3 minute read 13 Nov 2018
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Canadian executives are pressing pause on M&A

By

Murray McDonald

EY Canada Restructuring and Transaction Advisory Services Leader

Seasoned restructuring and transaction advisor who has been with EY for over 30 years.

3 minute read 13 Nov 2018

Canada’s executives are optimistic about the strength of the Canadian and global economies but are dialing back their merger and acquisition intentions.

This article is part of our M&A report Global Capital Confidence Barometer, 2nd half 2018.

Our 19th edition of the Global Capital Confidence Barometer finds that Canadian executives are taking a breather from record levels of deal making in recent years. Canadian executives are very bullish on the global and local economies, so we don’t believe this will be a long-term regression, but rather a pause to take the time to digest recent acquisitions and assess the changing global geopolitical landscape.

Overall, the survey results are very positive and speak to continued corporate optimism and sustained growth.

  • On the domestic front, 81% of Canadian respondents see the local economy improving, compared with only 60% 12 months ago.
  • On the global front, 96% of Canadian respondents see the global economy improving, compared with 78% 12 months ago.

This further strengthening in the economic outlook has Canadian respondents confident that we will see improvements across the board in corporate earnings, credit availability and the stock market over the next 12 months.

The world continues to take notice of the Canadian economy. Global respondents, for the second consecutive time, see Canada as one of the world’s top investment destinations, ranking it the number-three investment destination globally. This high ranking, the highest Canada has ever achieved, signals strong continued momentum for the Canadian economy on the whole.

In addition, we’re in the midst of a very strong M&A market, which Canadian respondents see continuing at an elevated level.

  • The vast majority (95%) of Canadian executives see the global M&A market improving, compared to 44% 12 months ago.
  • What’s more, 81% of Canadian respondents see the domestic M&A market improving, compared to 51% a year ago.

However, despite this optimism, only 46% of Canadian executives intend to actively pursue M&A in the next 12 months – a drop from the record-setting mark of 80% in our last survey.

M&A intentions

46%

of Canadian executives intend to actively pursue M&A in the next 12 months

Why are Canadian dealmakers, who see an improving overall market, making the decision to step back? We’ve identified two key reasons for this disconnect:

1.       Canadian respondents see regulatory, geopolitical and policy uncertainty as the greatest risk to dealmaking. They’re taking the time to assess and wait for the dust to settle on USMCA, Brexit and the looming threat of trade wars before firming up deal plans. We believe some of the pullback on deal intentions is Canadian executives taking the prudent step to wait.

2.       Following recent record levels of M&A, Canadian executives are renewing their focus on realizing synergies and optimizing the integration of recently completed deals. More than half (53%) of Canadian respondents revealed that in a recent transaction, they did not achieve the synergies identified at the time the deal was struck. This is critical, since missing the mark on realizing synergies can be the difference between a good deal and a bad deal. The majority (80%) of Canadian respondents valued synergies at 20%-40% of the total deal value. The cause may be that Canadian respondents identified “back solving” into a target as the top method to calculate synergies — compared to global respondents who consulted the views of third-party experts. Starting the integration process earlier, setting aggressive targets and ensuring a greater focus on integration leadership were identified as the top corrective actions taken to optimize the integration and achieve full value of synergies.

Canadian respondents are also using the current pause in deal appetite to invest in their existing operations and strengthen core competencies. The two most important corporate strategy points Canadian respondents identified are improving working capital and investing in existing operations. We are also seeing investment in Canadian workforces, with most Canadian respondents focusing on motivating, retaining and reskilling their people. Strengthening current operations and building the best internal team are giving Canadian companies the foundation to react quickly to the right opportunities in the future.

We are encouraged on the overall health of the M&A market and believe that the pause Canadian respondents are taking will have positive effects on the strength and duration of this M&A cycle. To Canadian executives: take a deep breath, digest the acquisitions you’ve made, optimize your business and prepare to come back to the negotiating table stronger than ever.

Summary

Canadian executives are optimistic about the global and local economic and M&A outlook, and global respondents ranked Canada the number-three investment destination globally. However, Canadian executives are prudently pausing their M&A intentions — to take the time to digest recent acquisitions, optimize their business and assess the changing global geopolitical landscape. Download the full report (pdf).

About this article

By

Murray McDonald

EY Canada Restructuring and Transaction Advisory Services Leader

Seasoned restructuring and transaction advisor who has been with EY for over 30 years.