M&A in infrastructure, mining, commodities expected to thrive

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This article was originally published by The Lawyer’s Daily, part of LexisNexis Canada Inc.

Last year’s uncertain geopolitical climate was expected to wreak havoc on the world’s markets, ominously echoing 2008’s financial crisis a decade earlier.

Looking back, it was a year of tremendous geopolitical volatility whose reverberations are continuing into 2019. For Canada, the most significant geopolitical event affecting trade in 2018 was undoubtedly the renegotiation of the North American Free Trade Agreement. The deal’s negotiations had Canadian market players on the edge of their seats for most of the year, culminating in the signing of the new Canada-United States-Mexico Agreement (CUSMA) on Nov. 30. The trade deal awaits ratification by each country’s legislature this year.

Tensions between North America and the Middle East also escalated early in the year with the United States’ withdrawal from the Joint Comprehensive Plan of Action on May 8. Matters intensified over the summer after Canadian officials criticized human rights violations in Saudi Arabia, commentary that was met with economic sanctions from Saudi leadership. In the fall, pressures mounted further, as investigations were launched into the death of a Washington Post journalist in Turkey.

While the full effect of such political volatility on many industries, including the mining and commodities trade remains to be seen, Canada continued to face challenges in the oil industry in 2018, with many investors backing out due to political uncertainties.

In Asia, what has been dubbed the “technology cold war” between the U.S. and China continues to brew, with the two countries battling to become the definitive technological leader in 2019. Advancements in artificial intelligence and mobile Internet connectivity are paving the way for timely and marketable solutions in infrastructure as the need for smart cities continues to grow. However, the two nations’ technological conflict is but the tip of the iceberg.

The U.S. and China have also been embroiled in a tariff war throughout 2018. Recently, the global ramifications of this conflict were highlighted when the U.S. and its allies rejected the Chinese 5G networks, citing national security concerns. To add another layer of complication, Canada’s recent arrest of a Chinese tech executive for the alleged breach of U.S. sanctions against Iran further entangles the geopolitical landscape.

Meanwhile, Europe continues to sort out the aftermath of the Brexit decision, which carries with it major infrastructure and trade implications that have yet to be seen in their entirety.

Market reaction and outlook for 2019

While many predicted that trade wars and political uncertainty would sink deal-making in 2018, the year closed with US$3.53 trillion in global mergers and acquisitions (M&A). With an average deal size of US$384.8 million, M&A value in 2018 was one of the highest ever recorded with several megadeals accounting for these results, including a notable US$6.5 billion acquisition in the gold mining industry. In fact, the trend across all sectors is that both deal size and activity are on the rise.

Those with a more conservative outlook, projecting that deal flow will remain constant or decrease, represent a humble minority of only 25 per cent of corporate investors. In the mining industry, a recent study reports that global mining executives’ appetite for M&A is 12 per cent greater than that of executives in other sectors, with 58 per cent intending to pursue deals in 2019. These findings are supported by global reports on capital confidence, which state that the sector is on course for a significant rise in M&A in the next year. This is not to say that global economic instability is no longer a concern; however, statistics show that it is on a decline.

Several factors support a healthy M&A outlook for 2019. For one, while the average deal value rose in 2018, the overall deal count dropped. This is likely attributable to a reduced risk appetite in the market in light of both trade and political turbulence. Companies have learned to be more cautious and calculated in their investments. For 2019, this will likely translate into more liquidity for deal flow. Coupled with the confidence gained by having weathered the geopolitical storms of the recent months, many will be eager to source deals to spend their cash reserves.

Another motivating factor is the threat of higher interest rates and tariffs, which have acted as a catalyst for M&A. Companies are seeking to spend their cash while rates are still moderate. This explains why a reported nine per cent  of investors have indicated that trade uncertainty has actually enhanced their deal-making appetite.

Fundamentals remain paramount 

As concerns about economic forces wane, no one can forget the fundamentals of what makes a “good deal.” Much ink has been spilled on factors that are determinative of deal success, yet most would agree that it continues to be post-transaction integration.

Other pain points also on the rise from reviewing literature in this area include a lack of focused strategy and sound due diligence, a failure to materialize on synergies and organizational misalignment. The fact that these deal fundamentals rank just as important as the relatively extreme geopolitical forces that are currently with us is somewhat surprising.

But remember, these factors have always been, and likely will always be, at the centre of success for every transaction, and are an area where expert advice will make a difference.

Counsel must undertake due diligence with painstaking caution and scrutinize a target’s liabilities and risks, restraints on transfers, operational roadblocks and overall economic value. Counsel must also identify the appropriate legal and business structure for any given circumstance to ensure that the proposed synergies can be achieved, while remaining vigilant of both current and upcoming global legislative and tax changes.

In this unpredictable economic climate, perhaps it is now more important than ever for investors and lawyers to cling tighter to these essential pillars of deal making.

The author would like to thank Maha Mansour, articling student, for her assistance in the writing of this article.