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M&A lawyers cautiously optimistic

|Written By Kendyl Sebesta

Bay Street lawyers who earn their bread and butter on multimillion-dollar mergers and acquisitions are keeping a sharp eye on the European debt crisis and the slow economic recovery in the United States, hoping with cautious optimism for generous deals in the new year despite the uncertainty.

‘There’s no doubt that people are worried about the situation in Europe, of course, but it won’t have the same impact on Canada’s cash flow,’ says David Woollcombe. Photo: Laura Pedersen

But with many potential buyers keeping a firm grasp on their cash, it’s unlikely they’ll see a quick reprieve from the uncertainty, according to several top mergers-and-acquisitions lawyers.

Still, interest in Canadian resources won’t dwindle in the meantime with China continuing to be a key investor in the area in 2012.

At the same time, if 2011 is any indication, there’s no guarantee of robust activity. Europe’s debt crisis dealt a significant blow to potential acquisitions in the second half of 2011 after the first six months saw a frenzied spike in activity.

“The first half of last year was certainly more robust than the second half,” says David Woollcombe, practice leader of the business law group at McCarthy Tétrault LLP.

“But when I look at M&A, I still feel optimistic. In Canada, everyone seems to be pretty cautious about maintaining their cash flow, but we still look pretty strong compared to the U.S. and Europe and many of those underlying issues don’t impact Canada in the same way.

There’s no doubt that people are worried about the situation in Europe, of course, but it won’t have the same impact on Canada’s cash flow.”

But that doesn’t mean Canadian lawyers should expect frenzied activity in the year ahead, he adds. “All around the globe, governments are grappling with increasing levels of debt.

In the past, countries used to say as our economy grows, we will grow ourselves out of debt but more and more are realizing now that they can’t do that anymore and it translates into a slower growth period.

I think unless there’s a compelling public policy reason to keep an asset, you’ll start seeing more and more governments at all levels becoming more creative with the assets they do own.”

Still, for companies willing to make strategic decisions despite marketplace volatility, the results could be very lucrative, says Terence Dobbin, chairman of Norton Rose Canada’s mergers-and-acquisitions team.

“Despite the general lack of certainty, good transactions are taking place and there are still strong companies that are doing M&A,” says Dobbin.

“Canadian resource assets still remain incredibly attractive and although it has been a challenge over the last couple of years, there has been increased activity in certain sectors. Overall, Canada is still seen as a very safe place to invest in. It’s hard to do better than Canada right now.”

Still, Bill Jenkins, national co-chairman of Fraser Milner Casgrain LLP’s mergers-and-acquisitions group, says that while Canada’s oil, gas, and mining sectors will continue to play an important role in this year’s outlook, lawyers shouldn’t expect to return to the frenzied pace of a few years ago.

“M&A deals will take much longer to complete now and will not happen with the same frequency of pace that they did years ago,” says Jenkins. “I don’t expect it to be a year where we double our work.

In fact, I imagine it will stay relatively steady and will have more in common with the last 20 years than the frenzied pace between 2005 and 2007. I don’t see a return to that for several years.”

In the meantime, potential buyers in China are getting bolder and braver, he adds, by gobbling up larger companies after previously opting for much smaller chunks of the global pie.

“As long as China continues to grow and play a role in that way, it will be a very important part of the M&A scene,” Jenkins notes.

One recent example is the $6.3-billion failed bid for Equinox Minerals Ltd. by Chinese company Minmetals Resources Ltd. Barrick Gold Corp. eventually bought Equinox for $7.3 billion late last month in a highly publicized acquisition. Dobbin led the Norton Rose team that acted for Barrick.

Acquisitions like the Equinox purchase might be a hint of what’s to come, according to Jenkins.

“Companies with the proper resources can still be attracted, particularly when it involves China, and I think we’ll continue to see investments into the new year, especially if the U.S. economy holds up and eventually brings in more investors,” he says.

In the meantime, new figures released by Thomson Reuters show the number of deals over $1 billion decreased only slightly from 2010 figures last year, dropping to 33 from 37 transactions. By comparison, worldwide mergers-and-acquisitions activity was up marginally in 2011.

Of the completed Canadian transactions last year, according to Thomson Reuters, Blake Cassels & Graydon LLP ranked No. 1 with a 22.4-per-cent market share; Osler Hoskin & Harcourt LLP came in second with a 21.6-per-cent share; and Torys LLP was third at 19.1 per cent.

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