2014 is increasingly looking like a celebratory year in Canadian M&A. Despite a mild downturn in Canadian M&A deal flow in 2013, a steady increase in high-profile transactions in 2014 suggests that M&A activity continues to gain momentum, particularly in the retail and consumer product industries. The Canadian M&A market experienced a very strong second quarter with both deal value and volume up 10% from Q1 2014 and nearly 20% on a year over year basis. A recent Canadian Business article suggests that reasons for the upturn are low interest rates, combined with an accumulation of capital in private equity firms and pension funds eager to invest their cash.
There is also an increasing appetite for outbound US M&A activity flowing into Canada. As the resulting entity may be headquartered in Canada, such deals are regarded by many as a tax inversion, which has drawn significant attention in the cross-border M&A sphere. By allowing foreign companies to funnel profits to their Canadian parents, acquirers are able to take advantage of a lower corporate tax rate in Canada.
The recent history of US acquisitions of Canadian companies is replete with examples, demonstrating the popularity of cross-border connections, with several examples in the retail and consumer product spheres.
Canada’s favourable corporate tax policies may continue to increase the appeal of US purchasers. According to a recent edition of KPMG’s Competitive Alternatives report, Canada offers one of the best tax environments for businesses in the world. With the increased interest in US tax inversion schemes, Canada may expect a corresponding rise in inbound M&A activity. This time, however, the appeal of tax-motivated M&A may be incentivizing foreign investors to not only seek out Canadian acquisition targets, but also to set up shop in Canada.
The author would like to thank Marta Jankovic, articling student, for her assistance in preparing this update.