Take advantage of the changing shape and form of the deal

2023 mid-year Canadian M&A update

In our 2023 Canadian M&A outlook, released in February 2023, we focused on the appeal of mergers and acquisitions (M&A) in challenging times. We highlighted the finding from our recent Canadian CEO Survey that 54% of Canadian corporate leaders weren’t planning to delay deals in 2023 to mitigate potential economic challenges.

While this has been borne out, it’s still meant that Canadian dealmaking has been off to the slowest start since the same period in 2020. The slow start in 2020 was largely due to uncertainty around the pandemic, but in 2023 we’re seeing some financial uncertainty. In the period from January 1 to May 31, 2023, there were 1,218 deals in Canada with a total value of $85 billion. This is down by 17% in terms of volume compared to the same period in 2022, though up by 10% in terms of value because of some large deals.1

*Only includes deals from April 1–May 31, 2023

However, we continue to see reason for optimism. There are positive signs that inflation isn’t accelerating at the same rate it was at this time last year and that economic growth is continuing to hold up. In the next six months, we expect to see increased stability and a slow return to historical deal volumes as interest rate increases and inflation both temper.

As these shifts play out, there are three key actions dealmakers should consider to make sure they’re able to take advantage of opportunities as they arise.

Prepare for the rigours of the current market

There have been an increasing number of companies in financial distress in the United States since the interest-rate-strengthening cycle initiated by the Federal Reserve. After the notable collapses of a few regional US banks, we’ve seen credit tightening in the United States: lenders appear to be pulling back from new originations, and there’s strong competition among dealmakers for the credit that is available.

We don’t expect to see the same level of capital pressure in the Canadian banking system. But we have seen deal flow in Canada in the first half of 2023 impacted by credit tightening. In the Canadian case, this is largely because of expectations around the impact of inflation on borrowers and banks’ concerns around potential credit losses.

So what will this mean for Canadian dealmakers?

Buyers will need to be prepared to not just rely on traditional funding sources (albeit with lower leverage), but to also be very purposeful about securing available capital and a funding structure before committing to a transaction. They’ll also need to make sure they’re using all the tools available to them. This includes vendor takebacks, earnout structures and government programs.

Sellers, on the other hand, will need to be armed with data and hyper-prepared for a granular due-diligence process. It will be to their benefit to de-risk the transaction as much as possible for the buyer and their funding sources.

Perform continuous strategic reviews: The time to divest may be now

When we look at ways to create value that have been successful in difficult market conditions in the past, divestitures are top of mind. Many forward-thinking companies are already engaging in strategic reviews to identify which parts of the business they should divest to optimize, as well as to stay ahead of shareholder activism.

There’s immense value to be gained in recognizing the correct time to make a move—and the time to divest might very well be now.

A recent PwC US survey found 57% of companies that tried to fix a business unit rather than divesting said the unit’s performance deteriorated or stayed the same.

While the decision to divest will in many cases take imagination and even courage, there are three critical actions leaders can take to position their organizations for a stronger future. The first of these is to make timely decisions, understanding that speed often improves returns. The second is to infuse divestitures into your corporate DNA, meaning in practice that your organization considers divestitures multiple times a year. And the third is to understand and overcome organizational forces of inertia around divestitures and decision making more broadly.2

The goal is to be in a position to continuously evaluate your organization’s core capabilities and the market, and then shed assets that aren’t core to focus on what is in a disciplined way. This will free up cash to reinvest in higher-growth areas, and the to-be-divested assets will provide valuable buying opportunities for others.

Differentiate your organization via distressed opportunities

With the removal of government stimuli from the market and high interest rates, restructurings and insolvencies are both up. This marks a return to a historical norm that’s been absent from the market for years.

It’s important to understand the extent to which there will be opportunities for organizations to use acquisitions and distressed M&A to differentiate themselves and leapfrog over competitors. While companies might be underperforming, many will come with valuable assets, for example, intellectual property, that could be extremely valuable to acquirers.

However, these opportunities will only be available to buyers that have a line of sight into what’s going on and are agile and prepared to move quickly.

The uncertainty that surrounds events that lead companies into distressed and special situations often makes those situations extraordinarily difficult to evaluate.

To successfully take advantage of a distressed opportunity, organizations will need to be ready to mobilize, swiftly identifying the right target, evaluating the opportunity, executing the deal and mitigating risk.3 To optimize the synergies and transformative elements of a distressed deal, especially within the current economic conditions, both the organization and its tech and intellectual property environment need to be prepared to absorb acquisitions quickly and effectively.

Spotlight: Elevate the role of digital due diligence

With generative artificial intelligence (AI) representing a step change in the business landscape, digital due diligence is becoming an even more important starting point for value creation.

For organizations interested in acquiring a company with AI assets, the validation and diligence of the target’s technical environment are critical to realizing value. AI requires significant amounts of data from different sources, lots of processing power and adaptive algorithms that need to be tuned and maintained. So it’s critical to conduct careful diligence on the quality of the data architecture, the scalability of its supporting infrastructure and the capabilities of the research and development (R&D) team.

Transformations driven by technology acquisitions are often complex and can be disruptive, particularly when integrating technology. To set your organization up for sustained success, elevate the role of digital due diligence. In addition to assessing risks, organizations must map the path to tech transformation throughout the acquisition, integration and beyond.

“Digital due diligence is now more than a compliance exercise—it’s an opportunity to accelerate transformation.”

Shant Yeremian, Partner, Value Creation, PwC Canada

Bottom line

Going forward, the shape and form of the deal may not be what they were in the last couple of years. Organizations that want to emerge as leaders will need to be prepared, strategic and disciplined.

The next six months are going to be critical for many organizations. But for those that are prepared to adapt and take advantage of the upsides of the current economic environment, that same period could be transformative.

2024 Canadian M&A outlook

Prepare now to create value

Deals are an opportunity – for faster growth, stronger capabilities and dramatic transformation.

1 Source: Capital IQ data, PwC Canada analysis.

2 Source: The power of portfolio renewal and the value in divestitures, PwC US.

3 Source: Buying in a time of crisis, PwC Canada.

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