New national rules for mergers won't keep hostile bids away from Canadian firms.AKHTAR SOOMRO/Reuters
Merger arbitrageurs liked Canada before new rules to slow down hostile takeovers, and early reaction suggests they like it just as much after the proposals for the rules are in place.
On Thursday, the umbrella group for the country's 13 provincial and territorial regulators said the plan is to create new rules that will about double the length of time available for a target board to find an alternative to a hostile bid.
There are plenty of reasons for arbs to like this. They are in the game of buying stock of a company that's in play and holding it until the deal closes. They take the risk that the deal won't happen in return for the reward if it does.
The new rules shift the power to the board of directors from the acquiror, increasing at the margin the risk that a board can convince its shareholders to say "no." But really, shareholders generally want to sell, so that's not going to happen too often. On the other side, there are lots of potential outcomes of a longer window that are good for an arb. If a board is able to use the longer window to drive up the bid from the hostile acquirer, to go friendly or to find a new friendly white knight, those should all increase returns.
The longer hold period is not an economic disincentive that will keep arbs out of the game, according to one large player. Long hold periods are common in the U.S. Longer holds are also common on transactions in Canada that need approval of other regulators such as the Competition Bureau or Investment Canada.
Add to that the fact that interest rates are at record lows, the carrying costs of borrowing money to buy shares while a deal is pending are not very material. Arbs may offer a slightly lower price when snapping up shares after a bid is made public to reflect the longer hold, but aside from that, there may not be much effect.
Acquirers may be the ones pinched with higher costs. They will have to pay advisers such as lawyers and lobbyists and public relations firms for a longer time. In addition, while investment bankers work toward receiving success fees at the completion of a deal, the banks may end up charging more for financing fees. In Canada, a hostile bid must have committed financing. Banks that are making financing commitments for 120 days may charge more than they would have for a shorter commitment. But competition – as well as the reality that the biggest deals often take long periods to get all the approvals – suggest that any change there will likely be minimal.