Andrew Willis

From Tuesday's Globe and Mail Published on Tuesday, Dec. 29, 2009

To understand the tsunami of takeovers that will roll through markets in 2010, you only need understand one simple concept: Cash is trash.

Interest rates have never been lower. It is now punitive for companies to hold cash reserves - the capital doesn't earn its keep, and will weigh heavily on financial results. This cash-is-trash concept marks an abrupt change in sentiment: Many industry-leading players built war chests in the past two years, a cautious stance that reflected the recession and stormy credit markets.

Looking ahead, there will be pressure to stop hoarding cash, and start building profits.

Now, consider the challenges facing chief executive officers trying to bulk up the bottom line. Costs have been squeezed out of most companies. Margins are under pressure.

Acquisitions beckon as a way to open markets and win new customers. There's fuel to do deals, with investors open to stock and bond financings, and banks once again lending. And the weakest companies in most sectors trade at relatively weak valuations, in part due to a lingering hangover from the recession.

So here's the dynamic that will underlie what's expected to be a busy year for mergers and acquisitions: Strong companies, with plenty of cash, will feast on weaker rivals.

With that in mind, here are the predators to watch in corporate Canada over the coming year, and those that will be prey.

CONGLOMERATES

Bruce Flatt, Brookfield Asset Management

No one is coming out of the downturn in better shape than Brookfield. Mr. Flatt spent years attracting outside investors to Brookfield-run funds. Now he can draw on $12-billion raised in 2009, along with the $500-million-plus of cash that Brookfield's own real estate, power and infrastructure assets kick off each quarter.

Targets: Brookfield will have its choice of real estate plays with triple-A properties and single-C balance sheets. And sovereign wealth and private equity funds will likely be dumping infrastructure.

Gerry Schwartz, Onex

His only regret is the recession didn't last a little longer. Onex has never been stronger, with $1-billion of cash and a new $4-billion fund, and rival private equity funds are still reeling. For all his firepower, expect Mr. Schwartz and partners to be their usual disciplined selves - as likely to sell companies into frothy IPO markets as buy.

Targets: Onex loves to carve unloved divisions from large industrial companies, and lots of those units are available, including American International Group's aircraft leasing arm.

GROCERIES

W. Galen Weston, George Weston Ltd.; and Galen G. Weston, Loblaw Cos.

Their priority is continuing a turnaround at the country's dominant retail chain. The question is what the first family of groceries does with $5-billion of cash. They may have the patience to sit tight.

Targets: The natural targets are rival chains Safeway and Overwaitea, and neither is for sale. The Weston clan's most likely move is taking private their own holding company, George Weston.

FINANCIAL SERVICES

Jeffrey Orr, Power Financial; and Allen Loney, Great-West Lifeco No one executes on a long-term strategy better than the team hired by the Desmarais clan. These executives are far from perfect: Mutual fund Putnam Investments was bought by Great-West at a market peak, and is a far more difficult turnaround than anticipated. But Power Financial and its Great-West Life unit avoided major potholes, are cash-generating machines, and are targeting dominant market share in sectors where they compete.

Obviously, RBC and TD are also likely also acquirers, in wealth management and U.S. retail banking.

Targets: Many North American wealth management and insurance companies are still reeling, and U.S. banks are dumping fund management units to raise capital.

TELECOM

Darren Entwistle, Telus

No executive has more ambition. Remember, before the recession, Mr. Entwistle put Microcell in play with an offer and was bitterly disappointed when Rogers Communications outbid Telus, and then he took a hard run at BCE. Now he has fewer rivals, and more targets. BCE got religion on giving cash back to shareholders, and Rogers is a different beast without Ted at the helm.

Targets: If any of the new wireless players stumble, Telus will pounce. That list would include Vidéotron.

GOLD MINING

Charles Jeannes, Goldcorp

Barrick Gold may be the big dog, but Goldcorp is hungrier and has the better takeover currency, in the form of a stock that trades at a premium valuation. The Vancouver-based company's board is also acquisition-savvy, and chairman Ian Telfer is the new head of the World Gold Council, which promises all sorts of new relationships.

Targets: Goldcorp is the logical buyer of Osisko Mining, and will be part of a feeding frenzy of junior and mid-tier acquisitions.

MINING

Don Lindsay, Teck Resources

Good poker players have no conscience. They lose a big hand, learn their lesson, and then push their chips back onto the table as new cards are dealt. Mr. Lindsay is a good poker player. Teck survived a near death experience in 2009, and came out of it with a deep-pocketed backer in China Investment Corp., or CIC. A life-long deal maker, Mr. Lindsay will be heard from again.

An honourable mention here to Cameco, which should start buying uranium reserves after finally shedding Centerra Gold.

Targets: Teck will likely target copper miners, but could up its coal holdings to please CIC. Cameco will snap up junior uranium plays.

ENERGY

Brian Ferguson, Cenovus; and Steve Laut, Canadian Natural Resources

The biggest play in domestic oil and gas, Suncor, will spend the year digesting Petro-Canada. Newly independent of EnCana, Mr. Ferguson has a chance to make his mark as a buyer of oil sands properties.

In natural gas, Canadian Natural Resources is the best of operators, has commodity prices finally moving its way and has a growth-focused board of directors (that means you, Murray Edwards).

Targets: If Nexen and Talisman both survive the year as independents, something has gone seriously wrong in global energy markets.

They won't be bought by domestic peers: Global oil companies will pick them off. This pair has solid but widely dispersed assets, so they are candidates for a bust-up.