Canadian companies are in a pole position for US takeovers

Canadian companies should seize the opportunity for mergers and acquisitions as fears of the credit crisis subside and the value of the loonie remains high, said York University Professor George Georgopoulos, commenting on his study of cross-border takeovers.

While some decry the hollowing out of corporate Canada and the federal government blocks the foreign takeover of the maker of the Canadarm, the study lends weight to American television pundit Jim Cramer’s tongue-in-cheek warning in 2007 of an imminent Canadian invasion.

"This year – or early 2009 – may be the time that things really kick into gear," said Georgopoulos, who teaches economics in York’s Atkinson Faculty of Liberal & Professional Studies. "With the high value of our dollar and the banks starting to show signs of easing on lending, it’s a good time for Canadian companies to buy unique or productive American assets."

Right: The high Canadian loonie means that it’s a good time for some corporate cross-border shopping

The study, appearing in the May issue of the Canadian Journal of Economics, is the first to use Canadian data to test a well-known theory on how exchange rates, among other factors, influence foreign direct investment. It examines how a low Canadian dollar over the 1990s was linked to trends in Canadian-US merger and acquisition transactions within the manufacturing industry.

Depreciation of a country’s currency is known to make its companies more vulnerable to foreign takeovers, but the study found this is particularly true in industries that have high technology or innovative assets.

"A major factor is whether the target company has a unique asset, something that either boosts productivity or brings something new to the foreign company’s home market," Georgopoulos said. "The acquiring firm buys the asset using the lower valued currency, and uses the asset to generate revenues in its own higher-valued currency, yielding a high rate of return."

Transactions of Canadian firms acquiring US firms during the rise in the value of the Canadian dollar include Onex Corporation acquiring the aircraft business of Raytheon (December 2006) and Dorel Industries acquiring high-end bicycle maker Cannondale Corporation (February 2008).

In general, the credit crises dramatically reduced mergers and acquisitions over 2007 and early 2008. However, recent market indicators that the interest-rate banks charge each other, known as the London Interbank Offered Rate (LIBOR), could start to decline relative to similar maturity asset market interest rates. This trend suggests that an increase in merger and acquisition activity could be on the horizon, Georgopoulos said.

"LIBOR gives a signal of how concerned the major banks are about the credit crisis. It is the measure," he said. "When that starts coming down, fears of this crisis will diminish, easing lending conditions, which will then lead to an increase in financing of merger and acquisition activity within Canada and across the border."