New opportunities for strategic buyers

Until recently, cash-flush private equity funds, low-cost financing and a hot mergers and acquisitions market meant stiff competition and sometimes prohibitive pricing for strategic industry buyers.

Times have changed – with financial buyers on the sidelines because of a dysfunctional debt market, industry buyers are seeing new opportunities, says Alan Bell, a senior M&A partner at Bennett Jones LLP.

“There are transactions being looked at in the manufacturing sector, across the board in the commodities industries, in health care and high tech – it’s really quite a range.”

With the continuing and increasing globalization of the market, says Ava Yaskiel, partner at Ogilvy Renault LLP, there is pressure for companies to grow through strategic acquisitions in order to expand or even dominate their markets.


Over the last five or six years, however, the “liquidity glut and low-cost, covenant light financing terms supported a private equity shopping spree, which increasingly left strategic buyers on the sidelines.

Strategic buyers historically had an advantage, being able to pay a nice premium because they could take advantage of synergies that might not otherwise be available to financial buyers. In the past few years, they weren’t able to take advantage of their home game.”

Ms. Yaskiel also believes that strategic buyers can benefit based on their long-term outlook and financing options. “Private equity buyers seek to increase revenues or profits through efficiencies and cost reduction; strategic buyers can also focus on synergies and growth. They have the opportunity to focus on a more long term horizon – they may pay a larger premium today based on their expected future rewards. Further, their ability to fund the purchase either entirely or partially with their own paper currency (shares), as opposed to cash, allows strategic buyers to completely bypass or at least limit their reliance on the debt markets.”


But according to William Ainley, partner at Davies Ward Phillips & Vineberg, it remains true that strategic buyers face considerable challenges that purely financial buyers do not. “In light of the BCE issues, for example, pundits have commented that a deal with a strategic buyer such as TELUS would have avoided the debt issues that have arisen. But the challenge for strategic acquirers, especially in the big companies, is antitrust and regulatory issues. If you look at the phone company, TELUS would likely have had to divest most of its mobile division to get that deal done. So, strategic buyers do not always have an advantage, although there are lots of areas, the Canadian commodities sector, for example, where these strategic deals just make sense.”

Based on anecdotal evidence, it seems clear that years of competition from private equity may have created an appetite for strategic mergers and acquisitions that is supported by a strong Canadian dollar and commodities sector.

“Among the senior management of many Canadian companies,” says Mr. Bell, “there is renewed interest and emphasis on a strategic, longer term acquisition and mergers, in the more traditional value enhancement opportunities of vertical or horizontal integration or expansion. What we are seeing is an awful lot of careful review being done in many sectors.”