Surge in deal activity will be an essential part of economic transformation
After more than a year of upheaval caused by the global COVID-19 pandemic, governments worldwide are still taking extraordinary steps to support their economies and lay the foundations for a strong recovery. With a recent federal budget promising more than $100 billion in new spending measures and a projected annual deficit of more than $350 billion, Canada is no exception.
Amidst these numbers, it’s easy to overlook another critical element of economic recovery happening without any government involvement but likely to have lasting positive effects for Canadian businesses and workers: the surge in mergers and acquisitions activity.
The impact of the pandemic on businesses has been asymmetrical, with some industries and sectors – such as hospitality and travel – particularly hard hit. In contrast, others, including food retailers and technology companies, have thrived. But regardless of whether they’ve done well or not over the past year, most sectors need to reinvent themselves for the post-pandemic world, and M&A will be an essential part of their transformation.
M&A activity in Canada was already gaining momentum before COVID-19 but slipped back in the second quarter of last year as companies grappled with its early effects on their business. As lockdowns eased by the summer of 2020, however, activity recovered. By the time positive news about vaccines arrived later in the year, dealmaking activity reached new heights that exceeded forecasts made before the pandemic. This surge has continued into 2021 and shows no sign of subsiding any time soon.
In the first quarter of this year, Canadian announced deal value reached approximately $100 billion, more than five times higher than the same period last year and double a typical quarter of about $50 billion. This increase was driven by several megadeals, including Rogers Communications’ announced $26-billion deal to acquire Shaw Communications and CP’s announced merger with Kansas City Southern Railway valued at $31 billion.
We’re already seeing signs things are continuing at this pace in the second quarter, with CN’s rival bid for Kansas City Southern worth about $38 billion and several companies using the current environment to reconsider their strategic priorities and exiting non-core businesses. For example, George Weston recently announced its intention to divest Weston Foods, and the Bank of Montreal announced the $1-billion sale of its EMEA asset management business to Ameriprise Financial.
Many factors drive this frenetic pace of deal activity, including some remaining pent-up M&A demand following the quieter quarters last year. Companies of all sizes and in all sectors are also taking a more detailed look at their strategic priorities and making capital allocation decisions to safeguard core markets, accelerate transformation and give themselves unassailable market leadership.
For some, mainly businesses hit hard by the pandemic, M&A is part of a defensive strategy to salvage value or maintain competitive parity. For others, notably those thriving throughout the pandemic, it is part of an offensive strategy to safeguard the future of their business or to “change the game” through a web of multilateral partnerships, alliances, and investments to achieve scale.
Some recent Canadian examples highlight these two approaches. On the defensive side, there is Invoice Delivery Services’ decision to accept a US$80-million takeover by U.S.-based healthcare improvement company Premier Inc., and cryptocurrency startup Coinsquare selling a 20-per-cent stake to FinTech startup Mogo for $56 million. Examples of the offensive strategy include Kansas-based credit provider CURO Group acquiring Flexiti Financial for US$85 million, and Dye & Durham acquiring an Australian competitor GlobalX for $166 million.
Although no crystal ball exists to predict what will happen as this year unfolds, several sectors are expected to be active in M&A in the coming months, notably banking, insurance, real estate, and consumer products.
We also expect opportunistic M&A activity to continue in the retail, automotive, and tourism and hospitality sectors, and increased M&A activity and investment in the telecom, media, and technology sector. Even already highly consolidated sectors are likely to see businesses more open to acquisitions in adjacent or disruptive sectors as they think differently about their business model in a post-COVID environment.
For companies looking to execute on their M&A strategies this year, the conditions that have helped to finance the recent surge in M&A growth, such as historically low-interest rates and vast amounts of private equity dry powder, are expected to continue for the foreseeable future. It’s reasonable, therefore, to expect that substantial M&A activity will remain robust in Canada in 2021, contributing to a stronger and more resilient Canadian economy in the future.
As vaccination programs progress and as the economies of Canada and other developed countries start to recover from the impact of COVID-19, we should acknowledge and welcome the significant role that mergers and acquisitions are playing in fuelling that recovery.