Canada: What We Can Expect for M&A Trends in 2018
Building on an already strong M&A market in 2017, the Canadian and U.S. E&C industry is on track to exceed nearly everyone’s expectations for deal activity in both transaction volume and value in 2018. The favorable market conditions that had propelled buyers to act in 2017, such as access to abundant, affordable debt and equity capital, are still prevalent in the new year.
Late in 2017, additional fuel to buy-side motivation was added with the passage of a favorable tax reform bill in the U.S. In Canada currency rates and consolidation opportunities increased firms’ exploration of the Canadian market. All of this was underpinned by the continued strong, broad-based growth of the economy that has created robust demand for services across virtually all sectors of the E&C markets.
Cross-border transactions had strong momentum throughout the year, showing a significant increase from 77% of total volume in 2016 to 83%of total volume in 2017. In terms of inbound and outbound M&A in Canada, the past year broke some established patterns. For the first time since 2013, outbound deals decreased by 29%, from CA$251 billion in 2016 to CA$179 billion in 2017, whereas inbound deals increased by 15%, from CA$37 billion in 2016 to CA$43 billion in 2017. In looking at all outbound activity, Canadian buyers acquired more businesses in the U.S. than in any other country in 20171.
When asked in our recent U.S. M&A Trends survey, nearly three-quarters of all respondents believe M&A activity will increase in 2018 compared to 2017, and nearly 70%of respondents indicated that acquisitions are “a part of (their) current strategy,” compared to 60% last year.
While strong buy-side demand continues to grow, our research indicates the long-term demographically driven issues of ownership succession will continue to propel sell-side motivation in 2018. Across every sector of the E&C market, companies continue to grapple with issues involving ownership transition. Our research has found there has been a significant shift away from expectations of a transfer of ownership within family ownership groups to an expectation of a transfer of ownership to employees or through a sale to a third party.
In discussion with Canadian firms, many are exploring the idea of employee purchase models or employee stock ownership plans (ESOPs). In FMI’s recent Ownership Transfer and Management Succession Survey respondents indicating they planned to sell their equity to an ESOP increased from 4% in 2007 to 12% in 2017.
“Given the labor challenges and rapid pace of technological advancement in the construction industry, it’s now more important than ever for business owners to have a succession plan in place,” says Matt Drake, director at FMI Capital Advisors and head of FMI’s ESOP Advisory Practice. “Whether they sell to a third party, to management or to an ESOP, owners should weigh all of their options to ensure they are making a fully informed decision.”
With 2008-2009 a rapidly fading memory for most E&C companies, now fortified with strong and improving operating results over the past four or five years, many are well-positioned to execute a lucrative change of ownership as transaction valuations remain strong. All of the market conditions across the E&C market sectors are in place for 2018 to be a record-setting year of M&A activity.
1 “Canadian Mergers and Acquisitions: FAQs and 2018 Trends.” Blake, Cassels & Graydon LLP. 2018.
