Despite roiled equity markets, global mergers and acquisition (M&A) transaction volume – measured in dollars – remains on track for solid growth in 2011.
According to Dealogic, an aggregator of capital markets information and data, mergers and acquisitions across all geographies were up 7% through 2011's first nine months, despite a 23% decrease in deal volume in the third quarter. Driven by a 21% increase in year-to-date U.S. transaction volume, North America remains the most active region for control deals. In contrast, Canadian year-over-year deal volume remains essentially flat (down 1%) despite a measurable up-tick in the number of transactions closed.
Fortunes were reversed between the U.S. and Canada when it comes to cross-border transactions. Canadian in-bound cross-border M&As increased 5% to $28.5 billion, the highest nine-month period since 2008. Notably, the U.S. was the leading acquirer of Canadian companies, representing 61% of deal volume. These totals are the highest for any country since 2007. In contrast, U.S. in-bound cross-border M&As plunged 20% to $134.0 billion in the first nine months of 2011.
The rationale for interest in Canadian companies remains consistent with recent trends: buyers are seeking to access Canada's strong, stable economy and vast natural resource base. In contrast, U.S. industries are seeking consolidation and in-bound acquisitions have been oriented around perceived value, as acquisition multiples lag historical norms. This pattern is consistent with other slow-growth economies.
While we don't see Canadian acquisition fundamentals changing over the next 12 months, U.S. market dynamics are set to shift in 2012. Altering the U.S. M&A landscape are the unprecedented amounts of liquidity in North American private equity funds that are nearing their designated investment period and anticipated changes to the U.S. personal tax code that should take effect in January 2013.
As we discussed back in January, North American private equity funds remain overcapitalized. With nearly $265 billion in capital raised in 2007 and 2008 – 55% of the total private equity overhang – these funds only have 12 to 24 months left in their investment window, absent an extension.
Further, limited partners, including pension funds and endowments, have notable excess liquidity driven by large exits over the past 12 months of the cycle. In combination, these firms have unprecedented amounts of dry powder to invest directly in leveraged buyouts. If domestic debt markets remain liquid, private equity and limited partner direct equity investments in U.S. companies should accelerate markedly in 2012.
Of equal significance is changing tax dynamics for U.S. equity owners. Currently, legislation governing marginal tax rates, inclusive of the current 15% long-term capital gains tax, is set to expire on December 31, 2012. While it is unclear how much rates will increase, and for whom, the previous rates suppressed by the legislation would increase taxes a minimum of 10% if reinstated. As a result, companies that want to sell during the current cycle will be motivated to tap the markets in 2012. In turn, this will bring a host of product to market over the next 12 months, especially in the middle market.
These circumstances will significantly increase in-bound U.S. cross-border M&As, and we anticipate that Canadian firms will be more active players in U.S.-based acquisitions in 2012.
Already some notable cross-border transactions involving Canadian sponsors have been announced:
•Publicly traded Canadian private equity firm Onex Corp. acquired a 58% interest in family-owned and professionally managed JELD-WEN, Inc., an Oregon-based manufacturer of doors and windows. The total investment amounted to $871 million.
•Apax Partners, a global private equity fund, in partnership with CPP Investment Board and Public Sector Pension Investment Board, entered into a definitive merger agreement to acquire Kinetic Concepts, Inc. for $6.3 billion from public shareholders.
•CPP Investment Board in partnership with U.S.-based Ares Management, LLC agreed to acquire 99¢ Only Stores from its private equity owners and public shareholders for $1.6 billion.
All of the above deals are notable because of their size, but more importantly, because headline deals generally represent the leading edge for the lower end of the middle market. As such, we expect this buying pattern to trickle down into private company transactions involving enterprise values of between $25 million and $250 million. •
