The latest edition of the American Bar Association’s (ABA) Canadian Private Mergers & Acquisitions Deal Points Study was released on December 19, 2019. The study focused on deals signed in 2016 and 2017. A number of members of the Fasken team were involved in the preparation of the study, including the authors of this post.
The ABA deal points studies have been cited in numerous court decisions and are a leading source in seeking to answer the dealmaker’s most basic question: what’s market? This article highlights some of the key findings from the study and compares certain deal points to recent US studies.
Notwithstanding the importance of the study, readers should be mindful of the nature of the sample used before applying it too broadly. The agreements reviewed are sourced from the System for Electronic Documents and Analysis and Retrieval (SEDAR) maintained by Canadian securities regulatory authorities for reporting issuers. As result, the study necessarily reviews only a small portion of transactions completed during the relevant time period and is limited to Canadian private targets that are being acquired or sold by public companies. The latest study reviews just 90 agreements and is heavily skewed towards smaller deals (48% are under $50 million and 60% are under $100 million). That said, one of the biggest changes since the last Canadian study is the increase in deals over $200 million (up to 29% from 20% in the 2016 study). As a result of the how the transaction samples are developed for the study, 87% of the deals involved corporate buyers (unchanged from 2016 study) and only 6% involved private equity buyers (down from 10% in the 2016 study). 70% of deals in the study involved corporate sellers (71% in the 2016 study) and 9% involved private equity sellers (8% in the 2016 study).
Of note, the study shows that 21% of deals were in the oil & gas sector (up from 16% in the 2016 study and up from 8% in the 2014 study) and that 4% of deals were in the chemical & basic (natural) resources sector (down from 17% in each of the 2016 and 2014 studies).
Purchase Price Adjustments
The study shows a number of shifts in market practice with respect to post-closing purchase price adjustments. First, 79% of transactions include such an adjustment (up from 72%) with the vast majority of deals adjusting for working capital. Second, and somewhat puzzling, is that that the buyer prepares the first draft of the closing balance sheet in only 59% of deals (down from 76% in 2016 and 61% in 2014). That is in stark contrast to the US study, in which the buyer prepares the first draft of the closing balance sheet in 95% of deals. Some of the change might be attributable to data collection challenges, as 19 of the agreements reviewed did not specify who prepared the closing balance sheet. Finally, Canadian deals tend not to use earn-outs to bridge valuation gaps to the same degree as deals in the US (16% in Canada and 28% in the US), which is consistent with previous studies.