Canadian mergers and acquisitions activity is holding up in the first half of 2005, although its expected to lag the projected 14% increase in worldwide M&A, reports KPMG Corporate Finance.

For the first half of the year, the value of completed Canadian transactions showed a modest decline. To June 6, M&A transactions were valued at US$39.2 billion, compared to US$45.0 billion in the first half of 2004, according to KPMG Corporate Finance’s analysis, based on data supplied by Dealogic.

The number of Canadian M&A deals that closed in the first half of 2005 remained fairly consistent with 2004. Specifically, 638 deals were completed so far in the first half of 2005, compared to 649 and 594 in the first and second halves of 2004.

The top Canadian deals completed in the first half of 2005 include TD Bank Financial Group’s controlling acquisition of Banknorth Group Inc., the merger of Adolph Coors Co. with Molson Inc., the takeover of Masonite by Stile Acquisition Corp and Noranda Inc.’s consolidation of its ownership of Falconbridge Ltd.

“The first half of 2005 is showing a continuation of good levels of M&A activity,” says Steve Smith, a Toronto-based partner in KPMG’s Advisory practice. “The M&A market hit bottom midway through 2003 and while the downturn was steep, the recovery has been more gradual. A wave of high-profile deal announcements at the start of 2004 paved the way for a strong second half, and this strength has continued into 2005.”

“Although the 2005 numbers have not matched the most bullish predictions, the level of activity is consistent with the current backdrop. This is characterised by stable capital markets and a number of transactions in the form of income trust IPOs, instead of traditional M&A activity. Of course income trust IPOs occur more widely in Canada than elsewhere, and they are not included in the M&A numbers,” Smith continued. “The good news here is that many trusts have already become acquisitive in order to show growth. We expect this trend to continue, adding a new type of potential buyer to the market dynamics.”

As for worldwide M&A, KPMG’s global analysis reveals that US$671 billion worth of M&A deals have been completed to date in 2005. This is a fraction less than the US$675 billion closed in the whole of the first half of 2004. However, by the end of June, the total value of global activity is forecast to reach US$771 billion – a 14% increase on the same period last year.

The Asia-Pacific region experienced the greatest upturn in action, recording a 39% rise in deal value and 34% increase in completed deal volume compared to the first half of 2004. Within the region, Japan is leading with M&A values up 52% and volumes rising 70% on the first half of last year. So far this year Japan has closed 1,074 deals putting it not far behind the UK’s 1,273 completed transactions for 2005 to date.

Elsewhere results were mixed. Growth in inward and outward investment flows for Western Europe lagged behind other world regions last year, KPMG said. This year Western Europe has closed 3,897 deals, valued at a combined US$298 billion, putting it ahead of the US which recorded 3,652 deals worth US$279 billion. While the deal count in both regions is below last year, Western Europe has so far gained 24% in value terms. By contrast the US is down by 27% on value compared to the first half of last year.

“The US has been through an economic soft patch with rising energy costs, consumer debt and interests rates all affecting business confidence,” says Smith. “Although deal closures have slowed, interest in looking at transactions has not diminished. Strategic buyers are, however, being very careful. This translates into extensive due diligence and negotiations. Private equity firms are more active due to large capital commitments and favourable debt market conditions.”

Looking at the Canadian industry breakdown, the resource sector generally, led by oil and gas, mining and pulp and paper, has been most active, the firm notes. “All these industries benefit from strengthened commodity prices, but oil and gas trusts dominate the deal landscape because of their ongoing need to build through acquisition to meet their continuing demand for distributable cash flow,” it adds.

@page_break@Globally, financial services remains the largest sector by value but it has seen a large fall (46%) in the value of activity compared to the first half of last year. Financial Services M&As total US$90 billion to date compared to US$168 billion for the first half of 2004. Deal numbers for the sector are also down by 16%.