Canadian executives are looking to M&A to capitalize on digital disruption
The 17th edition of EY’s Global Capital Confidence Barometer finds that Canadian respondents are still firmly aiming to pursue acquisitions in the next 12 months, and are buoyed by positive momentum in the local and global economies.
Confidence in the economy
Canadian respondents have a greatly improved outlook on the local and global economies, largely sustained by accelerated growth in developed economies.
On the domestic front, 60% of Canadian respondents see the economy improving, compared with only 38% 12 months ago. Outlook for the global economy is also more optimistic, with 78% of Canadian respondents seeing it improving, compared with only 19% 12 months ago. These improvements bode well for economic growth, especially as we continue to see a stronger than expected turnaround in the eurozone and continued economic strength in the US and China.
Confidence in investments and dealmaking on the rise
The broader economic outlook is also leading to increased confidence in investment and dealmaking intentions for Canadian respondents.
On the local level, 66% of Canadian respondents have improved confidence in corporate earnings, up significantly from only 17% a year ago, while 57% have greater confidence in stock market valuations, compared to 15% the same time last year.
These markers, coupled with almost 60% of Canadian respondents believing that there will be improved credit availability in the next 12 months, are supportive of a healthy M&A market.
Digital disruption: opportunity or threat?
Canadian respondents believe that the impact of digital technology and the threat of digitally enabled competitors will be the most prominent item on their boardroom agenda over the next six months. Innovation and digital transformation are accelerating the pace of change across industries, and companies need to actively review their portfolios and other market opportunities to be able to capitalize on new digital trends.
Canadian firms are leading the trend on rapid portfolio review, with 62% reviewing their portfolio quarterly compared with only 30% of US respondents and 42% of global respondents.
To try and get ahead of the digital wave, the majority of Canadian respondents are being proactive in the face of digital technology, transformation of business models and threats from digitally enabled competition. However, the majority are also reactive in the face of sector blurring and changing customer behaviors.
Executives need to look both internally and externally to find the expertise required to fully capitalize on and transform their digital capabilities. Canadian companies are prioritizing acquisitions to help improve their digital capabilities, with 41% looking to acquisitions, compared to only 32% of US and 38% of their global peers.
By contrast, 38% of global respondents and 43% of US respondents are focused on building the capabilities in-house as their top priority to improve their digital capabilities, compared to 33% of Canadian respondents. Technology heightens the need to have the right staff on hand, with the right skill set and the right employee training programs. Canadian, US and global respondents are focusing on reskilling/training their existing people, rather than looking to hire the skills externally.
Robust deal pipeline
Canadian respondents predict that the Canadian deal market will continue its strong performance over the next 12 months, with 61% of Canadian respondents intending to pursue acquisitions in the next year compared to 48% a year ago.
Further strengthening the deal market is Canadian respondents’ positive outlook — 51% of Canadian
respondents see the local M&A market improving over the next 12 months, and 44% see the global
M&A market improving.
For the third straight period, Canadian respondents expect pipelines and deal completions to increase
over the next 12 months, providing further evidence of a robust M&A market. In addition, Canadian
respondents believe that anticipating the full range of integration challenges and opportunities in advance is the key new factor an executive must consider when structuring an acquisition, a sure sign of a healthy and prudent deal market.
Private equity making a comeback
Finally, one of the main predictions in the M&A market this year, according to global respondents, is the return of private equity as a major acquirer of assets.
The current M&A cycle, which started in 2013, has been dominated by corporate acquirers, but private equity rebounded significantly in 2017. Private equity firms have record levels of dry powder and have made changes to their investment models (e.g., long-hold funds) to enable them to be more competitive with corporate acquirers.
Canadian respondents tend to agree, as they believe that there will be more competition for assets in the next 12 months, with private equity being the largest source of this competition. A uniquely Canadian angle to this trend is that Canadian respondents believe that pension plans will make up a significant amount of this private equity rebound, accounting for 30% of the increased competition, compared with only 11% from global respondents.