M&A industry audio transcript

Featured speakers: 
David Bryan, Partner, Deals & Alberta Region Private Leader
Christine Pouliot, Partner, Deals, Montréal office and Managing Director, Corporate Finance

Sabrina Fitzgerald:
Welcome everyone. My name is Sabrina Fitzgerald and I lead our PWC private practice. And I'm also the managing partner for the Ottawa region. 

For today's event, we will cover key areas and M&A trends in Canada, including our speaker perspectives and the role of value creation in this changing environment. So to present these insights, we brought together two of our strong industry leaders. So with that, let's start with a quick round of introductions.

Dave Bryan:
Hi, everyone. Welcome to today's session. My name is Dave Bryan. I'm a partner in deals, and I work in our Alberta practice. I'm also a member of Sabrina's team leading our private practice for Alberta.

Christine Pouliot:
Hi everyone. My name is Christine Pouliot. I'm a deals partner based in Montreal, as well as the deals leader for private companies 

So let's dive into today's M&A landscape. So what's happening? What is the status of M&A? When we came out of the gates in 2021, we were seeing record levels of deal activity across a wide range of sectors, including the privately owned company space. So as we continue to move out of the pandemic and get closer to 2020, we expect to see a once in a generation situation, which is tons of capital available, waiting to be deployed combined with low interest rates, facilitating these transactions.

And just before I go any further, did you know that we estimate private equity funds to have approximately $1.3 trillion of dry powder. Dry powder being capital available for investments. So that's huge, and that's without considering cash available in operating companies. So there are definitely a high number of organizations with cash on their balance sheets, looking for the right deal.

So from our perspective, that is a strong indication that deal activity will continue well into 2022, despite the recently higher interest rates. Now, if we look a little deeper at where the opportunities will be in 2022, we see a few different streams. One of them is that we expect to see a wave of family in privately owned businesses going through a sell process. These owners have made it through the pandemic, but are now ready to move on. And it's actually started. Over the last six months I had several discussions with business owners who realized how fragile the wealth they created in their business could be. And add to it that some of them might not have another 5, 10, 15 years to rebuild it if it were to be damaged. So a lot of them are reflecting or have already decided to sell their business while the valuations are high and the market conditions are appealing.

So that's one stream that we're seeing. Another one is that we have private companies that have embraced technology during the pandemic and have been able to adapt. They're of particular interest to investors in strategic acquirers, who are looking for market leaders, as well as visionary management teams, agile management teams.

So these companies will be able to tell a compelling story about how they looked going into the pandemic, the steps they took throughout this process, and how they're going to look coming out. So these companies will raise high interest from buyers and investors. So in summary expect a continued strong level of M&A activities going into 2022, expect valuation to stay high. There is still a lot of capital available and plenty of buyers and investors looking to deploy it. Expect companies that have adapted, transformed, and come out strong of the pandemic to be attractive to both strategic buyers and private equity funds. So, I mean, if you're a private business owner, you might find some great opportunities to acquire businesses at low capital cost or great opportunities to sell your business at high valuation.

Sabrina Fitzgerald:
So Dave, I'm going to ask you, have you seen business owners evolve or, I guess, want to use that term “pivot” their operations over the last 19 months? 

Dave Bryan:
We definitely have seen it. I would say when the pandemic first started, lots of companies basically went into a kind of a lockdown mode and they were kind of thinking about survival. Because we really didn't know where all this would lead. But as the pandemic progressed, we saw that these companies started to look at how they could get back on a path to growth as they started to think about the end of government support, and started to think about what life after the pandemic would look like.

And to go a little bit further over the last year, I would say we basically saw companies go into three camps. First was the sellers. We saw some business owners exhausted. They exhausted all their resources and started to think about an exit. Others realized that they needed to scale to compete and could only do this by joining forces with peers or making acquisitions. And then finally some are actually considering what happens next for their business and their families. And kind of that thought is it time to move on? Where does the next generation fit for our family business? Second, we have the buyers. Some businesses have done well during the pandemic or have access to capital, the dry powder that Christine talked about. And they see this as a once in a lifetime buying opportunity. Especially at a time of lower interest rates, when the sellers that I just spoke about are starting to think about an exit strategy.

And then finally, and maybe this is more to the pivot comment, Sabrina is the transformers. As I mentioned previously, lots of owners viewed the pandemic and the associated shutdowns as maybe an opportunity to change or transform their business by implementing digital transformations, maybe changing the way they interact with their customers or looking at entering into new markets. 

Sabrina Fitzgerald:
Christine, maybe I'll ask you this question to you about digital transformation. Because it sounds like there's a lot of transformation in this transformer bucket, reconfiguration. How has digital transformation really affected the deal's environment?

Christine Pouliot:
It's a great question Sabrina. Well if you think about how the overall transformation, digital transformation has affected the execution of a transaction the last 18 months we had to reconfigure how to execute transactions. So a lot has changed. Most of the transactions I have been working on in the last 18 months have been done 100% virtually, which means that the buyers are acquiring companies without an in person tour plant or an in person visit of the facility, or even an in person meeting with the management team. So who would've thought. So, I mean, I've had clients that have put together videos to show their office their plans and send it to the investors and the buyers, but the entire due diligence is done virtually. And forget about closing in a board with your advisors and the other party and a bottle of champagne. That hasn't been done for a long time now. So now signatures are just being exchanged by email and that's the end of it. 

I'd like to go a little bit off of your questions, Sabrina, and talk a little bit about valuation, because this is an angle and an approach that has also changed a lot in the last 18 months. So COVID has impacted the way we're approaching the valuation of companies.

One of our biggest challenges is to define basically what is the representative and sustainable EBITDA figure on which to rely for valuation purposes. So some companies have gone through a tremendous growth over the last year, and some of it might be due to their high performance, digital transformation, and agility in adapting to their new environment. And that will sustain, that will remain moving forward.

However, some of the growth might be due to COVID and might very well disappear once COVID is controlled. So how do you remove from the non-sustainable COVID impact from the financial results and forecasts of the company when you look at valuation. So always an interesting discussion to have when negotiating in a transaction. So that's also a key point that is always part of any transactions we're doing, and that was brought by this new way of executing a transaction.

Dave Bryan:
Yeah. And Sabrina, maybe I'll jump in here too, as you know I've never met a microphone that I didn't like. So maybe I'll just comment from an industry perspective, because there's some neat things we're seeing in various industries. There's this move to a virtual environment and it's really opened up the playing field for kind of digital leaders as both Christine and I have talked about a bit earlier. But it's also increased competition as outsiders can now access your local markets and even your people. And we're seeing some of our people leave to opportunities that would've never been presented to them pre-COVID. So it leads to lots of questions around how is this playing out for key players and sectors in the economy. And what does it mean for companies looking at M&A opportunities to adapt and grow their businesses?

A good example, maybe, would be agriculture. So producers who had tended to survive on really thin margins and face ongoing and varied risks are now concentrating on technology to try to optimize their returns and using that technology to work differently. In ag it's a really good example. The investments by the producers are in real time data and precision farming technologies and it's helping them increase yields and improve their margins and reduce the impacts of environmental risks.

And it's all gone towards increasing the value in their business. And if you go a little bit deeper, some of these large agricultural businesses are focusing on optimizing their core capabilities and actually even making technology acquisitions that help them scale and develop. And it's creating opportunities for those technology companies, which is kind of a theme you're hearing here, specifically those involved around data capture and analytics.

Another good example is energy service companies. And as you know I'm based in Alberta so I deal with energy service companies regularly. And we've seen lots of instances where a key priority for these companies is to diversify their revenue streams by looking to go global. For example, some companies are looking at how to use their reputation in Canadian skills to target growth in other areas.

For example, if you can be productive in Fort McMurray in the dead of winter, your technology and your instrumentation probably can operate anywhere in the world. In addition, many are focusing not only on physical production capabilities and expansion also opportunities to create different sales outlets for themselves. So where this ties back to deals is we're seeing an increase in deal volume in the energy sector, along with continued upstream, consolidation and unfortunately even some restructuring. But for established companies in particular partnerships and joint ventures or acquisitions of players with certain types of expertise it's starting to happen.

And really the goal of these entities is to try to manage their own risk and diversify their own service offerings. 

Retail, we found again, those companies looked inward during the pandemic and they thought about accelerating their eCommerce capabilities or improving their digital platforms.

But the transition during the pandemic was so quick that many of them discovered that their platforms actually weren't sufficient and they needed to beef up their teams and their resources, particularly with people with expertise in eCommerce and how to address its related challenges. And again, that has caused that bit of that acquisition grab to look for those talents and that deep expertise in eCommerce.

And that, again, leads back into technology where we are seeing transactions in which the value drivers are of the digital transformation itself. And again, it's driven by maybe a lack of resources and expertise to meet demand. And so companies are looking to acquire these IT companies to help them navigate through this demand.

Sabrina Fitzgerald:
Maybe can you quickly touch on private equity, Dave.

Dave Bryan:
Sure. So an interesting finding in our recent Canadian M&A trends is heightened interest among private equity. And I would even throw family offices into that as well, Sabrina.

Sabrina Fitzgerald:
Yeah, that's true.

Dave Bryan:
And institutional investors. And they're interested in buying or investing in local organizations, even to support local economies. And kind of that feeling where charity starts at home. So if I'm Alberta based, I want to support the resurgence of the Alberta economy, invest in Alberta, do those things that help get our economy restarted again.

Another thing we're seeing in the West is private equity firms are showing interest in our growing technology sector and some venture capital opportunities. We've seen several technology deals from FinTech to software closing recently. And we're seeing very healthy and growing venture capital activity as I think these market players are looking for disruptive technologies and opportunities for both standalone investments, as well as add-on acquisitions to their existing portfolio companies. And then finally, and certainly last but not least is keeping a close eye on clean tech. A sector that we've seen strong growth and it’s gaining momentum amid increased focus on production efficiencies and carbon emission reduction goals. Christine, I don't know if you're seeing the same thing in the East?

Christine Pouliot:
Yeah, yeah, Dave, it's actually very, very similar a lot of new funds have emerged. Information technology, industrial technology, healthcare in general, food and beverage are all sectors in which PEs are very active.

Dave we're talking a lot about private equity as having tons of capital to deploy, but there are also 300 SPACs that haven't found their acquisition targets yet. So can you imagine how much additional capital that represents out there in the market? These SPACs are looking for acquisitions in order to realize their business plan. So that's just to show how that's a good example of the pressure that is being put on investors and buyers to make an acquisition.

Sabrina Fitzgerald:
Yeah, a great point. And so I'm wondering if I'm in the audience and I'm thinking, "Okay, it's time for me to sell or consider selling" - how can businesses really make sure to put their best foot forward? What are some tips?

Dave Bryan:
Yeah, maybe I'll go first on this one, Sabrina. For those companies that are considering a sale, I would say it's important to really focus early on planning and execution. A sale of your business requires a lot of pre-planning and preparation. As Christine mentioned, valuations for Canadian private companies have been increasing as has the level of demand from both domestic and international buyers and investors.

And it can be an incredible feeling when you take all of your hard work and you're able to monetize that for the benefit of your family or other stakeholders. But I would say you only get one chance to sell, so plan to get the most from that one and only exit. But it can be really complex and complex from a financial perspective, as well as from a personal perspective, particularly when your family's involved and you really need to have some conversations that maybe you haven't had before. And when we look back on successful deals that we've been involved in, the common theme is really detailed planning and preparation well in advance of the actual sale. Christine, I'd love to hear your perspective on this one too. 

Christine Pouliot:
I totally agree with you, Dave. I mean, planning and preparing is really key to make a successful transaction. We also need to be aware that a transaction process can be very emotional and time consuming as well. These days we're talking about six to nine months, sometimes even 12 months from the moment you decide to undertake a transaction process to the closing of that transaction. So therefore it's worth it to plan and prepare on that front as well. 

And one of the key factors or key items that we're very much recommending entrepreneurs and owners to think about before they actually undertake a transaction is first, you need to engage your stakeholders around your vision, your plan. So that means your family, your management team, your investors, if you have some, your advisors. Also reflect on what would be a successful transaction for you, the shareholder.

So obviously think about valuation, but also about the transaction structure. Would you be willing to have an earnout as part of the transaction structure? Would you be willing to receive stocks from the buyer as a form of payment? Would you be willing to keep some equity in the company? So those are all important items that you need to reflect on. You need to think about your tax structure planning, the buyer's profile that would be good for your company. And also the transition period that you will go through post transaction. Both in terms of how long do you want to stay post transaction and what kind of a role do you want to have? So those are all very important factors to take into account. 

Sabrina Fitzgerald:
Awesome. So I'm going to pull the mic away from both of you because I think it's time to wrap us up. That was amazing. Thank you for the great conversation and so thanks everyone. Have a great day.

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