The following article appears in the July 2008 publication of the Association of Corporate Growth's Mergers & Acquisitions Journal, a glossy bi-monthly publication with international corporate finance distribution. Free download of magazine per link, article on pages 60 to 62.
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TRENDS IN CANADIAN M&A
In economic terms, popular folklore is that ‘when the US sneezes then Canadians catch a cold’. Over recent years, M&A in Canada has boomed. Both volumes and values of M&A transactions have breached record levels. But US economic conditions have materially changed. This article highlights six Canadian M&A trends, identifies their economic drivers and considers their impact for the future.
<p><strong>“Canadian M&A opportunities favour strategic acquisitions of international, mid-market targets.” Ross McDonald, Vice President, Stirling Mercantile Corporation.</strong></p>
<p>First, blockbuster Canadian M&A deals are gone, for now at least. Per the Financial Post, Canadian announced M&A deal volumes rose from $83 billion in 2003 to a peak of $270 billion in the first half of 2007. Billion dollar Canadian M&A deals became commonplace.<br />Blockbuster deals are highly sensitive to global macroeconomics and financial markets. Global economic prosperity and the widespread availability of large deal financing created the management ambition and enabled the transaction execution of M&A deals. Alas conditions have changed. Materially. US economic recession; enormous, still increasing sub-prime banking losses; and a fundamentally tighter credit market have made blockbuster deals strategically unattractive or financially unviable. </p>
<p>Second, mid-market Canadian M&A deals will soften but be underpinned. M&A deals under $250 million have quietly doubled in volumes over the last five years, and now represent $45 billion annually.<br />Canada is home to one million small-medium sized businesses. Per the Canadian Federation of Independent Businesses, Canadian SMEs employ 60% of the workforce and generate 45% of economic output. However one-third of owners intend to sell their businesses in the next five years. A further one-third intends to sell in the subsequent five years. The ‘baby boomer’ generation want to retire. Prior to any eventual sale, some larger SME firms may partially divest to private equity boutiques. This social externality will help support mid-market M&A activities.</p>
<p>Third, unrealistic valuation expectations will limit short-term dealflow. Deal multiples in the public markets have fallen materially since the credit crunch, however many business sellers still hanker for, at best, optimistic prices. “Valuation expectations are still based on a frothy market” notes Roger Hardy, CEO of Coastal Contacts, who has completed four cross-border acquisitions in the last three years.</p>
<p>Fourth, welcome back the strategic investor. For several years, leveraged private equity firms have largely displaced strategic investors. But risk-adverse credit markets and modest valuations present an opportunity for Corporate M&A Directors to reassess and execute M&A opportunities, provided that their firms have available investment capital.<br />“The strategic investor is back, but increasingly will involve a private equity firm in the deal” highlights Thomas Hellmann, Strategy Professor at the Sauder School of Business.</p>
<p>Fifth, cross-border M&A will favour outward investment. Only a minority of Canadian M&A deals involve solely domestic counterparties. The foreign currency market has significant impact on cross-border M&A deals. Over the last five years, the Canadian dollar has appreciated 44% versus the US dollar. “We anticipate that the recent dramatic appreciation of the Canadian dollar against the US dollar in particular will drive increased outbound investment” notes Kim Harle, Partner, Blake Cassels & Graydon LLP.</p>
<p>Finally, clean technology will continue to gain momentum. Canadians are an entrepreneurial bunch and have often been teased as ‘tree huggers’, given their environmental awareness. So it is no surprise that Canadians are generating considerable innovation within clean technology.<br />The externalities that drive clean technology are both powerful and global. Increasing energy consumption; record crude oil prices; scarcity of available drinking water; emerging consumer awareness of climate change; innovation in technology and materials are all driving both entrepreneurs and investors. Cleantech dealflow gains momentum. Related M&A counterparties and investors are typically not domestic, reflecting the international nature of cleantech issues and opportunities.<br />“Middle market cleantech M&A deals, those valued under $100 million, have not been affected by the credit crisis” comments Estelle Lloyd, MD of Venture Business Research, a cleantech research firm, “it’s the larger deals that have essentially disappeared”.</p>
<p>The US economy has not caught a cold, but rather a nasty, contagious fever. Canadians should ensure that they have plenty spare paracetamol.</p>
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