The mergers and acquisitions business is expected to rebound after a two-year slump, but opinions are divided over the strength and speed of the recovery.

On the more bullish side, Martin Roberge, a portfolio strategist and quantitative analyst with Toronto-based Dundee Securities Corp. in Montreal, suggests the number of M&A transactions could surpass the record levels set in the second quarter of 2007 by the fourth quarter of this year.

Roberge says the catalyst will be the “enormous cash balances” some companies have accumulated during the past few years, noting that “this hoard of cash is ready to be redeployed.”

He points to two recent deals in the U.S. as being indicative of the trend toward big cash acquisitions.

Norway’s Yara International ASA recently bought Iowa-based fertilizer-maker Terra Industries Inc. for US$4.1 billion in cash, while Indianapolis-based Simon Property Group Inc. has offered US$10 billion for Chicago-based shopping mall operator General Growth Properties Inc., US$9 billion of which was in cash.

“These sizable cash transactions have sparked an M&A revival,” Roberge says, “that is likely to continue for the balance of the year.”

However, Colin Walker, managing director of Toronto-based Crosbie & Co. Inc., a specialty investment-banking firm, has a more cautious outlook. He expects M&A activity to climb at a slow but steady pace this year, with most deals in the mid-market range and few, if any, megadeals.

“The mid-market is fairly robust,” he says, referring to deals worth less than $250 million.

Walker expects to see a total of about 254 transactions in Q4 2009 once his company’s quarterly M&A report is completed. This would be well above the 167 deals recorded in the first quarter of last year, when the market bottomed out. But, he notes, the Q4 figure is well off the record high of 417 deals in Q2 2007.

Unlike Roberge, Walker does not expect a return to the heady days of 2005-08 until the capital markets get back on their feet. The syndicated bank loan market, hedge funds, mezzanine financing and many other components of the wholesale banking sector were “blasted to oblivion” during the credit crisis — and, he says, they won’t recover soon: “A lot of the credit financing has disappeared. We’ll see some gradual strengthening, but we won’t see the spikes we saw earlier.”

Thus, Walker says, he foresees few megadeals for the same reason: they are simply too difficult to finance in the current environment.

Both Roberge and Walker expect a wide range of M&A deals in Canada this year; they say the bulk of them will be in the energy and industrial sectors. Walker is paying particular attention to the Alberta natural gas business because a new extraction technology has created a higher demand for natural gas properties.

As well, Walker says, Canadian companies are also keen to shop across the border because of a relatively high Canadian dollar, the relative strength of Canadian balance sheets and the stability of the Canadian banking system, which is becoming more generous with its financing as confidence levels rise. These factors give Canadian companies a distinct advantage over their U.S. counterparts, allowing them to make good acquisitions across the border.

And many Canadian companies are looking to the U.S. for an acquisition target at a good price because many U.S. companies suffered during the recession and are now financially troubled, or even distressed.

“It’s not surprising to see Cana-dians looking at the U.S.,” Walker says. “It’s a good time to have capital in the market.”

A recent report published by New York-based law firm Paul Weiss Rifkind Wharton & Garrison LLP found that Canadian companies were surprisingly active in foreign M&A markets last year.

It found the value of cross-border deals in which Canadian firms bought foreign companies rose by 94% in 2009, to 566 deals worth US$37.1 billion, while the value of U.S. companies buying foreign firms fell by 35%, to 1,445 deals worth US$114.8 billion.

Although 2010 is only two months old, two major Canadian pension funds have already announced a number of major acquisitions south of the border.

The Ontario Teachers’ Pension Plan Board has bought United Guaranty Canada, a unit of insurer American International Group Inc. and the second-largest private mortgage insurer in Canada. The OTPPB has also picked up Atlanta-based Simmons Bedding Co., a well-run U.S. manufacturer that had slipped into bankruptcy.

@page_break@The CPP Investment Board has also been active. It bought Liv-ingston International Income Fund in partnership with U.S. private-equity firm Sterling Partners.

Meanwhile, the total value of Canada-based cross-border deals could leap if Agrium Inc., a Calgary-based fertilizer company, is successful in its US$5-billion hostile bid for CF Industries Inc. of Deerfield, Ill.

But despite the expected increase in overall M&A activity, analysts expect little to happen in the financial services sector this year and next.

Roberge foresees a quiet market because Canadian banks are leery of running their cash reserves down until the international banking community issues its long-awaited Basel III liquidity requirements, which are probably coming next year.

“Basel III is a big knife hanging over the head of the [banks’] CEOs,” he says, adding that uncertainty over the forthcoming rules is also dampening merger enthusiasm among the bank-owned brokerage houses and life insurance operations.

And he doesn’t expect independent brokers to go looking for acquisitions anytime soon: “There’s no hurry for the [investment] dealers to merge. They did a lot of cost-cutting in 2008 and they are making lots of money. There won’t be any mergers until the market turns down.”

Walker agrees that the financial services sector will be quiet for the foreseeable future. Canadian banks and investment dealers, he says, are unlikely to expand for a while.

One investment dealer investing cautiously in a pickup in M&A activity is Raymond James Ltd., the Canadian arm of U.S.-based Raymond James Financial Inc.

Last August, it hired prominent industry veteran Jeremy Rakusin to head up its new M&A team; the firm then added Wes Zimmerman in mid-February to that team.

The firm is building this team to take advantage of an expected upswing in Canadian and cross-border M&A activity. Says Peter Kahnert, vice president of corporate communications in Toronto: “We will be picking up [business and additional staff] in Canada over the next [few years] as our business grows.” IE