Elusiveness of successful deals puts premium on closing

The US credit crunch, a downturn in the economy and even buyer’s remorse are increasing the challenges in structuring and closing successful mergers and acquisitions. The result is that today’s deal is more likely to be in the $500 million to $2 billion range and involve corporations intent on strategic acquisitions, say some of the country’s leading M&A lawyers.

“There is a heightened awareness of all these issues,” says Paul Mingay, national coordinator, securities and capital markets at Borden Ladner Gervais LLP.

“The result is that deals take longer and involve more work up front structuring. Accordingly there is increased uncertainty over the success of transactions,” adds Mr. Mingay.

With successful deals fewer and farther between, those involved in M&A have to search harder and spend more time and money on the pursuit of a successful deal, adds Myron Dzulynsky, head of the private equity and venture capital practice at Gowling Lafleur Henderson LLP.

“A year ago, you may have investigated three deals to close one,” he says. “Today, that ratio might be 10 to one. When the ratio was just three to one, it was easier to justify the external pursuit costs on the two unsuccessful deals against the profits earned on the successful one. It is a lot harder to do that when the ratio is nine to one.”

The lack of debt financing and the cost of what is available is a major factor in today’s M&A sector, explains Craig Thorburn, a partner in Blake, Cassels & Graydon LLP. The credit crunch means huge sums of debt are no longer available, and it was debt that fuelled mega takeovers by private equity funds.

That lack of debt financing means today’s transactions are more likely to be carried out for sound strategic reasons – buying a competitor or expanding into a new geographic market. Those strategic acquisitions are usually carried out with a mix of cash and shares versus the highly leveraged transactions favoured by private equity investors.

“It is a return to the way things were six or seven years ago,” he says. “We are not going to see those $25-billion deals.”

At the same time, buyers – especially in the U.S. – are focusing more on the specific wording of the terms, such as material change clauses to provide a ready escape should the unexpected occur, especially during economic downturns, says Frank Callaghan, manager of BLG’s Toronto business law group.

And while approval by Investment Canada has almost seemed a given, its decision to reject Alliant Technosystems’ acquisition of MacDonald Dettwiler and Associates’ space business has also cast a chill on activity.

“That transaction may have been a special case; the situation may never arise again,” says Mr. Dzulynsky. “We just have to wait and see if it is one of a kind.”

Overall, more caution is being exercised in the approach to mergers and acquisitions, says Mr. Thorburn. “It’s like when you see an accident on the 401; you drive more slowly and more defensively for a while.”