Canadian M&A Activity Mirrors U.S. Trends

By Generational Equity

11/29/2021

According to Reuters:

Canadian M&A Jumps 28% in Third Quarter; Canadian mergers and acquisitions activity for the third quarter hit its highest since 2016 as historically low interest rates and strong equity markets helped companies to revive transactions that were put on hold due to the pandemic.

"Higher deal flow in the third quarter was driven by a combination of factors including strong equity markets, historically low borrowing costs and market confidence in a gradual COVID-19 recovery," said Jake Lawrence, Group Head and CEO, Global Banking and Markets, Scotiabank.

As we have discussed in past articles, 2021 is shaping up to be a record year for M&A activity throughout the world, but especially in the U.S. and Canada.

Much of this growth in 2021 is pent-up demand due to the pandemic shutting down the economy for the first two quarters in 2020. However, in the last two quarters of 2020 and continuing so far in 2021, we have witnessed an incredible explosion in M&A demand.

Economic recovery and historically low interest rates have also fueled demand. Record dry powder with private equity firms has also made the competition for deals tight. Professional buyers are using 2021 and most likely 2022 to gain market share, add key assets and build businesses in industries and markets poised for significant growth.

However, again according to Reuters, the party will likely not last forever:

"I guess the big threat that's overhanging the M&A landscape is the threat of rising interest rates," said Sarfraz Visram, Head of Canadian and International Mergers & Acquisitions at Bank of Montreal.

Ah yes, the old interest rate conundrum. Quite simply, since most deals have some component of the transaction financed, as interest rates rise (which they surely will do) it becomes more expensive for buyers to acquire companies. This not only drives the purchase price down, but it can also put the brakes on deals left and right.

So, we believe that if your business is buyer ready (i.e. will pass buyer scrutiny during due diligence) the time to act is now if you are the owner of a privately held company in the U.S. or Canada.

As interest rates rise, as they are predicted to do in 2022 and 2023, the cost of borrowing will potentially impact the net proceeds you may receive upon exit. You will most likely still sell your company, but the premium buyers will be on the sidelines, and you will leave significant chips on the table by waiting to move in late 2022 and 2023.

To learn more about all the factors (in addition to interest rates) that are making this a true seller’s market, call us at 972-232-1121 or provide us with your contact information and we will reach out to you and have a confidential discussion regarding your business and personal financial goals.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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