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Canadian executives bullish on deal market

Global Capital Confidence Barometer Canada highlights | 15th edition

Global executives increasingly looking to Canada as a top investment destination

The 15th edition of EY’s Global Capital Confidence Barometer finds that Canadian respondents have a strong belief in the local economy and deal market, but have concerns about the global market as a whole.

The Canadian deal market has been given a positive bill of health in this edition, with Canadian respondents actively looking for deals and predicting a buoyant M&A market in the year ahead. The Barometer reveals that 44% of Canadian respondents expect the Canadian M&A market to improve in the next 12-months, compared to only 14% last year. In addition, almost 50% of Canadian respondents are actively pursuing deals this year, which marks the fourth period in a row that Canadian respondents are above the historical average.

Key findings

While it is obviously important to look at Canadian respondents to gauge the health of the Canadian M&A market, it is equally important to look at how respondents in other countries view Canada. For the first time since the heady oil price environment in 2013, Canada has been noted as one of the top five destinations where global respondents will actively pursue acquisitions. This strong interest in Canadian companies, combined with Canadian respondents’ positive outlook on the local deal market, should lead to a robust M&A market ahead.

There are also encouraging results for the Canadian economy, with 39% of Canadian respondents anticipating that the domestic economy will improve, versus only 10% in our previous edition in April 2016.

However, Canadian respondents are less encouraged by the prospects outside of our borders, with only 19% seeing an improvement in the global economy. Global disruptors, such as currency and commodity volatility and the potential slowdown in global trade flows stemming from economic nationalism are seen as the biggest risks to the bottom line for Canadian respondents.

Today’s M&A market is a complex and sturdy market, with respondents demonstrating strong intentions to actively pursue new acquisitions, but also demonstrating a surge in deal selectivity and evaluation. More than 75% of Canadian respondents are bullish on the quality of acquisition opportunities and the likelihood of closing acquisitions.

They also have some of the deepest pipelines in the world, with more than 80% of respondents indicating they are currently looking at more than one acquisition. Further strengthening this point is that more than a quarter of Canadian respondents believe that their pipeline will grow over the next 12 months and 52% expect to close at least one deal.

With all this activity, Canadian respondents are still acting with discretion and taking a prudent view when evaluating acquisitions, with 85% of respondents indicating they had walked away from an acquisition in the past 12 months. A valuation gap that was too wide to bridge and critical issues uncovered during due diligence were cited among the common reasons for calling off a deal. An encouraging point that should lead to more deal closings, is that 52% of Canadian respondents believe that we will see a decrease in the price/valuation of assets, which may help to bridge the valuation gap.

With so much on the line, it’s critical for senior management and their advisors to invest the time and effort on due diligence as well as the evaluation of synergies and post-integration issues. Underestimating the cultural fit, the challenges of integrating IT systems and the poor identification and quantification of synergies are identified as the primary causes for acquisitions failing to meet expectations.

With respect to deal size, we’ve seen a drop-off in “jumbo” deals (greater than $1b), particularly among US and global respondents. However, it is interesting to note that Canadian respondents are looking at larger deals than in recent periods, with 64% looking at deals worth $250m to $1b, compared to only 9% one-year ago. This is a sure sign of confidence, as Canadian respondents look to more transformational deals.

Executives remain positive about dealmaking, look to boost deals in 2017

EY - Executives remain positive about dealmaking, look to boost deals in 2017

Due to concerns raised by Brexit, the UK is no longer a top investment destination

EY - Due to concerns raised by Brexit, the UK is no longer a top investment destination
Doug Jenkinson

Doug Jenkinson

Transaction Advisory Services

+1 416 943 3589

Download Canada highlights (PDF) Canada ranked in top-5 global investment destinations

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Transaction Advisory Services
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