSS FEED
