Corporate financings and mergers hit the economic wall in '08

Canadian companies decided to hold off new financings and mergers for most of 2008, according to two separate reports released Tuesday.

PricewaterhouseCoopers said the Toronto Stock Exchange threw a shutout in terms of initial public stock offerings for the last half of 2008. This meant companies that were privately held decided not to initially offer their shares on Canada's largest stock exchange for the July-to-December period.

As a result, 2008 was the worst year on record for initial public offerings, with only 10 new issues coming to market on the senior exchange for the entire 12-month period, PricewaterhouseCoopers said.

"It's hard to find much to be optimistic about in this data but it is small comfort to know that it isn't just the Canadian IPO market, or even Canadian equity markets that are struggling," says Ross Sinclair, national leader for PricewaterhouseCoopers' IPO and income trust services.

Companies usually launch an initial stock offering when equity markets are strong, guaranteeing that a well-financed firm will receive as much cash as possible from its share sale.

As the global financial crisis worsened after September 2008, however, deteriorating stock values destroyed any incentive for private firms to start selling their shares in the fall and winter.

2008 IPOs $Franco-Nevada Corp. 1.1BMecachrome 206M Northstar Healthcare 148M Lockerbie & Hole 131MSource: PricewaterhouseCoopers

Those 10 new IPOs raised slightly more than $3 billion in 2008. By contrast, another 38 companies went public on the thinly capitalized Venture Exchange, raising $382 million.

Fewer mergers

Besides the lack of IPO activity, 2008 does not appear to have been a halcyon year for mergers.

BMO Capital Markets said the number of takeovers slid by more than one-third in the worldwide packaging industry last year.

Only 252 corporate marriages, shotgun or otherwise, were announced in this sector in 2008 compared to 386 for 2007.

As a result, 2008 was the first year in six in which merger activity fell in the packaging sector and represented the fewest deals in a decade, BMO said in its third annual report on mergers in this industry.

The results for the packaging industry are likely to be representative of merger activity across industries as companies usually try to purchase other firms when stock markets are rising in value.

That is because the acquirer can be pretty certain they have bid for another firm close to the lowest valuation for that corporation.

By contrast, firms have an incentive to ignore takeovers during a period of falling equity prices on the theory that the target firm will be even cheaper in the coming weeks or months.