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MNP's TAKE: The low value of the Canadian dollar coupled with low interest rates have created a strong climate for merger and acquisition activity. As a prospective buyer, it's important to recognize that not all businesses will have immediate payoff. However, there are still advantages to be gained whether you're looking at acquiring an asset-heavy company or a cash flow-heavy company.
A business rich in assets - such as equipment or real estate - is the more obvious way to take advantage of the current low interest rates and dollar value. If making a purchase in USD, you're essentially receiving an near-instant discount on the assets you've acquired. Plus, in the event the market shifts several months after the acquisition, those assets will still typically carry a dollar for dollar value if you choose to offload them to recoup your initial investment. In other words, if you had a piece of equipment valued at $1 million CAD, you could potentially sell it for $1 million USD down south, automatically generating a favourable return.
In contrast, a business that is more cash flow-heavy by say, generating fees, may not present the same instantaneous advantages of purchasing an asset-focused business in the current economic climate. Acquisitions must be as strategic as possible to ensure you are investing in a company that can continue to generate the same amount of revenue (or ideally, grow it) over a longer-term period. While the Canadian dollar may not reach parity with the U.S. dollar, it will eventually recover to a place where you'll be able to convert that revenue into USD at a better rate.
One potential ideal situation to keep an eye out for? Cash-positive businesses that conduct all of their operating expenses in CAD but have a strong customer base in the U.S. You'll essentially be cutting down on your operating costs while boosting your revenue, taking advantage of the low dollar on both sides of the border.
To learn more about how MNP Corporate Finance can help your business through a merger or acquisition, contact Aleem Bandali at 778.374.2140 or
[email protected] or your local MNP Corporate Finance Advisor.
BY ALEKSANDRA SAGAN FROM THE CANADIAN PRESS
TORONTO - The plight of the loonie and low interest rates can make Canadian companies ripe for the pickings, observers said Wednesday as U.S. home improvement chain Lowe's announced its acquisition of Quebec retailer Rona.
Companies paying in U.S. dollars receive a discount thanks to the Canadian dollar, said Perry Sadorsky, an associate professor of economics at York University's Schulich School of Business in Toronto.
"For international companies, it's very attractive to buy Canadian companies," he said.
Retail consultant Wendy Evans predicted the Lowe's-Rona announcement is likely to be the first of other takeover deals in the offing.
"Particularly with our dollar, this market looks like very good value so there will be others," she said.
The loonie has not closed above 80 cents US since late June last year. As of Wednesday it was hovering above the 72-cent US mark.
The $3.2-billion deal by Lowe's to buy Rona is partly motivated to pursue a strategic opportunity to become the largest home renovation retailer in Canada, said Jean Rickli, a retail analyst with the JC Williams Group.
But when the price tag translates to roughly US$2.3 billion, the deal is more affordable, he said.
Historically, there is often a bump in mergers and acquisitions when the dollar slides, Sadorsky said.
On the flip side, Canadian companies have purchased American targets when the loonie sells at a premium, said Laurence Booth, a finance professor at the Rotman School of Management at the University of Toronto.
He points to acquisitions made by TD Bank (which bought The South Financial Group Inc. in 2010) and Royal Bank (which acquired City National Corporation in November 2015).
The low loonie can also incentivize Canadian companies, which may not be able to afford to acquire entities abroad, to consider purchasing local ones, said Sadorsky.
Already this year, Suncor Energy offered a multibillion-dollar deal to take over Canadian Oil Sands. The offer expires Friday.
Sadorsky anticipates more domestic action this year in the oilpatch.
Canada's current low interest-rate environment provides further enticement, he said, as companies can borrow money for any potential deals at cheaper rates.
But some believe there is little correlation between low interest rates, a low dollar and an increase in mergers and acquisitions.
In the third quarter of 2015, Canadian companies made 186 foreign-target acquisitions worth a total of $60 billion compared to 172 acquisitions over the same time the year before for $42 billion, according to the most recent quarterly report by Crosbie, a Toronto-based investment banking firm that tracks Canadian merger and acquisition activity.
In the same time frame last year, Canadian companies acquired 1.6 times more companies outside the country's borders than foreigners acquired companies within Canada, the report found.
It's important to recognize that while the exchange rate can offer a discount, it's the prospects for profit that often motivates acquisitions, said Booth.
A sliding loonie can also mean that some Canadian firms are not as appealing to prospective buyers.
"The change in the value of the currency is also strongly correlated with the attractiveness of Canadian firms as foreign targets."
— With files from Ross Marowits in Montreal.
Follow @AleksSagan on Twitter.
Copyright (2016) Canadian Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
This article was written by The Canadian Press and Aleksandra Sagan from The Canadian Press and was legally licensed through the NewsCred publisher network.
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