Enhancing Canada’s competitiveness

The significant slowdown in Canadian mergers and acquisitions activity in the first quarter of 2008 was hardly surprising in the light of the U.S. credit crunch and its global fallout. What is more difficult to predict is how the situation will unfold over the next 12 to 24 months.

Phil Brown, head of mergers and acquisitions at Torys LLP in Toronto, says strategic players with strong balance sheets are one of the main beneficiaries of the new business environment. They have a number of advantages including the ability to use shares, as well as cash, as currency. Other winners in the current situation are cash-flush pension funds with deep pockets and the patience to invest for the long term.

Mr. Brown says we have not yet seen what these players are really capable of in a credit-challenged market. “There still hasn’t been a significant price correction in many sectors, but it’s going to happen, and when it does, the strategic players and the pensions funds will move in, particularly south of the border.”

The losers following the credit crunch have been the private equity players, particularly those who had been doing really big deals. “They’ve clearly taken a back seat and are not aggressively pursuing new deals,” says Mr. Brown. Michelle Lally, a partner specializing in competition and antitrust law at Osler, Hoskin & Harcourt LLP in Toronto, says the reduced volume of M&A caused by the credit crunch or liquidity failure is an important reminder of the vital importance of Canada’s relative competitiveness in vying for foreign investment, a factor that becomes critically important when there is an economic slowdown.

“Canadian companies are competing globally for talent, innovation and capital, and it’s therefore vital to the Canadian economy that the competitive environment in the country is attractive to investors,” she says. Ms. Lally says the federal government-appointed Competition Policy Review Panel, which will report this month (June 2008), has already indicated that the two principal issues for Canada’s economic performance are how best to create the domestic conditions to foster the development of Canadian-based global businesses and how to best position Canada to be a world leading destination for talent, capital and innovation.

“We hear a lot about the ‘hollowing out’ of Canada due to the acquisition of local companies by foreign investors. But it doesn’t really matter where the owners of a Canadian based company reside; the real issue is the need to continue attracting that investment while retaining the corporate head office functions and higher skills in Canada. That’s where we need to be as competitive as possible,” says Ms. Lally.

Silvie Kuppek, executive director of the Canadian Corporate Counsel Association (CCCA), says the global demand for Canadian resources and services means Canadian in-house counsel also play a significant role in global business, which in turn helps enhance Canada’s global profile.

“Our research shows that members’ roles are becoming increasingly ‘internationalized’ due to the number and complexity of deals involving Canadian companies,” says Ms. Kuppek.