2023 Canadian M&A outlook

Successful dealmakers will find opportunities

In 2022, Canadian mergers and acquisitions (M&A) market activity continued to be in line with historical norms while retreating from the new heights of the previous year. While economic and geopolitical uncertainties have created headwinds, they’re also generating opportunities. A reset in valuations, the availability of capital and increased competitiveness from corporates should provide openings for dealmakers in the year ahead.

The need for speed in business transformation, which is accelerating thanks to technological advances and the evolving economy, will continue to keep dealmaking front and centre. Whether organizations are changing supply chains, adopting new go-to-market approaches or adding capabilities, the market is impatient. The fastest way to transform a business is through M&A, divestiture or other deals.

The fastest way to transform a business is through M&A, divestiture or other deals.

We’ve entered a period of changing economic and financial fundamentals. Interest rates, inflation and wages have all been rising. A number of macro factors, including trade wars and geopolitical conflict, are driving economic uncertainty. But this isn’t an unprecedented environment—it’s a return to conditions we’ve navigated in the past.

Business leaders recognize the challenges. Still, most leaders know they can’t cut their way to growth. And as we saw in the past five years, deals have been a key fuel to business resurgence and economic expansion.

PwC’s 26th Annual Global CEO Survey illustrates the appeal of M&A in challenging times: while 76% of Canadian corporate leaders are pessimistic about global economic growth, 54% aren’t planning to delay deals in 2023 to mitigate potential economic challenges and volatility.

Source: Refinitiv and PwC analysis

“Doing deals in today’s volatile climate takes both imagination and courage. But with the right well-considered business strategy, organizations can transform and position themselves for long-term success.”

Sean Rowe, Deals Markets Leader and Value Creation Leader, PwC Canada

What will drive successful deals?

Though capital discipline has never gone out of style, we expect it will be a prime factor in deals in 2023.

While rising interest rates may make debt service more costly, rates are still far from historical highs. Lower valuations will create opportunities for acquirers. Companies with healthy balance sheets and a strong strategic vision can use deals as a path to business transformation and increased shareholder value.

Likewise, a disciplined, strategic approach to divestitures can provide an opportunity to improve overall returns—especially when the cost of capital is higher. Companies should consider shedding non-strategic units and focusing capital on transformation and strategic growth.

Private equity has been active in recent years with acquisitions and is expected to remain active in its capital discipline in looking at exits and recapitalizations. There’s been increased interest among private equity funds in acquiring financial institutions, particularly insurers, as a way to increase returns and assets under management, and we expect that to continue.

Growth alone isn’t a sufficient corporate strategic objective in a quickly changing environment. The right combination of acquisitions and divesting to reinvest can drive return on capital—even in an environment with higher capital cost and inflation.

The right combination of acquisitions and divesting to reinvest can drive return on capital—even in an environment with higher capital cost and inflation.

Economic uncertainty and global politics are generating macro-level uncertainty and will require leaders to be alert and strategic throughout the coming year.

Inflation and the rising cost of capital continue changing deal metrics and influencing financial markets. The possibility of a recession is also shaping expectations. At the same time, the war in Ukraine and its impact on energy costs and food prices continue to have an effect on Europe and the rest of the world. China/United States tensions, along with China’s approach to managing Covid, are reducing opportunities in China and contributing to a reassessment of supply chains. And elections around the world pose the possibility of disruptions.

In the face of all this uncertainty, C-suite leaders will need to protect the downside in their business, including watching spending, looking for opportunities to trim costs and bolstering their supply chains. Companies with strong balance sheets are likely to find uncertainty can serve up attractive deals. Other companies will be able to take advantage of the current environment to build on their core strategy through transformational deals.

In the face of all this uncertainty, C-suite leaders will need to protect the downside in their business.

Even in the midst of uncertainty, the markets are impatient. The most successful deals will be those that allow companies to quickly transform strategic aspects of their business, pushing the business forward quickly. These strategic shifts include opportunities like moving closer to customers, leaving troubled sectors and speeding up digital transformation.

How a company invests in purpose (ESG) and culture (including overall talent strategy as well as the approach to diversity and inclusion) are central to unlocking value from transformational deals. It starts with solid, strategic decision making around whether to do a deal and which deal is the right deal.

C-suite leaders need to have a plan not only to carry out the deal but to make sure it delivers on a transformation promise. Value creation goes well beyond integration, and deals in the coming year will need to have clear value creation plans, with immediate near-term execution, to harness value and drive the required capital returns. This includes detailed integration planning and a strategy for retaining key talent in a newly acquired business unit.

The most successful deals will be those that allow companies to quickly transform strategic aspects of their business.

“While M&A tends to slow during periods of uncertainty, those are often the times when M&A and transformational deals become increasingly compelling. We expect the current market will provide opportunities for strategic M&A plays.”

Domenic Marino, National Deals Leader, PwC Canada

Key actions for dealmakers to take now

Winning approval to conduct M&A transactions is becoming increasingly difficult. The misgivings of boards, investment committees and other stakeholders have grown in tandem with macroeconomic risks and recession fears.

Given greater investor scrutiny, dealmakers will need to take creative approaches, such as the following, to convince boards, investment committees and other stakeholders about new investment opportunities.

Build transformation into the narrative

Consider how a deal will be perceived by stakeholders—will it bring new offerings, markets or customers, accelerate digitalization, increase pressure on competitors or benefit the long-term position of the company? Deepening the narrative to highlight game-changing strategic attributes may help push cautious stakeholders over the line.

Accelerate strategic reviews and portfolio optimization

As CEOs reassess their portfolio against their core strategy, they must address the extent to which they should continue to invest in non-core or lower-growth areas. Where such assets are marked for divestiture, they’ll free up cash to reinvest in higher-growth areas—and the to-be-divested assets will provide buying opportunities for others. We expect such strategic reviews may also lead to further spin-offs by large conglomerates aiming to become more agile and optimize capital allocation.

Use lower valuations as a catalyst

Restructuring and distressed M&A may grow and intensify if current economic headwinds extend further into 2023. More cautious venture capital funding has already led to several early-stage companies facing down rounds or—in situations where they’re unable to secure additional financing—looking for a buyer. Combined with a soft IPO market, this will likely create opportunities, particularly for corporates, to invest in or acquire companies with innovative business models and interesting technology, digital assets or other capabilities at a more reasonable valuation than previously would have been possible.

The reset in public company valuations will likely lead to more deals involving public targets. Valuations for private companies are taking longer to adjust, but we expect dealmaking to pick up as sentiment evolves from a sellers’ to a buyers’ market.

Prioritize workforce strategy

Global PwC research has found the workforce is the number one risk to growth. As a result of the workforce’s direct impact on business performance, all deals today must have a well-considered people strategy. How to recruit, motivate and retain staff and what impact employee compensation and benefits will have on the go-forward cost structure—especially given talent shortages and wage inflation pressures—are all areas of due diligence that need careful consideration.

Bottom line

As business leaders look to surmount various challenges, M&A will be a key tool to help reposition their businesses, bolster growth and achieve sustained outcomes. Companies that have strategic discipline and conviction will be able to find and execute good deals that create shareholder value in the current business environment.

Markets will not be patient. C-suite leaders should look for transformational deals that can help their company move ahead and quickly generate value for shareholders. Despite some headwinds, we believe there will be opportunities for savvy dealmakers in 2023 and beyond.

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