With 64% of small—and medium-sized enterprises eyeing mergers, joint ventures, partnerships, or acquisitions in the near future and 69% intending to divest to another entity within the next three to five years, the Mergers and Acquisitions (M&A) scene is gearing up for some serious changes.
This blog explores what's up in the business acquisition industry and gives you a sneak peek into what's coming for M&A services.
1. Private Equity and Succession-led Deals to Lift M&A
After a challenging year for dealmaking, activity should start to spring back to life this year as interest rates come down and economic confidence creeps back into the market.
— Neil Blair, President, KPMG Corporate Finance Inc.
KPMG in Canada says M&A deals are going to ramp up this year! Private equity funds are looking to invest, family-owned businesses are on the hunt for new partners, and the economic pressure is starting to ease a bit.
Private equity funds are often an attractive option for business owners because they can sell a majority of the business but retain some equity and influence, allowing for an easier transition and opportunity for management teams.
— Neil Blair, President, KPMG Corporate Finance Inc.
Things were a bit slow in the private equity scene in 2023, such as a slower pace of portfolio company exits and a slower rate of capital deployment. That slow pace is setting the stage for some serious action in 2024. Moreover, private equity funds will target top-notch, growth-ready businesses. A business that fits the bill might just get itself a great valuation deal.
TheMiddleMarket: Thoma Bravo agreed to acquire Canada’s Magnet Forensics Inc. for about C$1.8 billion ($1.3 billion).
— Dr. Karl Popp (@karl_popp) January 20, 2023
The private equity firm intends to merge the company with Grayshift LLC, which it acquired last year, according to a statement, confirming a Bloomberg
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So, what does all this mean? Well, it looks like there's a real move towards smarter investment strategies in mergers and acquisitions. As the economy steadies itself and people start feeling more confident, it's time for significant growth and transformation on the horizon.
2. Expected Interest Rate Cuts to Stimulate Deals
PwC Canada's economics and policy experts forecast a gradual easing of labor market conditions and an anticipated inflation rise to 2% by later in 2024. But with more people immigrating and joining the workforce, these economic tweaks are like opening a door for dealmakers, paving the way for more strategic partnerships and buyouts.
As businesses adapt to evolving economic conditions, the M&A sector is primed to reshape industries and drive growth.
3. Amendments to the Competition Act
Proposed amendments are set to overhaul the rules governing mergers and other agreements completely. These changes herald the introduction of administrative monetary penalties (AMPs) and the potential for merger-style divestiture orders, extending beyond traditional mergers to encompass joint ventures and other collaborative ventures.
The goal? To widen the net of who needs to report their deals and give the Competition Bureau more power to intervene in transactions and prevent closures. Notably, the Bureau's jurisdiction would extend to scrutinize horizontal and vertical collaborations, regardless of whether they culminate in a merger, with the authority to impose significant financial penalties and divestiture orders.
The bottom line is that M&A services better be ready to jump through some new hoops and keep up with the stricter rules coming their way.
4. Anti-competition Regime in Canada
According to the Global M&A Trends and Risks Report, half of the respondents say that antitrust rules are a major roadblock to getting deals done in Canada. This trend mirrors the increased scrutiny seen in Canada. In June 2023, Canada scrapped the cap on penalties for anti-competitive practices, letting the courts dish out penalties at their discretion.
This move might be just the tip of the iceberg. Ongoing talks hint that Canada's competition law and enforcement practices might undergo substantial alterations. So, M&A services may need to adapt to accommodate the heightened focus on antitrust compliance and its potential implications for deal-making strategies.
5. New Interest Limitation Rules
The federal government dropped some new rules on interest limitations. What does that mean? Well, it could increase after-tax borrowing costs for certain organizations and affect the economics of mergers and acquisitions.
To handle this, M&A services have to calculate how these rules affect a company's finances. Take the Excessive Interest and Financing Expenses Limitation (EIFEL), for instance. It could slash the amount of interest and lease financing that can be written off on taxes. If a company finances an acquisition with borrowed cash, that could seriously mess with the economics of a transaction.
Plus, these new tax rules might complicate traditional calculations for expected returns on acquiring a target company. The bottom line? After the deal's done, the combined company's tax situation could be totally different from what it is now.
6. Amendments to the Investment Canada Act
“The government has said that a business expansion triggered the review under the #Investment Canada Act. It hasn’t stated which one, but a government database shows a notification of new business from #TikTok in June 2023.” https://t.co/d8lFzNQ5pm
— Mark Warner (@MAAWLAW) March 15, 2024
With more emphasis on protecting Canada's "national integrity," foreign acquisitions now face increased scrutiny. It could lead to more transactions being blocked based on the buyer's country of origin.
This could mean foreign investors might need to give advance notification before diving into certain sectors. Plus, there could be waiting periods, and even some conditions slapped on deals during national security checks.
So, with all these new rules and regulations popping up, businesses getting into M&A deals need to be on their toes with a better strategic approach to deal structuring and M&A due diligence. There's a lot more red tape to cut through.
Looking ahead, mergers and acquisitions services in Canada need to ensure everyone plays by the rules, minimizes risks, and ensures transactions go smoothly, especially with all this extra government attention.
Conclusion
The business acquisition industry in Canada is evolving rapidly, thanks to regulatory shifts and economic dynamics. Businesses face increased complexity due to increased scrutiny under amended laws like the Investment Canada Act and the Competition Act.
But trends like private equity-led deals and anticipated interest rate cuts reshape strategies. Compliance and risk mitigation are paramount. Moving forward, mergers and acquisitions services in Canada must adapt, ensuring regulatory adherence and facilitating smoother transactions.
With strategic partnerships and smart moves, there's plenty of growth and change on the horizon. So, stay sharp and flexible in the Canadian business acquisition industry.
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