Cross-border dealmaking continues to boom despite market challenges

The market for cross-border deals continues to surge as interest rates remain low — and confidence in the economy has been restored amid the COVID vaccine rollout — so companies are looking further afield for strategic growth opportunities. 

Canada’s merger and acquisition activity rebounded in the first quarter of 2021 after a nine-year low in 2020. In one recent example of a sizable deal, Canadian Pacific Railway announced on Sept. 15 that it has entered into an agreement with Kansas City Southern, under which Canadian Pacific will acquire Kansas City in a stock and cash transaction worth US$31 billion. The deal will create the first US-Mexico-Canada rail network with new single-line offerings.

With the post-pandemic economic recovery in sight, many other Canadian companies are eagerly hunting assets north of the border while US companies snap up strategic investments in Canada. 

“Most of the deals I’m seeing are strategic from a private equity perspective, and it’s all being fueled by cheap money — which is all over the place,” says Mark Redinger, partner at Dickinson Wright LLP. “I don’t think we’ve seen the full extent of the recovery because things are still skittish with these third and fourth waves.”

Karrin Powys-Lybbe, a partner at Torys LLP, agrees that the dealmaking pace shows no sign of weakening. 

“There are very few examples where deals can’t get done because of the pandemic,” she says. “It’s really quite remarkable how well companies and the market have adapted.” The market rapidly evolved to a climate of virtual meetings and e-signatures to allow deals to continue during lockdowns and travel restrictions. Although Powys-Lybbe notes there was a slowdown in dealmaking during the summer of 2021, the pace has rapidly picked up again in the fall, she says. 

Despite the buoyant market, cross-border dealmakers are navigating complex challenges during the ongoing pandemic crisis. Border closures created challenges with due diligence, and the situation also forced many deals to close with minimal reps and warranties, creating further difficulties for buyers. 

“Too often, companies engage in buying businesses in a different jurisdiction without really thinking about their tax position and how funds are going to flow, so structuring a transaction is really helpful,” says Redinger. In a competitive situation, engaging external counsel, accountants and other advisors early on will help ensure the deal is presented with a complete set of concepts. 

“If you’re in a competitive situation and you know share deals don’t work for your tax structuring, it’s no good going to market with a share deal,” says Redinger. “It would be better if you spent some time at the front end, kicking the tires with counsel, lawyers or accountants, just to make sure whatever structure you’re okay with works.” 

As legal lead for M&A at TD Bank Group, Kashif Zaman has experience with cross-border transactions. He shared some thoughts, speaking in his personal capacity.

“You need to understand how this other jurisdiction works and you need to understand not just the rules, but also how all the parties in a cross-border transaction negotiate deals,” says Zaman. The negotiating style of parties in different jurisdictions can vary, such that some may be more abrasive or blunt in negotiations, so understanding differing types is essential, Zaman says. 

To mitigate risk in cross-border dealmaking, it is also essential to understand the political and regulatory environment. 

“When you don’t have the home-court advantage, you have to have to be very careful to look at how these processes could derail a transaction,” says Zaman. “If you’re doing a transaction in the US, you have to go with US customs. You can’t just impose your own jurisdictional norms.”

Another critical skill in cross-border dealmaking is to strike the right balance between exercising caution and overanalyzing, which can lead to delays. Zaman recommends having the right team members involved in the deal from the outset to bring different perspectives to the table and ensure all bases are covered without unnecessary delays. 

Many people are currently suffering from burnout caused by increased workload and challenges in their personal lives amid the pandemic, thus creating further difficulties for cross-border dealmakers. Powys-Lybbe advises in-house counsel to avoid skimping on the team when planning for M&A. 

“Don’t think, as you might have done in the past, that you can get a deal done with just one person or a skinny team with tight budgets,” she says. “There’s more pressure on individuals, so my advice would be to think strategically about where you need support and manage expectations internally.”

In times of remote dealmaking, market participants who already have a relationship have a distinct advantage.

“If you’re competing in an auction and you’re already known to the target, you’re going to have a leg-up over a company that’s coming from a cold start,” says Powys-Lybbe. “When people are looking to get deals done, they are more likely to go back to someone they have a relationship with.” Careful examination of the target company’s financial information can help prevent unpleasant surprises after the deal closes. 

Redinger anticipates an ongoing strong market for cross-border M&A in 2022 as companies continue to look across the border as a strategy for growth and strategic economic recovery. 

“I think it’s going to be a very robust year because interest rates are still low, and there’s a lot of pent-up demand because people have been sitting on the sidelines for the last few years,” he says.