Source: The Canadian Press

The high loonie, increasing demand for goods in Asia and companies looking to spend their idle cash will lead to more mergers and takeovers involving Canadian businesses next year after a slight dip in 2010, according to business consultants and auditing firm KPMG.

KPMG says companies will be looking to emerging markets as a way to expand their boundaries and invest money sitting in bank accounts as they continue to recover from the recession.

Adding the high dollar and favourable exchange rates to the mix makes it more affordable for Canadian companies to buy foreign ones, KPMG said in a report issued Wednesday.

“I think there’s going to be opportunities in Eastern Europe and the rest of Europe for Canadian companies…with huge growth in those emerging economies like China and India,” Peter Hatges, president of KPMG Corporate Finance, added in an interview.

Increasing buyer confidence boosts company values to levels that both buyers and sellers think are reasonable, creating a better breeding ground for deals in 2011, Hatges said.

“When you reach that point, you get a lot of merger and acquisition deals,” he said, adding that Canadian companies will be looking to manufacture directly in the emerging markets that are demanding their products.

Irwin Michael, portfolio manager ABC Funds in Toronto, said corporate earnings are better than expected and Canadian companies are considering what to do with their excess cash.

He said they are in the same boat as American families and corporations, who are sitting on nearly US$10 trillion and are looking for ways to invest.

“It is now cheaper today for corporations to buy companies in the stock market…than to start a division in that company itself from scratch,” said Michael, adding that current low interest rates act as an “aphrodisiac” for the market and encourage companies to invest in mergers or acquisitions that can give them a higher return.

KPMG says the increase in deals in 2011 will turn around three years of consecutive declines. There was a small decrease in the number of deals in 2010, with the firm estimating just over 1,800 transactions involving Canadian companies will be completed this year with a total value of between US$114 billion and US$117 billion.

There were 2,110 completed deals in 2009, by comparison, with a value of about US$129 billion

Hatges said the slight decrease could be due to lingering fear from recent tough economic times.

“Everybody knows what happened there with the credit crisis and I think the hangover has been longer than expected,” he said.

The report says that although the total number and dollar value of deals are down in 2010, they are consistent with other expected numbers around the world.

KPMG says the value of mining deals increased “dramatically” this year, with one-third of all transactions being in the mining sector, and the majority of others in energy and industrials.

Canadian companies were the buyer in seven out of 10 of the biggest deals in Canada this year, with all but two of the top deals being in the mining or oil and gas sectors.

The biggest single Canadian deal completed this year was the US$6.8-billion acquisition of Red Back Mining by Kinross Gold Corp. (TSX:K).

“The high transaction values in this sector are not surprising, given strong commodity prices driven by the continued and increasing need for commodities from emerging economies,” Brian Imrie, head of mining and metals for KPMG Corporate Finance, said in the report.

KPMG notes that the pace of activity picked up in the second half of 2010 as the result of improved conditions for raising money on the debt and equity markets.

The lower Canadian numbers for 2010 are the direct opposite of booming mergers and acquisitions in India and China. KPMG estimates those countries saw a 117% and 31% increases respectively in the number of inbound and outbound deals.