By Dave Planques
It’s been a good year for Canadian mergers and acquisitions (M&A). Looking over the market data, there are a number of trends worth noting, along with some key takeaways for both buyers and sellers.
Year-to-date in 2017, we’ve seen a significant uptick in deal volume. And while average deal size is down slightly from last year (due in part to fewer “megadeals” over $1-billion), both inbound and outbound activity remains robust, and valuations remain high.
Overall, deal volume has increased by 23% compared to Q1-Q3 of 2016, and increased significantly for deal sizes up to $1B—a continuation of the trend we’ve seen over the past several years.
Meanwhile, large deals of $1B+ have seen a slight decline in volume. However, it’s important to note that these megadeals are somewhat anomalous: they don’t really drive the market, but when they happen (or don’t happen), they can distort overall market data.
We have some key observations regarding the deals market at present:
The M&A market is hot at the moment. Throughout the past several quarters, there’s been a steady uptick in volume of private equity (PE) and pension fund buy-side and sell-side deals, and the average deal size has increased by approximately 20% in 2017 for those deals with disclosed value. This is evidence of a highly competitive market with aggressive bidding, steadily rising multiples, and a lot of capital that needs to be deployed.
High deal volume and high prices will drop at some point, most likely when sentiment shifts in the broader public equity market. However, it’s unclear when that correction will happen, and whether it will impact all sectors or only certain industries.
Outbound deals reflected the overall market trend, as volume increased 17%, but at a lower average deal value. The US remained the largest outbound destination, growing in volume by 27% from 2016. Consistent with the broader trend, outbound deals between $50M–$1B saw robust growth, while outbound megadeals (>$1B) were down slightly.
The bulk of this growth in outbound deals was in the high tech and real estate sectors. In tech, there was strong growth in IT services and consulting deals, while software deals were roughly flat. Within real estate, development and operations businesses saw strong deal activity, while real estate services were flat. This trend echoes the market appetite for tech in public markets.
The growth of outbound deal volume into the US is somewhat counterintuitive at first glance, considering the relatively weak CAD-USD exchange rate, as well as ongoing US political headwinds and uncertainty about business-friendly issues (NAFTA, repatriated earnings, tax reform, etc.).
However, the strong US economy, paired with the fact that many of the outbound investors into the US have a medium term horizon, make these obstacles less likely to deter growth-focused acquisitions. Establishing a domestic US presence may also act as a mitigating strategy to barriers that arise as trade terms are renegotiated between the two countries.
PE and pension funds have been highly active in the M&A space, with activity growing almost 40%. For those deals with a disclosed value, 52% are in the $50M–$1B range. Historically, this has been a “sweet spot” for the industry; under that threshold, PE and pension funds generally don’t participate. But we’re starting to see smaller, niche funds participate in the $20M–$50M range.
This strong growth echoes the general expansion of PE activity we’ve seen over the last several years. There continues to be high demand for quality businesses/transactions from PE and pension buyers.
Given these trends, we see four key takeaways that have important implications for active buyers and sellers in the M&A space:
For business owners considering selling, now might be the right time. Valuations are high and there is plenty of capital looking for deals, including a very well funded PE sector with plenty of dry powder. While multiples may still continue to rise, the market is in your favour if you’re considering an exit now.
On the other hand, if you have capital to deploy, you’ll need a strong investment rationale that can justify the high valuations that you may need to pay to land a deal. Make sure to stress test any deal before signing:
More and more, we’re seeing sophisticated players use data and analytics in their stress testing to consider these factors and others to determine how their business will respond if there’s a downturn.
To that end, buyers need to have a concrete plan for changing the way the business operates, rather than just buying and holding. If you’re going to pay today’s high multiples, you’ll need a strong post-deal value creation strategy. We see a number of funds leading the way on using technology and analytics to drive increased value from their investments. Whether it’s through growing topline revenue (i.e. digital marketing, improving user experience), cost-cutting, or making working capital improvements, technology and data analytics can help you pinpoint where and how to extract the most value and do so with a speed and granularity that was simply not possible previously.
One possible strategy for dealing with high multiples: go where the market is less crowded. In the $25–$50M “bucket,” multiples are lower and there’s generally less competition (including less PE focus). Perhaps a consolidation play makes sense here: instead of buying a single business for $100M, look for smaller businesses where there are consolidation opportunities through bolt-on acquisitions (albeit that multiple deals may increase execution risk).
In general, even though overall deal value is down slightly, corporations, PE and pension funds are still very active in the M&A market. Activity has not been notably dampened by the low Canadian dollar or the ongoing uncertainty in global markets as the US and UK political climates remain unpredictable.
As evidenced by the increase in deal volume, buyers and sellers are still finding transactions to meet their needs—to extend their capabilities, add new products, and increase shareholder value. From a big picture perspective, we view this activity as a strong vote of confidence in the North American markets, and a sign that Canada’s market remains strong.
Source: Thomson Reuters, PwC Analysis