September 27, 2021

Innovation and Opportunity in Canada's M&A Market

By Marco Grifferty, Sales Executive

 

With a clearer picture of Canada’s post-Covid business landscape beginning to emerge, both buyers and sellers in the M&A world are working out new approaches to dealmaking. Together with Mergermarket, Datasite brought together several industry insiders to share their perspectives on the future of M&A in Canada.

Heather West, Mergermarket’s Editorial Director for the Americas, moderated the discussion. She kicked off the conversation by noting that the rise in deal volumes following May 2020 had finally seen a downturn and asked the panelists what they thought was driving this trend.

Rob Olsen, a M&A partner at Deloitte Canada, expressed optimism about the outlook for future deals, despite the slowdown of the post-Covid explosion.

Fotini Gagaoudakis, an M&A partner at Davies Ward Phillips & Vineberg in Montreal, agreed. She pointed out that there are still significant reserves of dry powder in search of targets, and that the uncertainty left by COVID-19 is creating a push to get transactions done while the opportunity is open.

 

An Aggressive, Seller-Friendly Market

The panelists highlighted a rise in alternative M&A structures like earnouts and novel strategies like preemptive bids for high-quality assets, driven in part by the desire to quickly lock in deals.

“We’re seeing a lot more approaches from private equity funds directly to private companies,” said Andrew Kemper, a partner at Capital West Partners. “Pre-emptive bids are something that’s always happened in the public market, but we are seeing it a lot more in the private market right now.”

The experts felt that many buyers who lost out on opportunities when the pandemic hit are now eager to strike while the iron is hot; that urgency is motivating them to offer deals that sellers simply can’t pass up.

“Companies that weren’t even thinking about selling, when they see the multiples at accelerated levels…” Rob said. “Why not take advantage of it?”

Viewers shared the panel’s optimistic outlook. 100% of respondents to the first audience poll predicted an increase in Canadian M&A volumes over the next year - 70% anticipated growth and 30% anticipated strong growth.

Tech Remains Dominant

The discussion pivoted to the question of which sectors are expected to see the most M&A growth. Chris Gillett, Sales Director at Datasite, shared some trends from Datasite’s online platform. Hot sectors included energy, mining, financial services, and consumer discretionary.

Rob highlighted tech as well, noting that in many industries Chris referenced, the biggest growth is in the form of tech-enabling traditional sectors.

“Whether it’s fintech, or consumer tech, or industrial tech, or health tech,” he explained, “the tech-enabled side of everything has caused M&A to increase and multiples to go massively up.”

The other panelists agreed that growth in TMT is continuing to skyrocket. Fotini pointed out that even hard-hit sectors like leisure and recreation are seeing bright spots with tech-based entertainment like video games. However, she did note that due diligence is imposing increased scrutiny around cybersecurity and privacy.

The panel also highlighted healthcare and infrastructure as promising sectors.

Responses to the second audience poll question - “Which sector will see the most growth over the next 12 months?” - were once again in agreement with the views of the panelists. 47% of viewers said Tech, 21% said Infrastructure, 21% said Healthcare, and 12% said Consumer.

ESG Concerns on the Rise

The speakers all felt that environment, social, and governance criteria were taking on increasing importance in Canada.

“The pandemic put a focus on health, economic, and social systems generally,” Fotini said, adding that even midmarket and smaller funds are coming under unprecedented pressure from their investor base to focus on ESG.

The panelists emphasized that investors and buyers are taking a keener interest in seeing target companies take concrete steps to address their societal impact. Lip service no longer cuts it when it comes to things like diversity, social responsibility, and environmental stewardship.

“All those things matter - they’re not just words anymore,” Rob said. “However, implementing ESG principles is hard as it’s so big and amorphous, the key is breaking it down into something actionable.”

 

Valuation and Retention Are the Biggest Hurdles

The final poll asked the audience to identify the greatest challenge in completing deals. More than 70% of respondents pointed to high valuation multiples, while 19% said staff reduction was the biggest issue.

Rob agreed that holding onto talent was a major concern. “It’s all about staff right now, there’s a war for talent everywhere...they’re all fighting to hold onto people.”

He pointed out that it’s hard for employees to feel a genuine sense of corporate culture when work is primarily remote. And he noted that many workers have left their former sectors permanently.

 

Audience Q&A

A viewer asked the panelists if they expect a significant trend of US buyers acquiring Canadian targets.

“We’re seeing as much as we ever have,” Andrew answered, suggesting that the increased prevalence of remote due diligence has made it easier to pursue transactions across borders. But he noted that much of the deal volume from America is driven simply by the sheer amount of dry powder there as compared to the Canadian private equity eco-system.

“There’s always more capital in the US, so...they’re going to be looking for opportunities here.”

Another audience member asked if the rise of long-term earnouts was causing difficulties for strategic buyers by delaying the integration of targets.

Rob said that in his view, it didn’t affect strategic firms any more than it would private equity funds. Andrew suggested that the impact would depend on the buyer’s plan for the business. Accepting and negotiating the terms of an earnout would be more significant if the buyer were looking to integrate staff and eliminate redundancies than if they were acquiring the target as a mostly independent division.

 

The Big Picture

Despite the slowdown of the post-Covid gold rush, and the rise of challenges like staffing shortages and ESG scrutiny, the outlook is favorable for ongoing growth in M&A. As both uncertainty and opportunity loom large, buyers and sellers continue to pursue creative strategies to get deals done.

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