Optimism up among Canadian businesses, but M&A barriers hold firm: Ernst & Young

(Toronto, 28 April, 2011) Some 78% of Canadian businesses are feeling more upbeat about their companies’ prospects than they were six months ago, says a new Ernst & Young report, Capital Confidence Barometer. In contrast, 70% of their global counterparts feel the same way about their own businesses. But it’s not all smooth sailing the report finds.

“Overall, Canadian companies can afford to be a bit more optimistic than others. Our markets have done fairly well relative to others, and commodities prices are now soaring,” says Tony Ianni, a partner in Ernst & Young’s Transaction Advisory Services practice. “But that optimism varies among sectors and regions. Companies that weathered the financial storm well are now on the prowl for new acquisitions and opportunities. Businesses that were hardest hit are turning inwards, choosing to focus on operational efficiency, organic growth.”

Ianni compares booming commodities businesses in Alberta to still-struggling manufacturers in Ontario as a key example. “In many ways, the post-crisis Canadian economy is characterized by ‘haves’ and ‘have nots.’ This is leading to mixed messages for M&A.” He says the haves are flush with cash and have access to available credit. The survey finds one-third of them are looking to buy. The have-nots, on the other hand, are still struggling to get access to credit, are looking to sell or are cleaning up their balance sheets to make themselves more attractive to buyers.

As a result, Capital Confidence Barometer finds thatCanadian M&A activity is expected to remain relatively flat in the next six months in contrast to the global trend, which anticipates a slight 3% uptick. Those with acquisitions in their sights don’t necessarily have an easy road ahead, however. New hurdles exist for M&A activity:

• The valuation gap between buyer and seller expectation is widening, with close to 50% of Canadian companies surveyed calling it a mounting concern and a deal-breaker.
• Political unrest in areas like the Middle East is complicating long-term plans.
• Ongoing economic uncertainty in Europe and China are making it difficult for companies to develop big picture strategies.
• Good assets are scarce, leading to greater competition and ever-higher valuations.

Over the long term, Canadian M&A activity is expected to decline slightly. The report finds 48% of Canadian businesses are likely to acquire in the next one to two years, down from 51% in October 2010. Global respondents showed a more dramatic decline. Forty-four percent of respondents worldwide said they plan to acquire in the next year or two, down from 54% in October 2010.

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