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Confidence is the most precious commodity for deal makers, and without more of it 2014 could be a quiet year in the business of mergers and finance. Investment banking activity is tied to economic growth. When chief executives are positive about the outlook, and their companies are growing, they push to make transactions happen. At the moment, there’s not much push.
“In the M&A [mergers and acquisitions] space, there’s a lot of dialogue going on, but there doesn’t seem to be any kind of urgency to get transactions done,” said Jack Curtin, who heads Goldman Sachs Group Inc.’s Canadian operations. “People are going to be judicious.”
There are signs of increased optimism about global economic growth, manifested in a long bull run in U.S. stocks. But there are still questions, chiefly around commodity prices and economic growth in markets such as China.
Those questions are especially crucial in a resource-driven market like Canada. In three of the last four years, more than half of the merger and acquisition activity involving Canadian companies has come from the resource sector – a business inextricably tied to growth and commodity prices.
“We seem to be sitting on a bit of a precipice: Where is the world economy going?,” said Egizio Bianchini, co-head of the global mining group at BMO Nesbitt Burns. “The capital is there. The will to sell is there. The will to buy is there, but at the end of the day the will to pull the last little bit of the trigger is just not there.”
Last year, that lack of will resulted in a plunge in activity by mining and energy companies. Chief executives who had made ill-advised acquisitions in previous years were turfed, prompting those that survived to duck for cover. Uncertainty about the outlook for commodity prices was reflected in a standoff between buyers and sellers. The paucity of transactions crushed profits at the many Canadian securities firms that focus largely on oil, gas and mining.
The year was saved only by an unexpected explosion of deals in areas such as real estate and retailing. That’s unlikely to repeat. There are simply not many more huge deals that can be done in retailing after Loblaw bought Shoppers Drug Mart, Sobeys bought Safeway’s Canadian stores and Hudson’s Bay bought Saks. Real estate investment trusts, which were active buyers early in 2013, endured a selloff in their stocks and are now likely to be much quieter.
“For Canada it’s pretty simple, in that to have a busy year you need an active resource business,” said Doug Guzman, head of global investment banking for the capital markets arm of Royal Bank of Canada. “Mining has been flat on its back, but there are signs of life in the last couple of weeks – similarly in energy.”
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