GLOBAL UNCERTAINTY, it turns out, works well for a resilient Canadian M&A market.
EY’s most recent Global Capital Confidence Barometer concludes that today’s record M&A market “has shown resilience, which looks set to continue through 2017” and beyond despite the “turbulent” global political climate.
Canadian business, it turns out, has “some of the deepest pipelines in the world.” More than 80 per cent of respondents were looking at more than one acquisition, 25 per cent believed their pipeline would grow in the next year, and 52 per cent expected to close at least one deal.
Reports from the street support the positive outlook.
“People seem to be running on all cylinders and we’re seeing deal volume of all shapes and sizes,” says Michael Amm of Torys LLP in Toronto. “Transaction volumes are significantly higher than in any of the last four or five years.”
It’s not that global instability has had no effect. “Compared to the situation pre-financial crisis, today’s transactions tend to be extremely strategic and aimed at allowing companies to either protect their existing positions or further develop their business plans,” Amm says. “On the whole, things seem healthier than they were back then.”
This is the fifth year in a row in which Canadians respondents expected to actively pursue acquisitions at a rate above the historical average. “They expect more M&A activity for this year, with 62 per cent actively pursuing deals, compared to 48 per cent six months ago,” EY states in its report.
Driving the M&A boom is a worldview that Canada is one of the top five destinations globally in which to actively pursue acquisitions — the first time this has happened since “the heady oil environment in 2013.” The country’s NAFTA partners are among its heaviest investors, with Canada checking in as the first and second preferred foreign destination for US and Mexican respondents, respectively. South America is also a catalyst, with Canada among the top 10 investment destination choices for most jurisdictions surveyed there.
“Cross-border activity is definitely a highlight of the M&A landscape,” Amm says. “Foreign investment across the board remains strong and speaks to Canada’s relative stability and attractiveness compared to the US and Europe.”
According to Amm, Canadian companies’ need to prosper on the global stage and being “bold and confident enough to go abroad” is driving the outbound market. So are institutional investors and pension funds looking overseas to diversify and to find product that isn’t available domestically.
Yet companies are also remaining cautious, with some 85 per cent of respondents having walked away from an acquisition in the past 12 months. “A valuation gap that was too wide to bridge and critical issues uncovered during due diligence were cited among the common reasons for calling off a deal,” EY states. But that trend may abate, with 52 per cent of respondents expecting a decrease in asset valuation and price.
On the inbound side, the market is seeing somewhat less emphasis on resources deals. “The oil patch is actually going the other way,” Amm says.
About the only significant damper on local capital markets activity is a dearth of IPOs. “Far fewer companies are coming into the public sector as opposed to those leaving through M&A and insolvency,” Amm says.
Among the IPO suppressants are regulatory burdens that are ever more onerous. “All things being equal, people will think twice about going public if there are … alternatives,” Amm says. “When there’s a choice, IPO doesn’t win like it used to.”
And there are alternatives, both in terms of strategic M&A opportunities and the availability of private money. “There’s an incredible amount of private equity around,” Amm says.
Canadian respondents’ outlooks differ sharply, however, when comparing the domestic and global economies. While 39 per cent of respondents anticipate that the domestic economy will improve, as compared to only 10 per cent in the previous survey of April 2016, only 19 per cent predict an improvement in the global economy.
“Global disruptors, such as currency and commodity volatility and the potential slowdown in global trade flows stemming from economic nationalism are seen as the biggest risks to the bottom line for Canadian respondents,” EY states.