2008 year in review, part 1 of 8.

After two years of record-breaking activity, mergers and acquisitions among Canadian corporations slowed down considerably in 2008 — and the level of M&A activity in the financial services sector was no exception.

The combination of tight credit and a weakening economy drove down both the volume and value of M&A activity during the past year, says Ed Giacomelli, managing director of Toronto-based investment bank Crosbie & Co.

“In general, M&A in 2008 has been weakening compared to 2007 and 2006,” Giacomelli says.

The financial services industry felt the slowdown even more acutely than most sectors on the M&A front, as financial performance of industry players was slammed by the liquidity crunch and the deteriorating value of assets under management.

“Financial services has been hit very hard in this market,” Giacomelli says.

In the three quarters ended Sept. 30, the number of transactions in the financial services sector fell 26.5%, to 161 from 219 in the same period in 2007. The value of the deals, at $10.54 billion, was less than a quarter of the $47 billion in the same period in 2007, according to Crosbie & Co.’s quarterly reports on M&A activity in Canada.

Although fourth-quarter numbers will not be out until the new year, this lagging pace of activity appears to be continuing.

“We would expect activity in the fourth quarter to be lower than in Q3 — likely materially lower,” Giacomelli says.

But the lower level of activity doesn’t mean that M&As faded away entirely this past year. Market uncertainty simply changed the “flavour” of M&A activity, Giacomelli says. He points out that many of the transactions occurring in the current market environment represent strategic and opportunistic acquisitions, many of which have resulted from the market turmoil.

Bank of Nova Scotia’s $2.3-billion purchase of a 37% stake in Toronto-based CI Financial Income Fund from Sun Life Financial Inc. is one such example.

The deal, which takes the cake as the biggest financial services sector M&A transaction of 2008, represented a strong opportunity for Scotiabank to snag a stake in a major mutual fund industry player at a reasonable valuation, Giacomelli says.

The transaction made Scotiabank CI’s largest single shareholder and it gave Sun Life a chance to boost liquidity and strengthen its balance sheet without having to attempt to raise equity in difficult market conditions.

“It was a timely transaction,” Giacomelli says. “It was defensive, it was opportunistic.”

The deal wasn’t the only opportunity Scotiabank ceased this year.

Following January’s news that DundeeWealth Inc. was no longer on the market — which put Scotiabank’s hopes of exercising its right of first offer to buy the wealth-management company to an end — Scotiabank moved on to other prospects. It scooped up Toronto-based discount brokerage E*Trade Canada Securities Corp. in September for $444 million.

Other financial services firms have also displayed a willingness to pursue growth even when market conditions are far from stable.

National Bank of Canada, for instance, had an especially busy year on the M&A front, as it worked to strengthen its position in its home turf of Quebec and continue expanding into the rest of the country.

The year kicked off with National Bank’s acquisition of Aquilon Capital Corp., a Toronto-based investment-management firm, in early February. The transaction boosted the bank’s assets under management by $500 million and added to its scope of services for individual investors.

Just one day later, National Bank announced that it had acquired Groupe Financier Everest, a Montreal-based brokerage firm that added another $550 million to its AUM.

The bank further grew its Quebec operations later in the year by acquiring Montreal-based Retirement Option Group, a full-service securities brokerage firm specializing in personal financial planning, with $1.5-billion of AUM.

National Bank also grew its Western Canadian footprint in 2008 with the purchase of Bieber Securities Inc., an investment-management firm based in Winnipeg, in May.

A few months later, the bank snapped up a 12.5%-stake in wealth-management company Wellington West Holdings Inc. National bank paid $35.8 million for the stake, providing Wellington West with new cash for growth opportunities and National Bank a spot on the Winnipeg-based firm’s board of directors.

Another Quebec-based firm, Industrial Alliance Insurance and Financial Services Inc., was also very active in the M&A realm in 2008. IA boosted its wealth-management capabilities in early July with the acquisition of companies in AEGON Canada Inc.’s National Financial Corp., the holding company that housed AEGON Dealer Services Canada Inc., Money Concepts (Canada) Ltd. and National Financial Insurance Agency Inc.

@page_break@In late October, IA closed its acquisition of Winnipeg-based private mutual fund manager Sarbit Asset Management Inc. The transaction put control of Sarbit into the hands of IA subsidiary IA Clarington Investments Inc., and integrated Sarbit’s funds into the IA Clarington family of funds.

Just days later, IA entered into another acquisition agreement; this time, it was with Toronto-based DundeeWealth Inc. Under the agreement, which is still subject to regulatory approval and expected to close Dec. 31, IA will acquire DundeeWealth’s financial planning, mutual fund dealer and life insurance sales operations in Quebec. This includes $2.6 billion in AUM and a network of more than 400 licensed financial advisors throughout the province.

DundeeWealth also made its mark on the buying side of the M&A equation this year. In July, the company picked up a 60% stake in Toronto-based institutional money manager Aurion Capital Management Inc. for roughly $26 million. The same month, DundeeWealth also announced the acquisition of 89% of U.S.-based mutual fund manager BHR Fund Advisors LP in an effort to expand its international reach.

Other financial services sector M&A deals in the spotlight this year included Royal Bank of Canada’s $1.36-billion acquisition of Vancouver-based Phillips, Hager & North Investment Management Ltd.

Announced in late February, the deal caught many by surprise. One of the biggest financial services sector deals of the year, it added to Royal Bank a diverse spread of about 600 institutional clients with AUM of roughly $55 billion.

The deal also added to Royal Bank’s portfolio roughly 6,000 client accounts linked to independent advisors with total assets worth $19 billion.

Another deal, announced late in September, brought Saxon Financial Inc. under the umbrella of IGM Financial Inc. for $273.9 million. This integrated Saxon’s $2-billion family of 12 retail mutual funds, as well as its $11 billion in institutional AUM, into IGM subsidiary Mackenzie Financial Services Inc.

The industry is experiencing the beginning of a shift toward a more strategic approach to M&A, in which there is more focus on the logical and financial fit of two organizations, rather than highly leveraged growth, Giacomelli says.

“I think M&A will be much more pragmatic in the future and based on core fundamentals, as opposed to based on just a desire to grow, for the sake of growth,” he adds.

IE