The Canadian dollar has taken a tumble in 2015 – dropping from approximately eighty-five cents to flirting around and even below eighty cents as compared to the American dollar. Analysts are blaming not only sinking oil prices, but also the Bank of Canada’s dovish monetary policy. On January 21st, the Bank of Canada cut its rate on overnight loans between commercial banks by one-quarter of a percentage point to 0.75%. The cut was unexpected as the rate had been at 1% since September 2010, and was last cut in April 2009. The Bank of Canada said its decision was in response to the “recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada.”
Unfortunately, many forecasts predict that the Canadian dollar will stay depressed for at least the next two years, with projections ranging from the loonie falling to anywhere from seventy-five to seventy-seven cents by the end of this year, to ranging from seventy-one to eighty-one cents by the end of 2016. With speculation mounting and observers expecting that the Bank of Canada is preparing to drop its interest rate even further next month, one thing is clear – the lower Canadian dollar is here to stay.
So what exactly does this mean for M&A activity in Canada? With 2014 being a banner year for M&A in Canada and setting a three-year high, some may fear that the lower Canadian dollar will stifle Canadian M&A activity. In fact, though, it is predicted that M&A activity in Canada will continue on its upward trend in 2015 due to several factors. The Bank of Canada’s surprise rate cut suggests to potential acquirers that the cost of debt financing will remain low in Canada for some time. The weaker Canadian dollar, which seems to be settling below eighty cents, means greater purchasing power for international buyers of Canadian companies (especially US-based purchasers). Moreover, plummeting commodity prices are decreasing the valuations of Canadian energy and mining companies, resulting in decreasing purchasing costs and cheaper acquisitions.
With greater purchasing power and cheaper assets, we are certain to see heightened M&A activity in the commodities and resources sector. Even outside of energy and commodities, companies with strong fundamentals and reasonable valuations will appeal to U.S. and international buyers, especially if they generate a large portion of their revenue in the United States. However, the focus should not only be on international acquisitions of Canadian companies. According to a report by KPMG, the decline in the exchange rate will also encourage Canadian companies to renew their focus on domestic transactions. Over half of Canadian CEOs surveyed as part of PwC’s 18th Annual Global CEO Survey said they expect to undertake domestic M&A over the next year.
As the Canadian dollar continues to fall in comparison to the stronger American dollar, it seems that there is a bright side to the decreasing value of our currency – greater M&A activity in the year ahead.