Outlook 2008 (The watch list): Mergers and acquisitions

Canada's blistering M&A pace is set to slow in 2008.

Private equity played a significant role in making 2007 a record year for M&A activity. In the first three quarters, more than a thousand deals were announced, totalling $319 billion. But ever since the credit crunch hit in August, banks are less willing to back the highly leveraged buyouts made by private equity. That means the blistering M&A pace is set to slow in 2008.

On the other hand, cash-rich corporations will remain active, and market conditions could actually present a buying opportunity. “Corporate buyers were struggling last year to compete against private equity guys on the large deals because of the ridiculous amounts of debt they could take on,” says Ian Macdonell, managing director with investment banking firm Crosbie & Co. Inc. in Toronto. PE firms will still play a role in smaller deals, and Macdonell expects them to compete again for larger companies within the first half of 2008 — just not at the high debt multiples seen recently.

Though the playing field may have levelled, Ted Nash, head of mergers and acquisitions at CIBC World Markets, says corporations might want to hold on to cash, given the liquidity crunch. Less aggressive bidding will also reduce valuations if corporations are looking to sell assets, and that’s something corporations could be slow to accept. Nash expects M&A activity to cool to the levels seen in 2005 — still a very active year. “Most people on the Street were rejoicing with the level of M&A in 2005,” he says. How times have changed.