There is an increasing trend for leading Canadian companies, pension funds and other investors to seek growth opportunities outside Canada. This is largely driven by Canadian demographics (as the population ages, consumption in many sectors of the economy decreases), low GDP growth rates and the relatively mature nature of the Canadian marketplace. For many industries, these factors lead to low domestic growth rates. In addition, the strong Canadian dollar, relative to the U.S. dollar, is helpful, particularly with respect to U.S. acquisitions.
Canadian financial institutions are currently well-positioned to purchase foreign assets. These institutions were fortunate to have suffered relatively fewer losses than many of their international peers during the financial crisis and have strong balance sheets and capital ratios. In fact, many of their international competitors will be sellers rather than buyers of international assets in order to de-lever their balance sheets and repatriate capital to their domestic operations. This is particularly true for institutions that now have a government as a major shareholder. Further, international institutions exiting a jurisdiction often have an inherent bias to sell to another international institution as a result of the “soft” M&A considerations, such as treatment of employees, customers and other local stakeholders.
Many Canadian pension funds still collect more than they pay out, so these funds have an inherent need to increase their investment activities. Further, their investment groups have been bolstered by excellent new talent that has become available as a result of the financial crisis. Their continuing cash inflow and increasing internal investment capabilities bode well for increased investment and M&A activity. Given relative growth rates, and the pension funds’ desire for return, we expect that their international M&A activities will continue to grow.