Canadian firms look south of the border to bolster growth

More companies buying businesses in the States than the other way around

Howard E. Johnson, managing director of Veracap M&A International in Toronto, part of an international group of firms that advise on acquisitions and financing.

When Agropur Cooperative Agro-Alimentaire, one of Canada’s largest dairy companies, found itself with dwindling potential for growth at home, it started looking internationally.

The resulting foray into the United States vaulted the company into the international big leagues this year.

A deal to acquire Minnesota-based Davisco Foods International will add about $1-billion to the $3.8-billion in annual sales for the co-operative, which is owned by more than 3,500 Canadian dairy farmers. It will double its U.S. dairy-processing business and place it in the top 20 dairy-product companies worldwide.

“The world dairy industry is consolidating at an accelerated pace, and our acquisition of Davisco supports our objective of increasing our global presence,” said Robert Coallier, chief executive officer of Agropur, based in Longueuil, Que.

Border-spanning mergers are becoming increasingly common during an era of slow business growth. And contrary to a popular notion – fuelled by Burger King Worldwide Inc.’s $12-billion acquisition this year of Tim Hortons Inc. – Canadian companies tend to acquire more firms south of the border than American companies swallow in Canada.

In 2013, 304 Canadian companies acquired U.S. firms, compared with 274 acquisitions in Canada by U.S. companies. Over the past five years, there have been 1,672 Canadian acquisitions of U.S. companies, compared with 1,326 in the other direction, according to the financial data provider S&P Capital IQ.

Cross-border mergers and acquisitions are also more likely to be instigated by Canadian companies than in reverse in Africa, Europe and Latin America.

Canadian companies face limited options if they stay in Canada, says Howard E. Johnson, managing director of Veracap M&A International in Toronto, part of an international group of firms that advise on acquisitions and financing. “Companies may be facing 1 to 2 per cent domestic growth.”

The M&A pace picked up in the wake of the financial upheaval of 2008, which saw Canadian banks and financial services companies actively expanding internationally, while U.S. banks have been more cautious, Mr. Johnson says.

Acquiring businesses outside Canada is also less likely to result in regulatory snags, he adds. An acquisition that might trigger a review by the Competition Bureau in Canada would more likely fall below the radar for antitrust regulators in the much bigger U.S. market.

“When there is a takeover of a major Canadian company, it tends to hit the front pages of the news, as opposed to the acquisition by a Canadian company of a foreign entity, which tends to be more in the business section,” Mr. Johnson says.

He sees plentiful opportunities for Canadian companies in energy, materials and resources. Data services also are ripe for picking, but U.S. acquisitions in Canada in that sector still outnumber Canadian deals in the States, he adds.

When companies are in play they don’t want it widely known, which is why they work through agents such as M&A International, he says.

“It creates anxieties for managers and staff to know a company is up for sale,” he says. “Ironically, it is often that employees fear they’ll be let go and, conversely, the acquiring company fears that talent will leave.” In most cases, these fears are overblown, Mr. Johnson says.

Foreign entities also invariably continue to be run as separate companies incorporated in their home countries. “It becomes much more difficult to manage companies centrally from Canada, and local management helps reassure clients and employees,” he explains.


But speed is essential to avoid deal fatigue that can derail an acquisition. The maximum time from beginning of discussions to closing a deal should ideally be less than nine months. Any longer than that and one side or the other starts to lose interest and might back away, he says.


Mr. Johnson cites four common pitfalls to avoid:


Ambiguous letter of intent: When the LOI doesn’t spell out all major deal points, the buyer and seller might have different expectations, such as conditions for payment of the purchase price. A comprehensive, unambiguous LOI is critical.


Due diligence surprises: If the buyer discovers new information that was not previously disclosed, such as the loss of a major customer, it could renegotiate the terms or walk away altogether. The golden rule for sellers is: no surprises after signing back the LOI.


Losing focus on the business: One big reason that deals fail is management stops running the business, and slipping results lead the buyer to have second thoughts. Managers and owners must continue to satisfy clients and motivate and support their employees.


External events: Shifts such as the credit crisis of 2008 are unpredictable and uncontrollable. The seller’s best course is to keep the sales process moving forward.

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