Greenwich Associates says that the sustained strength of the Canadian economy is generating a robust environment for mergers & acquisitions, and the robust Canadian dollar could provide the M&A market with a considerable cross border boost.

Roughly one-third of the 161 large companies participating in a Greenwich Associates study say they retained the services of an investment bank for advisory service on a domestic M&A transaction during the 12-month period ending in June 2007. That matches the level of domestic M&A activity reported in 2006. Activity was particularly high among companies in metals & mining, oil & gas, media, and real estate.

Looking ahead to the 2008 period, 50% of Canadian companies expect to require the services of an M&A advisor for a domestic transaction, the firm notes. Expectations are especially bullish among companies in oil & gas and metals & mining.

Nearly a quarter of Canadian companies say they hired an advisor for a cross-border merger or acquisition during the 12-month period covered in the research and nearly 40% expect to undertake an international M&A deal in the coming year, it adds. Among the industries with the most active cross-border M&A plans are paper & forest products, metals and mining and media.

“There’s a real sense of optimism coming through the research, much of which is rooted in the Canadian economic picture, both short- and long-term,” says Greenwich Associates consultant Jay Bennett. “The growth in China and other developing markets is generating demand for commodities that appears to be sustained, as opposed to cyclical. This has kept the Canadian economy strong while fueling the M&A market. Although the weakness in the U.S. dollar is a real source of concern for Canadian manufacturers, the appreciation of the Canadian dollar is creating new cross-border M&A opportunities for Canadian companies.”

When it comes to the global M&A business, Canadian companies are also benefiting from their domestic market’s relatively lower levels of exposure to credit products affected by the liquidity crisis sparked by the collapse of the U.S. sub-prime mortgage sector, Greenwich notes.

“In the United States, the M&A market took a huge hit in late summer 2007 as the financial sponsors that had been driving deal flow lost access to the cheap credit that made so many deals possible,” says Bennett. “Despite some high-profile private equity-driven mega-deals like BCE, a higher proportion of the M&A business in Canada has been strategic in nature, and the market took a smaller hit from the credit crunch. In particular, after a long run of solid earnings, Canadian companies have significant cash positions and appear well positioned for at least the near term.”

The firm says that one of the most bullish findings of its research was the spread of M&A activity from the large-cap sector into mid-caps. Among Canada’s largest companies, the proportion expecting to be active in M&A over the next 12 months is 45%, an increase from the 39% who were active in 2006, Greenwich found. For companies with less than $2.5 billion in market cap, M&A activity in the next year is expected to increase to more than 50% from less than 30%. While a stable 35% of large-cap companies predict they will use international M&A services in 2008, more than 40% of mid-cap companies say they expect to undertake a cross-border deal next year.

“Even the mid-cap organizations we’re talking to seem very positive,” adds Bennett. “People feel their businesses are growing, so they have the opportunity to expand their market profile through acquisitions.”

He cautions, however, that Canadian companies have also compiled a track record in recent years of forecasting more M&A activity than they actually initiate. Last year 43% of respondents anticipated using domestic M&A services in 2007, but only 33% actually did so. The shortfall was similar for both large- and mid-cap companies. On the international side, 32% said they expected to conduct M&A activity but only 23% did so.