6 minute read 12 Jun 2020
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Three ways Canadian companies can plan M&A for what comes next

By

Doug Jenkinson

EY Canada Strategy and Transactions Partner

Extensive M&A and divestiture experience both within North America and globally in a variety of industries. Specializing in extractive industries and foreign investment into emerging markets.

6 minute read 12 Jun 2020

By redoubling efforts to implement leading practices and M&A, Canadian companies can build resilience and prepare for the recovery ahead.

For Canada, the COVID-19 crisis didn’t come into full focus until mid-March 2020. Prior to that, although Canadians were reading news reports of the severe impact the virus was having in China, Italy, Spain and the rest of Europe, for many Canadians the crisis felt as if it largely remained overseas.

After all, on March 13 (the beginning of the March break holiday for many Canadians), when Canadian Prime Minister Justin Trudeau announced that Canadians should refrain from all nonessential travel, Canada had fewer than 50 confirmed cases of COVID-19. Five days later, when the Prime Minister closed Canada’s borders and provinces began issuing emergency responses that ordered businesses closed and Canadians to stay home, still only approximately 130 Canadians had tested positive for COVID-19.

At the time of this writing, Canada’s positive COVID-19 cases have climbed above 91,000. Meanwhile, many businesses are attempting to navigate how they emerge from forced hibernation to help flatten the curve — an effort that has pushed Canadian unemployment statistics to an all-time high.

The rapidly evolving set of events happened to overlap with the survey for the most recent edition of the EY Global Capital Confidence Barometer, which ran from February 5 until March 26, 2020.  Notably, even as the breadth and depth of the crisis began to emerge, Canadian respondents surveyed after February 19 remained bullish on M&A, with 62% saying they still intended to pursue deals in the next 12 months. Whether these intentions hold firm is something we’ll be able to assess in the next edition of the EY Global Capital Confidence Barometer.

Now, the focus remains on human and financial health

As Canadians know, perspectives on our health, well-being and the economy have changed by the day since March 13. We now know more about the virus, and we’ve viscerally experienced the impact the pandemic has had on our lives and the economy. As some provinces begin to catch a glimpse of a flattening of the curve and consider plans to slowly reopen the economy in phases, Canadian executives know that a new normal is emerging, with sectors and companies affected by this crisis to varying degrees.

One of the hardest-hit sectors, of course, has been oil and gas — an industry that’s of significant importance to the Canadian economy. In addition to local issues, such as declining demand and stranded production, a disagreement between Russia and the Organization of the Petroleum Exporting Countries (OPEC) regarding supply further exacerbated the situation for Canada as global pricing for oil plummeted.

Canadian companies remain focused on the health and safety of their employees and customers, and on maintaining the health of their balance sheets. Given the timing of our EY Global Capital Confidence Barometer survey, the concept of “return to work” was not explored, as the full gravity of the shutdown was not known. However, this has to be a top priority for all companies in the post-pandemic world. How companies manage supply chains, customer experience, customer safety, employee safety, evolving regulatory environments and changing business models as the economy reopens will become the key questions all executives need to assess.

Next, the top three leading practices for Canadian companies post-pandemic

Companies in every affected sector, as previous editions of this report have revealed over the last decade, should consider three leading practices.

1. Reshaping results

As Canadian companies begin to emerge from the crisis and address immediate short-term priorities of keeping their employees safe, keeping their business open and securing enough liquidity to survive, they need to be rethinking their vision for what’s next and develop an action plan for sustained success in the recovery period.

Portfolio reviews should underpin the capital allocation process. They should also identify assets that are at risk of disruption or that face future growth challenges that may make them better off owned by another company or a private equity fund. While we were encouraged to see that more than one-third (35%) of Canadian respondents in our latest survey review their portfolios on a quarterly basis, in the face of this new world we expect portfolio reviews to be an even higher priority on board agendas.

It became evident following the global financial crisis that companies who made bold acquisitions in the recovering market outperformed their peers in the decade that followed. Similarly, Canadian executives have the opportunity, once the extraordinary challenges presented by COVID-19 are past them, to take decisive action, create a plan to reshape the results of their organization and implement a focused M&A strategy to fuel growth into the next decade.

2. Supply chain reinvention

Even before COVID-19, geopolitical, trade and tariff uncertainty had nearly one in five (18%) Canadian companies looking to reconfigure their supply chains. As companies realized the depth of the pandemic’s impact on their supply chains during the survey period, 96% said they needed to re-evaluate, or were already taking steps to change, their global supply chains.

Arguably, every Canadian company will be looking to reinvent its supply chain on some level in the wake of the pandemic. Some may look closer to home for suppliers, while others will seek alternative suppliers in multiple jurisdictions so they aren’t caught flat-footed again. Still others will move from linear supply chains to networked value chains that are data-driven and can react to events and make changes in real time. By sharing data in the cloud, or directly integrating with suppliers, Canadian companies can improve collaboration and supply chain visibility.

Supply chain reinvention

96%

of Canadian respondents said they needed to re-evaluate or were already taking steps to change their supply chain.

3. Digital transformation

Pre-crisis, transformation was moderately high on the Canadian corporate agenda, with 60% (vs. 72% of global respondents) saying they were undergoing a significant business and technology transformation program. For Canadian executives, pressure on revenue targets and an inability to keep up with competitors’ technology were the primary reasons.

The shutdown of nearly all brick-and-mortar retail channels should remind everyone of the importance of an e-commerce strategy and a work-from-home strategy, which have accelerated IT infrastructure projects that would have typically taken years into a few weeks.

Meanwhile, as companies accelerate their digital strategies, hackers see increased opportunities for cyber attacks. As organizations move toward the next phase of their digital strategy, many will likely be closing the gaps created by rushed projects or competitors who were further into this journey. While many of the efforts will be organic IT projects, executives will want to consider M&A to further their digital strategy.

Digital transformation

54%

of Canadian respondents said they needed to re-evaluate or were already taking steps to change their digital transformation efforts.

Beyond the pandemic, Canadian companies will need to adjust to a new business-as-unusual

As Canada’s economy emerges from the pandemic and consumer demand picks up, the new normal of tomorrow will look very different from the normal of yesterday. Canadian companies will have to adjust to a new business-as-unusual environment that may require anything from bolt-on acquisitions that 46% of respondents said they were planning, to divestment of underperforming assets, to a complete reimagining of the very core of their business.

Initially, it appears as though Canadian companies were hoping for the best in terms of the pandemic’s impact, both on human health and the economy, but they are now bracing for a longer U-shaped recovery extending into 2021 (66%). As more becomes known about COVID-19, it is more realistic that we will see a seesaw recovery as we wait for a vaccine.

We encourage Canadian companies to remain focused on their core mission, prioritize their people, and build resilience — as a team — to prepare for the recovery and resurgence ahead.

Summary

The EY Global Capital Confidence Barometer (pdf) gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas.

About this article

By

Doug Jenkinson

EY Canada Strategy and Transactions Partner

Extensive M&A and divestiture experience both within North America and globally in a variety of industries. Specializing in extractive industries and foreign investment into emerging markets.