Though many parts of the capital markets are slow, a new report by Grant Thornton International suggests that the pipeline for pending mergers in Canada is pretty full.
The Grant Thornton International Business Report (IBR), which polled 12,000 businesses in 40 countries, found that the overall proportion of businesses seeking to grow through M&A has risen significantly from 26 percent in 2010 to 34 percent in 2012. Canada stands out as one of the most likely mature economies to grow this way over the next three years, with 42 percent of companies planning to expand by buying or merging with another company. Other likely regions include North America (37percent) and the BRIC economies (35 percent). This compares to only 28 percent in mainland Europe, 25 percent in Asia Pacific and just 16 percent in the troubled economies of Greece, Ireland and Spain.
The report found the key drivers for M&A activity amongst Canadian companies are to gain entry into new geographic markets (69 percent), build scale (48 percent), gain access to lower cost operations (39 percent) and to acquire new technology or an established brand (34 percent). These driving factors are consistent around the world, indicating that Canadian companies believe M&A remains the simplest and most effective way for businesses to grow and build scale in new geographies.
Last week, a separate report by Thomson Reuters found that the value of M&A transactions involving at least one Canadian company is up 22 percent, to $68.6 billion, so far this year. Domestic-only activity has increased by a whopping 85 percent from the first few months of 2011, valued at $28.7 billion. Results from the Grant Thornton International report reflect this trend, with almost three quarters of Canadian businesses looking for domestic deals, while a quarter are looking cross-border.
Canadian companies are also not depending on the rocky equity markets to fund these deals. About two-thirds said they planned to finance their growth through retained earnings, 55 percent said they would use bank loans and 31 percent would use private equity. “Despite the global slowdown, many companies are holding significant cash and have excess debt capacity on their balance sheets, positioning them well to make acquisitions,” said Greg Wright, Director of Mergers and Acquisitions at Grant Thornton Corporate Finance Inc. in Vancouver.
Despite the appetite for M&A, only 12% of Canadian companies foresee a change in their own ownership over the next three years. Of these, 31% said they expect an acquisition by a competitor. According to Greg Wright, many of these businesses may command a premium price. “High quality businesses are attracting premium prices across the globe, and particularly in Canada. Slow economic growth over the last few years has definitely increased competition for attractive assets.”
Sell-side companies looking to capitalize on M&A activity by Canadian firms should consider setting up a virtual data room ahead of time. Using a Firmex virtual data room to manage and organize business documents ensures you are prepared for the transaction and can drive the best deal. Advanced reporting tools help monitor user activity during the due diligence process to better gauge buyer interest and keep the deal moving.