M&A-driven growth

CEOs of large Canadian companies are poised for growth and they're on the hunt for acquisitions, with nine out of 10 planning to make an acquisition over the next three years.

M&A activity greatly increased over the last 12 to 18 months, following a period of adjustment to the COVID environment. This has been fueled by a large amount of capital in the market, high valuations and low interest rates that facilitate the use of leverage for acquisitions.

of large organizations are looking to make an acquisition in the next three years

With many large organizations sitting on significant capital, CEOs looking for the best way to deliver shareholder value are looking at acquisitions to create synergies that will generate considerable shareholder return.

Acquisitions present corporations with the opportunity to move into specific geographic regions, diversify from their core service area or take a much stronger position as a market leader in their sector. Companies are also increasingly using acquisitions as a means of bringing innovative technologies in-house. In recent years we've seen a wave of banks acquiring fintechs and insurers acquiring insurtechs, and now this strategy is being used in other industries such as HVAC and water management.

A recent poll conducted by KPMG of small and medium-sized businesses (SMBs) reveals that nearly a third are looking to be acquired.

Business owners are making their companies available for acquisition as high valuations are motivating them to trigger liquidity events and cash out some of their earnings. The Canadian market has also seen the entrance and growth of private equity firms in the last 15 years and, given that they tend to hold assets for five to 10 years, there are more companies cycling through the market as they end their fund cycle and look for liquidity.

In such an active market, companies will need to think carefully about whether a potential acquisition is ultimately going to create value for their shareholders and thorough due diligence will be essential to ensure the target actually provides the perceived value. Companies should consider investing in a dedicated corporate development group that can help them perform an appropriate market scan and assessment of the landscape to identify the best potential acquisition targets.

Businesses have fared differently through the pandemic and the value of targets will depend on where they are on the K-curve. For instance, a third of the SMBs surveyed expressed some concern that their businesses wouldn't survive the next three years and a third are looking to be acquired to remain competitive. Buyers will need to determine whether those on the downward trajectory, which may appear cheap, will be able to improve their performance in a normal economy and bridge the gap until that time and that the growth of those on the upward trajectory of the curve is sustainable in a normal environment and warrants their valuation.

"The market for acquisitions is highly competitive right now, so companies are going to have to perform thorough due diligence and think carefully about whether an acquisition is going to create value for their shareholders."

— Benjie Thomas, Canadian Advisory Leader

Two-thirds of deals fail to achieve management's envisioned goals. Of those, 70% of the value erosion occurs in the post-transaction phase. To avoid this, companies need to start planning for the integration early on, pay attention to the human capital and cultural aspects of bringing an acquisition into their organization, and understand and focus on the aspects of the business that will create synergies.

With careful due diligence and dedicated resources, Canadian CEOs, who are confident about the economy and looking for acquisitions, may find they are able to create great value for their shareholders. And businesses looking to sell are likely to find eager buyers.