With the gradual reopening of the economy, the mergers and acquisitions market is gradually recovering. What’s next?
Prior to the pandemic, the Canadian mergers and acquisitions (M&A) market was very stable and even on the rise. The Canadian outlook was very favourable for sellers. However, the pandemic caused disruptions in the M&A world, and several firms suspended or cancelled deals.
Unprecedented economic impacts
Nine out of ten transactions were taken off the market or put on hold due to the lack of medium- and long-term financial performance visibility on companies, leading to global uncertainties and the preservation of cash resources.
There is no doubt about the need for every entrepreneur to be vigilant in this uncertain economy, but better days are ahead. With the gradual deconfinement of economic activity, businesses will be able to revisit their M&A plans and even take advantage of opportunities that may arise.
Proactivity and innovation: essential for recovery
In Canada, we are currently in the recovery and revitalization phase. With the reopening of the U.S. and Canadian economies, after a few months of crisis, we are already seeing some recovery in the transactional market.
In spite of the major difficulties encountered, some companies have proven to be resilient and others have shown strong growth. Several organizations, especially in the retail sector, were proactive, thinking outside the box and repositioning their Web activities, which, for some, drove a 200-300% sales increase. As a result, many are now re-evaluating their priorities in order to further invest in an online sales platform for future success.
Our viewpoint: our predictions for the future
We are seeing some demand in the market and are already witnessing the resumption of transactions, leading to business continuity. With entrepreneurs’ confidence and a more optimistic outlook, including the recovery of North American stock exchanges, as well as several attractive business opportunities, the M&A market will gradually pick up again.
However, we expect a change in the structure of transactions, as selling price values and earnouts will become increasingly common. It is still not certain what role the effects of COVID-19 will play in lenders’ and investors’ analyses. They will possibly be more careful in selecting transactions, but, to date, these partners have been very flexible in order to support entrepreneurs, despite the context.
As mergers and acquisitions gain momentum, investors and lenders will continue to focus on companies with strong management teams and a proven business model operating in growth sectors. Entrepreneurs will therefore have to demonstrate how well the company and the management team navigated through the crisis, mainly in terms of agility, flexibility, cost control and loyalty.
On the other hand, an entrepreneur who decides to sell today must approach this step with a certain open-mindedness. Valuations will be under pressure, since we are seeing a decrease in the available leverage in transaction structures, which will require much more operational and financial creativity.
We remain optimistic about long-term transaction volumes. With the pandemic stabilizing, many buyers will be ready to do business: there is still a lot of capital available in the market. However, it is important for an entrepreneur to avoid making hasty operating decisions that would maximize short-term profits and transaction value at the expense of long-term value creation.
Please view our webinar for more information on the return of M&A and financing.