Canadian companies are expecting mergers and acquisitions activity in the coming year to exceed the record-breaking levels of the past 12 months, according to new research from Greenwich Associates.

Among the more than 180 Canadian companies interviewed by Greenwich Associates, 43% say they expect to engage the services of an M&A advisor in the coming year for a domestic transaction. That proportion substantially tops the 33% of companies that actually engaged in domestic M&A activity between 2005 and 2006.

The same trend exists in cross-border M&A, where the proportion of Canadian companies expecting to be active in the coming year increased to 32% from the 22% actually transacting in the 12 months leading to the 2006 study.

“In terms of expected M&A activity, our research forecasts the biggest demand among the largest companies in Canada,” says Greenwich Associates consultant Jay Bennett. “41% of the TSE 300 companies interviewed for the study say they expect to use an advisor for a domestic transaction in the next 12 months and nearly two-thirds with a market capitalization of over $10 billion expect to do so.”

The research reveals a number of sectors that expect to be most active domestically: non-bank financials, metals and mining, paper and forest products, real estate, telecommunications, and utilities.

“It is also interesting to note that U.S. companies are predicting a higher level of activity than their Canadian counterparts,” says Bennett. “In 2005 expectations in the two countries were comparable, with 42% of Canadian companies and 45% of U.S. corporations expecting to be active in domestic M&A. This year, fully half of U.S. companies expect to engage the services of an advisor for a domestic merger or acquisition in the next 12 months.”

Greenwich notes that there will always be a discrepancy between the reported predictions and actual deal flow. For example, in 2005 42% of Canadian companies said they expected to engage an advisor for a domestic M&A deal, but over the next 12 months only a third of the total actually did so. On the international side, 30% expected to hire an advisor for a cross border deal; 22% actually did so.

“Over the course of the past year, investment-grade companies were actually more active than they had predicted, with one third of the investment-grade participants in our 2005 study saying they expected to be active in domestic M&A and 42% actually engaging an advisor,” says Bennett. “Among non-investment-grade companies the opposite was true: 63% predicted that they’d be active domestically, but only 27% were able to follow through.”

Nevertheless, the firm says this year’s research results indicate clearly that Canadian companies have maintained their optimistic outlook and are prepared to hire advisors in what they expect to be a robust market for domestic — and to a lesser extent international — M&A. What is less clear is the precise role that these advisors will be playing, it adds. For the past several years Greenwich Associates has been tracking a trend among Canadian companies: a growing number of them have been internalizing parts of the M&A process. This trend has been consistent from the smallest deals to the largest — even for those in excess of $1 billion.

Over the past 12 months, however, the trend reversed itself. Bennett explains, “The trend of internalizing M&A functions existed for some time. During investment banking cutbacks of 2001 and 2002, when many talented and experienced professionals lost sell-side jobs, companies took advantage of this available expertise by hiring and shifting some core M&A tasks from paid advisors to in-house staff. Over the past 12 months, however, it seems that Canadian companies have reached a point at which — perhaps due to high levels of M&A activity during the period — some functions began to move back to the advisors. These companies appear to be in the process of feeling out which tasks are appropriate for internal staff and which are best served external advisors.”