EY - Canadian Capital Confidence Barometer

October 2014

Canadian Capital Confidence Barometer

Middle-market deals to fuel M&A rebound

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Canadians more tentative around M&A than US counterparts.

A note from Tony Ianni, Partner, Transaction Advisory Services

The results of our latest Capital Confidence Barometer show that Canadian executives continue to have all-time high confidence in both the Canadian and global economies. Of those surveyed, 98% feel that the economy is stable or improving.

This confidence has led to a significant increase in those respondents who expect to create jobs and hire talent in the next 12 months — 71%, up from 26% in our last Barometer in April 2014. However, that confidence is still not translating into a more active M&A market — caution seems to be the new normal. Only 24% of respondents expect their company to pursue an acquisition in the next 12 months, down from 41% six months ago and the lowest we have seen in two years.

For those respondents who are pursuing acquisitions, opportunities have never been better. Respondents see both the number and quality of transactions at an all-time high while they see little risk in not being able to close their acquisitions. There appears to be a shift towards smaller transaction sizes compared to what we have seen of late. Respondents who are focused on M&A activity tend to be more focused on the middle mark et (consistent with respondents from most markets around the globe) which should help produce a healthier M&A landscape down the road.

Canadian respondents continue to focus on cost efficiencies and discipline around debt-to-capital ratios. More than half (57%) of executives said the main driver of their M&A strategy is to reduce costs and improve margins. While responses from US executives are similar, it’s clear that they are more bullish about the M&A market as a whole over the next 12 months and see M&A as an opportunity to take advantage of a variety of opportunities in the market. In fact, 81% of US respondents are expecting the local deal market to improve whereas only 38% of their Canadian counterparts feel the same about the Canadian market (down from 49% in April). Is the c autious behaviour being demonstrated by Canadians going to hurt our competitive position down the road?

Canadians’ outbound investment decisions continue to fluctuate. While 36% of Canadian respondents indicate their focus on BRIC emerging markets has increased, that interest is now focused more squarely on India, Brazil and China. Russia dropped out of Canadians’ top five investment destinations due to the recent political situation. Germany was also dropped from the top five being replaced by the UK. Of course, the US continues to be a top investment destination for Canadians.

Canadian executives are clearly still taking a slow and steady approach to growth. While generally staying clear of higher-risk strategies, their strong confidence in the economy is a positive sign. In time we expect to see a stronger, healthier M&A market to surface.

Key Canadian findings

EY - Canadian Capital Confidence Barometer - Key findings