Canadian companies have been on a buying spree for the last two years, reveals an analysis by KPMG of the final tally of M&A deals in 2006 and 2005.

“Despite the perception that Canada is up for sale, there is significant deal flow going both ways”, says Peter Hatges, a corporate finance partner. Based on data supplied by Thomson Financial Securities Data, there were more outbound than inbound deals in 2005 and 2006. Canada had 348 outbound deals in 2005 and 442 outbound deals in 2006 when you include all Canadian companies. In contrast there were only 277 inbound deals in 2005 and 383 inbound deals in 2006.

The real story is in the dollar value of those deals. Outbound deal values are about US$51 billion over the last two years. But inbound deal values are almost double that at US$99 billion over the same period. Typically deal values can be swayed by one or two big transactions, and that was the case in 2006 with two significant transactions in Canada’s mining sector involving Falconbridge and Inco. Those two transactions accounted for US$38 billion.

“We’re not surprised by the statistics”, says Hatges. “As Canadian companies mature to the point where they are world class players, they are getting world class attention, and typically, the most appropriate suitor will be a foreign buyer. Furthermore growing and emerging Canadian companies are being very active in cross border transactions. Despite the fact that the overall outbound deal values are smaller, the outbound deal activity is 20% greater than inbound deal activity.”

The outbound deal activity by Canadian companies provides further evidence that careful consideration is needed when considering interest deductibility for Canadian companies making foreign acquisitions. Hatges says that, “any rules affecting the after tax cost of capital could have a significant impact on Canadian companies undertaking cross-border acquisitions. If Canadian companies are going to earn appropriate returns on invested equity, they are going to have to finance their acquisitions appropriately. If interest deductibility is limited on cross border deals it spells trouble for Canadian acquirers.”