Buying into Canada? M&A Cross Border Outlook
- Keywords:
- m&a
- cross border
With a 110-person M&A group with professionals in the U.S. and Canada, we’ve seen an increase in cross-border transaction activity for both strategic and financial buyers. In general, we’ve seen the institutional investor markets reward acquisition growth and, over the past several years we’ve seen our M&A engagements with U.S. acquirers of Canadian companies increase in sync with interest amid U.S. corporates for geographic expansion and diversification. Factset Data for cross-border Mergers and Acquisitions shows that instances of U.S. strategic buyers purchasing Canadian companies rose about 28 percent in 2018 over the year prior, and we expect to see continued strong interest in American acquisitions of Canadian targets.
Even as U.S. M&A activity has slowed in 2019 on the back of trade wars and questions about the expected duration of U.S. economic expansion, U.S. corporates are in a position of strength to acquire--with robust market capitalizations and clean balance sheets they have the ability to use highly valued stock, cash and/or relatively inexpensive debt to finance acquisitions. They also have the benefit of a strong U.S. dollar, which has been trending above the Canadian Loonie for a number of years, giving them another reason to look to Canada for investments.
We have seen that U.S. companies with the greatest success in northbound M&A are those with experience and comfort around the cross-border legal and tax frameworks. Buyers often view cross-border acquisitions in Canada with the same lens as domestic acquisitions, with the added consideration of potential volatility in the U.S./Canadian exchange rate. While not likely to make or break a deal, the potential for currency fluctuations over time can be an important underwriting factor for buyers. Companies who have experience in cross-border deals have come to the conclusion that the benefits of acquired scale, diversification, and growth often outweigh the risks. Strategic buyers, which account for the vast majority of U.S.-Canada cross-border M&A, are especially comfortable that they will gain far more in terms of lower acquisition prices and labor costs than they might lose to the exchange rate. Private equity buyers with past cross-border experience are also more comfortable that lower acquisition multiples in Canada as compared to similar businesses in the United States can represent significant buying opportunities. The data shows that U.S. private equity firms buying Canadian companies across all sectors remains elevated from historical levels and is flat YTD2019 over YTD2018.
Of all the cross-border transactions we’ve seen, the most successful are those with strong strategic rationale and a common culture to support ongoing growth.
It’s no surprise then that U.S. buyers looking for opportunities north of the border are also drawn by the cultural similarities with Canada, which minimize a key risk factor when acquiring assets in further-flung jurisdictions like Latin America, Europe or Asia. Decades of free trade across a shared border - Canada is the United States’ second-largest trading partner - have long underscored these and other cross-border synergies for both private equity and strategic buyers. Transactions and assets are easier to supervise, faster to execute on, and depending on the industry, also offer the chance for U.S. acquirers to continue to utilize domestic distribution channels. In some instances, companies can also leverage more advantageous cost arrangements north of the border.
As low unemployment in the United States has the potential to increase the cost of domestic skilled labor, Canada’s highly-educated, lower-cost labor pool and fewer immigration restrictions have become other key draws for U.S. buyers.
Areas that are particularly attractive to U.S. businesses seeking to acquire in Canada include the Industrial, Technology and Business Services sectors. U.S. purchases of Canadian Technology and Business Services companies rose 17 percent in 2018, although deal volume has fallen off year-to-date, aligning with the overall slowdown in U.S. M&A activity in 2019.
Canada has become a leading source of technology and talent, particularly in recent years. In its 2019 Scoring Tech Talent report, the Los Angeles-based CBRE Group identified Toronto as North America’s No. 3 market for tech talent. Vancouver came in the 12th spot, Montreal was 13th and Ottawa was ranked 19th. And in September, a comparative analysis by fDi Benchmark from the Financial Times ranked Montreal No. 1 among 20 major cities in Canada and the U.S. for the quality of its artificial intelligence (AI) industry.1
In Business Services, we have seen U.S. companies actively looking in the British Columbia and Ontario markets. Seattle has become a gateway to Western Canada and its professional service providers, with private equity particularly active in acquiring, utilizing Pacific Northwest-based law firms, accounting firms, and other such experts in issues like cross-border taxation and legal structures. Similarly, there are a number of Western Canadian private equity firms that have acquired businesses in the Pacific Northwest. U.S. Industrial businesses are taking an interest in Alberta, where a labor pool focused on the oil and gas industry is rich in skilled talent in areas from welding to electrical, plumbing and metalworking.
The shared border makes it easier to manage cross-border businesses. It is as easy for U.S. companies to travel from Seattle to British Columbia or Alberta, for example, as it is for them to get to San Francisco. Similar logistical synergies exist on the East Coast.
The number of cross-border conversations has continued to increase transaction volume in recent years, spurred by Canadian firms capitalizing on the larger buyer universe in the United States, whether they are involved in Technology and Business Services or Industrial sectors or areas such as Metals and Mining and Energy and Power. There is also elevated cross-border buyer interest in insurance and cannabis related businesses. For those interested in cross-border expansion, if you have a business in the United States and there are similar businesses in Canada, and vice-versa, there are clear synergies.
American buyers are clearly taking notice, with Canadian targets in recent years receiving relatively more attention from U.S. companies pursuing international acquisitions and comprising approximately 15-20% of all international acquisitions by U.S. acquirors.
In the end, it comes down to the simplicity of the transaction. Conducting business in Canada is very similar to that in the United States, with relatively similar legal, commercial, and business frameworks. A shared border and time zones make Canada a more palatable way to diversify than acquisitions further afield.
Seth Prostic, Managing Director, Co-Head of US Mergers & Acquisitions, also contributed to this article.
BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Commercial Bank N.A. (member FDIC), Bank of Montreal Europe p.l.c., and Bank of Montreal (China) Co. Ltd and the institutional broker dealer businesses of BMO Capital Markets Corp. (Member FINRA
and SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Investment Industry Regulatory Organization of Canada and Member Canadian Investor Protection Fund) in Canada and Asia, Bank of Montreal Europe p.l.c. (authorised and regulated by the Central bank of Ireland) in Europe and BMO Capital Markets Limited (authorised and regulated by the Financial Conduct Authority) in the UK and Australia. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Inc., used under license. “BMO Capital Markets” is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license.
and SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Investment Industry Regulatory Organization of Canada and Member Canadian Investor Protection Fund) in Canada and Asia, Bank of Montreal Europe p.l.c. (authorised and regulated by the Central bank of Ireland) in Europe and BMO Capital Markets Limited (authorised and regulated by the Financial Conduct Authority) in the UK and Australia. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Inc., used under license. “BMO Capital Markets” is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license.® Registered trademark of Bank of Montreal in the United States, Canada and elsewhere.
©2019 BMO Financial Group
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Cameron Hewes
Managing Director, Mergers & Acquisitions
View Full Profile
With a 110-person M&A group with professionals in the U.S. and Canada, we’ve seen an increase in cross-border transaction activity for both strategic and financial buyers. In general, we’ve seen the institutional investor markets reward acquisition growth and, over the past several years we’ve seen our M&A engagements with U.S. acquirers of Canadian companies increase in sync with interest amid U.S. corporates for geographic expansion and diversification. Factset Data for cross-border Mergers and Acquisitions shows that instances of U.S. strategic buyers purchasing Canadian companies rose about 28 percent in 2018 over the year prior, and we expect to see continued strong interest in American acquisitions of Canadian targets.
Even as U.S. M&A activity has slowed in 2019 on the back of trade wars and questions about the expected duration of U.S. economic expansion, U.S. corporates are in a position of strength to acquire--with robust market capitalizations and clean balance sheets they have the ability to use highly valued stock, cash and/or relatively inexpensive debt to finance acquisitions. They also have the benefit of a strong U.S. dollar, which has been trending above the Canadian Loonie for a number of years, giving them another reason to look to Canada for investments.
We have seen that U.S. companies with the greatest success in northbound M&A are those with experience and comfort around the cross-border legal and tax frameworks. Buyers often view cross-border acquisitions in Canada with the same lens as domestic acquisitions, with the added consideration of potential volatility in the U.S./Canadian exchange rate. While not likely to make or break a deal, the potential for currency fluctuations over time can be an important underwriting factor for buyers. Companies who have experience in cross-border deals have come to the conclusion that the benefits of acquired scale, diversification, and growth often outweigh the risks. Strategic buyers, which account for the vast majority of U.S.-Canada cross-border M&A, are especially comfortable that they will gain far more in terms of lower acquisition prices and labor costs than they might lose to the exchange rate. Private equity buyers with past cross-border experience are also more comfortable that lower acquisition multiples in Canada as compared to similar businesses in the United States can represent significant buying opportunities. The data shows that U.S. private equity firms buying Canadian companies across all sectors remains elevated from historical levels and is flat YTD2019 over YTD2018.
Of all the cross-border transactions we’ve seen, the most successful are those with strong strategic rationale and a common culture to support ongoing growth.
It’s no surprise then that U.S. buyers looking for opportunities north of the border are also drawn by the cultural similarities with Canada, which minimize a key risk factor when acquiring assets in further-flung jurisdictions like Latin America, Europe or Asia. Decades of free trade across a shared border - Canada is the United States’ second-largest trading partner - have long underscored these and other cross-border synergies for both private equity and strategic buyers. Transactions and assets are easier to supervise, faster to execute on, and depending on the industry, also offer the chance for U.S. acquirers to continue to utilize domestic distribution channels. In some instances, companies can also leverage more advantageous cost arrangements north of the border.
As low unemployment in the United States has the potential to increase the cost of domestic skilled labor, Canada’s highly-educated, lower-cost labor pool and fewer immigration restrictions have become other key draws for U.S. buyers.
Areas that are particularly attractive to U.S. businesses seeking to acquire in Canada include the Industrial, Technology and Business Services sectors. U.S. purchases of Canadian Technology and Business Services companies rose 17 percent in 2018, although deal volume has fallen off year-to-date, aligning with the overall slowdown in U.S. M&A activity in 2019.
Canada has become a leading source of technology and talent, particularly in recent years. In its 2019 Scoring Tech Talent report, the Los Angeles-based CBRE Group identified Toronto as North America’s No. 3 market for tech talent. Vancouver came in the 12th spot, Montreal was 13th and Ottawa was ranked 19th. And in September, a comparative analysis by fDi Benchmark from the Financial Times ranked Montreal No. 1 among 20 major cities in Canada and the U.S. for the quality of its artificial intelligence (AI) industry.1
In Business Services, we have seen U.S. companies actively looking in the British Columbia and Ontario markets. Seattle has become a gateway to Western Canada and its professional service providers, with private equity particularly active in acquiring, utilizing Pacific Northwest-based law firms, accounting firms, and other such experts in issues like cross-border taxation and legal structures. Similarly, there are a number of Western Canadian private equity firms that have acquired businesses in the Pacific Northwest. U.S. Industrial businesses are taking an interest in Alberta, where a labor pool focused on the oil and gas industry is rich in skilled talent in areas from welding to electrical, plumbing and metalworking.
The shared border makes it easier to manage cross-border businesses. It is as easy for U.S. companies to travel from Seattle to British Columbia or Alberta, for example, as it is for them to get to San Francisco. Similar logistical synergies exist on the East Coast.
The number of cross-border conversations has continued to increase transaction volume in recent years, spurred by Canadian firms capitalizing on the larger buyer universe in the United States, whether they are involved in Technology and Business Services or Industrial sectors or areas such as Metals and Mining and Energy and Power. There is also elevated cross-border buyer interest in insurance and cannabis related businesses. For those interested in cross-border expansion, if you have a business in the United States and there are similar businesses in Canada, and vice-versa, there are clear synergies.
American buyers are clearly taking notice, with Canadian targets in recent years receiving relatively more attention from U.S. companies pursuing international acquisitions and comprising approximately 15-20% of all international acquisitions by U.S. acquirors.
In the end, it comes down to the simplicity of the transaction. Conducting business in Canada is very similar to that in the United States, with relatively similar legal, commercial, and business frameworks. A shared border and time zones make Canada a more palatable way to diversify than acquisitions further afield.
Seth Prostic, Managing Director, Co-Head of US Mergers & Acquisitions, also contributed to this article.
BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Commercial Bank N.A. (member FDIC), Bank of Montreal Europe p.l.c., and Bank of Montreal (China) Co. Ltd and the institutional broker dealer businesses of BMO Capital Markets Corp. (Member FINRA and SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Investment Industry Regulatory Organization of Canada and Member Canadian Investor Protection Fund) in Canada and Asia, Bank of Montreal Europe p.l.c. (authorised and regulated by the Central bank of Ireland) in Europe and BMO Capital Markets Limited (authorised and regulated by the Financial Conduct Authority) in the UK and Australia. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Inc., used under license. “BMO Capital Markets” is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license.
and SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Investment Industry Regulatory Organization of Canada and Member Canadian Investor Protection Fund) in Canada and Asia, Bank of Montreal Europe p.l.c. (authorised and regulated by the Central bank of Ireland) in Europe and BMO Capital Markets Limited (authorised and regulated by the Financial Conduct Authority) in the UK and Australia. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Inc., used under license. “BMO Capital Markets” is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license.® Registered trademark of Bank of Montreal in the United States, Canada and elsewhere.
©2019 BMO Financial Group
This is part 5
of a
6-part series on
U.S. companies with the greatest success in northbound M&A are those with experience and comfort around the cross-border legal and tax frameworks.
PART 1
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PART 2
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We’ve worked with many U.S. businesses that have expanded into Canada, so we’ve seen firsthand the difficulties that crop up when it come…
PART 3
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PART 4
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For U.S.-based manufacturing companies looking to expand into international markets, Canada represents a logical entry point. From the nature of its …
PART 6
Looking to Expand into Canada? Tips from our Cross Border Experts
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Our cross border campaign, Expertise in Action, offers tips and insights for U.S.-based companies that are looking to expand their businesses no…
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