Canadian M&A Activity in 2022

In this week’s episode, we’re analyzing Canadian M&A activity with Jill Chua, managing director for investment banking at Raymond James.

Dealcast is presented by Mergermarket and SS&C Intralinks.

Listen to learn about:

• Environmental, social and corporate governance (ESG) trends in Canadian M&A dealmaking
• Impact of ESG on various industries
• The effect of rising interest rates on M&A and private equity (PE)
• Canadian cities that could become the next tech hub
• How PE firms will deploy dry powder in Canada 

[TRANSCRIPT]

[MUSIC PLAYING] JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham, a journalist who's been covering M&A for a decade. In this episode, we're going to find out about M&A in Canada. I'm joined by Jill Chua, managing director in investment banking at Raymond James.

Hi, Jill. Thanks for joining me today.

JILL CHUA: Hi, Julie-Anna. Thanks for having me.

JULIE-ANNA NEEDHAM: So let's start off by looking at ESG, which has been a huge trend across the world in recent years. ESG demands are growing fast, but what does it mean for M&A in Canada?

JILL CHUA: Thanks for asking that question. Yes, ESG has become significantly topical in a number of our processes, and really, the impact is two-fold. One, for existing M&A processes, people are really looking at companies with an ESG lens, making sure from an environmental, social, or governance standpoint that they're doing the right things, that there are no hidden skeletons in their closets, so to speak.

So that's really becoming a very important due diligence aspect. And there are processes that would take longer or might be aborted because a buyer may not like what they see from an ESG perspective.

But there's also a second component from an ESG, and this more impacts deal volume and the appetite to do M&A. So we are hearing from our corporate development counterparts in companies that are talking to us, saying, hey, ESG is becoming more and more important. As a company we have to have an ESG component, whether that's a product or a service offering. So what are opportunities out there for us to increase our ESG standpoint?

And the question they really have is: I could grow this in-house, but it'll take me a long time. So how can I jumpstart that? These M&A opportunities are typically a little bit smaller. They're more tuck-ins. And they really have to fit with the portfolio of the company. But we are really seeing that in these two aspects. So it's quite interesting how that has become prevalent.

And the more we see ESG becoming important in the public markets, that really does spill over in the private markets as well. So even for companies that are doing private transactions, ESG has become more and more important, the transparency of what a company is doing for its shareholders, for its customers, and for employees.

JULIE-ANNA NEEDHAM: Yeah. And certainly that kind of wider stakeholder focus has been something that I've kind of seen over the past kind of five, 10 years. It's not just about making money for shareholders. It's part of a much bigger focus now.

JILL CHUA: Absolutely. And it impacts different industries differently, right? So if you think about mining or oil sectors, it's really very environmentally focused. Sourcing also from social aspects. Are they good stewards of the Earth? And of the communities that they impact.

But we also see them in non-physical or commodity-related industries. Take financial services. Am I being transparent to my customers? Am I really giving them the products that they want and should help them? So we are seeing that component.

There are also some, I'd say, consequences of having an ESG focus from a buyer's perspective that are impacting how sellers promote their companies. So if you have a company that has an ESG component, historically it's not really something we'd focus from a marketing perspective, but it is becoming one of the key highlights we are seeing in deals.

JULIE-ANNA NEEDHAM: Thanks, Jill. So given how markets have performed over the last quarter, what does it mean for Canadian M&A? Because there are a lot of macroeconomic and geopolitical factors at play.

JILL CHUA: As you know, over the last quarter, the public capital markets have definitely taken a hit in terms of valuation. There are a number of impacts in terms of M&A from our standpoint.

For one thing, A, companies that we're thinking of becoming public are now looking at M&A as an alternative. And two, companies that want to acquire other companies in terms of their consideration if they're looking at a stock-based acquisition, that's also impacting their ability to do M&A.

Not so much the capital markets, but what's happening from an inflation standpoint, people are also worried. What are the impacts of rising interest rates in terms of M&A. And I think this will speak into more private equity in terms of some of their transactions when they look at capitalizing with debt or doing LBOs, rising rates, and what does that impact?

So from a pipeline perspective, people are really looking at these aspects and saying, if they are vested and will want to do transaction in the next 12 months, maybe we should accelerate that and do that now from a pipeline perspective, because we're not going to know what's going to happen in the second half of this year. So let's get those done. Let's get M&A deals that are in flight completed, because again, given where valuation is, we don't want to see another 15%, 20% decline in valuation of what that impacts from a deal perspective.

From a geopolitical perspective, we have seen some companies that have assets in geopolitical sensitive areas do divestment and look at M&A. And I wouldn't say it is the only driving aspect, but it definitely is a catalyst when they think about the divestments that they were already thinking about or wanting to do.

And this is just like, OK, given where the markets are, we're not getting credit. Investors don't like these assets in these certain geopolitical sensitive places. Let's do these deals right now.

JULIE-ANNA NEEDHAM: Great. Thank you. Looking at one particular sector, technology has obviously been one of the hottest sectors of the past couple of years with the pandemic, but it's fallen out of favor a little bit with investors more recently. Will Toronto become the next technology hub? And what kind of opportunities will that present in the market?

JILL CHUA: I think in general, Toronto or Canada, in general, has a pretty good technology bent to it. There's a lot of opportunities and a lot of entrepreneurs, new startups starting in our ecosystem.

We also have quite a few funding sources from a venture capitalist starting to grow in our geography in Canada. And I wouldn't say Toronto. I would say Canada in general, because there are quite a few pockets outside of Toronto. There's Waterloo. Vancouver is another place. Calgary, you're seeing a number of startups there.

So it's quite prolific across the board. We do have good people and strong people and entrepreneurs in our country that can help grow this community.

In terms of technology and what that means from an M&A perspective, we have seen last year quite a few companies doing IPOs as a route of monetizing for founders and investors. Going forward, we have seen those companies taking a hit from a public equity perspective. If you look back from an IPO, the number of companies that went IPO last year, the majority of them are now performing lower than their IPO price.

So what that implies is from an M&A perspective, these are quite good opportunities from a take private perspective. This ties in to private equity in the space or even companies wanting to buy these startups or technology growth companies that really couldn't compete with the public market valuation. But now that the public market valuation has compressed, they have the ability to deploy their capital and be attractive in terms of the offers that they could make for these companies.

JULIE-ANNA NEEDHAM: I'd like to pick up on a couple of things that you said there. We'll come on to the private equity in a moment. But I guess the technology companies that also straddle ESG offerings are probably going to be some of the more valuable companies in the markets.

But looking at the deal process specifically, how has technology changed that? How did it change over the pandemic, which we're now, fingers crossed, coming out of? And how will that change continue going forward?

JILL CHUA: Yes. Definitely, technology has played a significant role in our lives in general and the way we do business. During the pandemic, a lot of due diligence was done remotely or with the use of technology to be able to facilitate that.

Obviously, technology's also being used from a process perspective, from a deal perspective, whether that's being able to data-mine and use artificial intelligence to do due diligence a lot quicker, a lot more sophistication. That has also played a significant role in M&A.

But in terms of process-wise, obviously, we have the ability to go remote and to do meetings remotely. Now that the pandemic, people are coming out of it, we are now seeing a reversion back to some of the face-to-face or human aspects of the dealmaking that we've had in the past, because it's really an important part of our business.

Whether you're selling a widget company or a service company, knowing the other side and being able to have that face-to-face dialogue and look them in the eye and understand their business, or have that belief in what they're doing and their growth prospects, it is really important for buyers.

I know a lot of things, analytically you don't really need that human connection. But at the end of the day, you are investing in something that someone created, whether that's technology or a service. It's really important. So I think we're going to be in this space where we're taking the technology where it's helped us a lot and melding that with some of the good pieces of the process that we've done pre-pandemic.

JULIE-ANNA NEEDHAM: Yeah, and I think people are kind of keen to not maybe get back to how we were pre-pandemic with business travel, but certainly do more that involves face-to-face in the same room.

JILL CHUA: That's right. So you'd see pre-pandemic, everybody would be flying everywhere and trying to get these deals done, whether that's meetings, initial meetings to do due diligence. I think people are becoming a little bit smarter and more efficient. We are using technology where we can. But also, where it's important to have that human connection, those people are not hesitating to take that flight or to travel for those important meetings.

JULIE-ANNA NEEDHAM: Yeah, interesting. Thank you. You mentioned it earlier, but can we now look a bit to the future and Canadian private equity firms, and how they're likely to deploy their existing dry powder? What will be on their shopping list?

JILL CHUA: Yeah, so I think this links back to how the public market's doing, right? So we definitely had record-breaking fundraising historically over the last couple of years for private equity. And I would say also the Canadian private equity.

To put it in context, when we talk about private equity, it's not just Canadian private equity looking to do acquisitions in Canada. A lot of times, US private equity's quite prevalent in a lot of our processes. And I'd say in almost all of our processes, because they are keen to deploy that capital. There's quite significant amount of dry powder there.

Given where the public markets are, I think that is an opportunity for some of the private equity to take private opportunities. They might not have been competitive when people were thinking-- if you have a company, thinking about either doing an IPO or selling their company. Last year, given where the public markets were, they're not as competitive. But now given where share prices are and the ability of private equity to deploy capital, you now have a point where their valuations are becoming more attractive.

There's also the opportunity of taking these public companies private. And I think the opportunity there is definitely something that from a Canadian perspective we are aware of. Investment bankers or other market makers are keeping a keen eye on.

JULIE-ANNA NEEDHAM: And given that prices are going down, are you revisiting some deals you had previously proposed to clients?

JILL CHUA: I would say there are two components to it. They are the private buyers of private equity, but they're also the corporate buyers who could be public companies themselves.

I do think if you're talking about corporate buyers, it really depends on their cash flow and their current share price themselves. So if they don't have the cash on hand, it's really challenging to do an acquisition when you yourselves would be issuing equity at a price you're not happy with. So I think that's one consideration.

The second component is from a private equity standpoint, they are looking at these opportunities from also from cash flow and growth opportunities. So are these public companies able to fit well with their current portfolio companies, or do they now-- are they now at a valuation that it makes sense for them to acquire these companies and deploy it and provide a good return for the fund?

JULIE-ANNA NEEDHAM: Great. Really interesting to speak to you, Jill. Thanks very much.

JILL CHUA: Happy to be here.

JULIE-ANNA NEEDHAM: That was Jill Chua, a Managing Director in Investment Banking at Raymond James. Thanks for listening to this week's episode of Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review, and follow the podcast. You can find us on Apple Podcasts, Spotify, or look out for your Mergermarket news alerts. For more information, check out our show notes. Join us next week for another episode.

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