Global Capital Confidence Barometer, May 2016: Canada highlights | 14th edition
Canadian executives see continued strength in M&A market
The 14th edition of EY’s Capital Confidence Barometer finds that Canadian respondents have renewed optimism about the Canadian economy and a healthy, sustainable outlook of the M&A market.
Canadian respondents saw deal intentions slip back from our previous edition, but for the third report in a row, deal intentions are above the historical average. With 61% of Canadian respondents expecting to pursue acquisitions in the next 12 months, Canada is the most bullish country in the Americas and well ahead of the 50% of global respondents. Further strengthening our outlook on the Canadian M&A market is that 54% of respondents have elevated acquisitions onto board agendas, compared to only 5% from six months ago.
Optimistic outlook for economy
The Canadian economy has also been given a strong bill of health, with 98% of Canadian respondents seeing the economy as stable or growing, compared to only 70% of respondents 12 months ago. Canadian executives are putting this optimism to work, with 61% expecting to create jobs and hire talent, compared to only 28% of global respondents.
This optimism comes at a time when Canadian companies are facing headwinds and uncertainty from local and global disruptors. Forty-four percent of Canadian respondents are focusing on the increased volatility in the commodity and currency markets when making strategic decisions. In Canada we are watching two different stories play out, with the commodity sectors still facing the challenges of a low-price environment and manufacturing/export businesses starting to see positive momentum from a more favorable exchange rate with the US dollar.
Healthy M&A market
In the face of these disruptive factors, Canadian respondents are broadening their acquisition appetite compared to previous survey results. More than three-quarters of Canadian respondents (79%) are focusing on cross-border acquisitions, compared to only 34% six months ago. It is a sure sign of confidence that Canadian respondents are engaging in cross-border transactions, with the top destination being the US, in the face of the recent pullback of the loonie. Canada remains a mid-market M&A hotbed, with the bulk of deals happening in the sub-US$250m range. However, in this edition almost a quarter (24%) of respondents are looking at deals up to US$1b, compared to only 9% six months ago.
As you dig deeper into the merger and acquisition market fundamentals, the picture of a healthy M&A market that will be sustainable for the foreseeable future begins to come through clearly. The valuation gap is closing, with 83% of respondents seeing buyer and seller expectations at less than 10%, which is up from 57% one year ago. As well, Canadian respondents are more bullish than previous periods on their likelihood of closing acquisitions, the quality of acquisition opportunities and the number of opportunities in their pipeline.
Canadian respondents are also being more disciplined and prudent in their evaluation of acquisition opportunities, with 88% of respondents reporting that they have walked away from a transaction. When you look at recently completed transactions, Canadian respondents cited failure to achieve synergies as the primary reason for a transaction not meeting expectations. To counter this, we are seeing an increased focus on due diligence and pre-closing integration work, as buyers look to get it right before completing a transaction.
The combination of a robust economic outlook, positive deal characteristics and increased prudence by participants, speaks to the long-term sustainability of this healthy M&A market.