By James Langton

(November 6 – 18:20 ET) – The Canadian mutual fund industry was rocked with news of a surprise $3.9 billion bid by C.I. Fund Management Inc. for Mackenzie Financial Corp. this morning — now the fight gets interesting.

Mackenzie has come out against the bid, which only includes $600 million in cash, and the rest in C.I. stock, calling it “opportunistic” and insufficient. Mackenzie says that C.I. is essentially using the $536 million proceeds from Mackenzie’s sale of Merrill Lynch to finance the deal, while C.I.’s own cash commitment is minimal.

Mackenzie, which only learned of the bid along with the rest of the market first thing this morning, has also announced that its board has retained CIBC World Markets as its international financial advisor, and Goodman, Phillips & Vineberg LLP as its legal advisor in defense. CIBC is renowned as a fierce M&A defender. The Mackenzie board may also appoint an additional financial advisor over the next few days.

“The board, together with its advisors, will review the C.I. offer when and if it is received, following which the board will issue a formal communication to shareholders”, said Jim Hunter, president and CEO of Mackenzie . “As previously stated, management of Mackenzie believe that the C.I. offer price does not reflect the true value of the company. The board, together with management and financial advisors, intends to vigorously pursue all alternatives to maximize value for the Mackenzie shareholders.”

If today’s trading is any indication, investors are expecting Mackenzie to wring some more value out of the firm, too. Mackenzie stock closed the day up 28.7% to $28.25, with almost 12.5 million shares changing hands. National Bank Financial and Griffiths McBurney dominated trading in Mackenzie stock today, with NBF buying almost 3.9 million shares, and Griffiths moving 3.2 million. Scotia came in third.

Today’s closing price puts Mackenzie at the takeout price C.I. offered. However, C.I. shares lost 90¢ to close at $15.70 on heavy volume, taking steam out of the 85% of the deal that’s in stock.

CI has indicated that it likely won’t raise its bid if it is trumped by a rival, having priced this deal just south of where Amvescap plc bought Trimark Financial Corp. earlier this year. The deal, if it does go ahead, will create Canada’s largest fund company with approximately $68 billion in assets under management, including $58 billion in mutual fund assets..

If Mackenzie is hoping for a white knight it will likely have to look for a domestic bank, or a foreign buyer, as possible domestic independent buyers are few and far between. Any bid will have to please Mackenzie’s major shareholders, Fidelity Management & Research Co. and AIC, which own 10.1% and 24.4%, respectively. The offer will be subject to 66 2/3% of the outstanding Mackenzie common shares tendered to the deal.

Let the games begin.