In 2022, Canadian mergers and acquisitions (M&A) market activity continued to be in line with historical norms while retreating from the new heights of the previous year. While economic and geopolitical uncertainties have created headwinds, they’re also generating opportunities. A reset in valuations, the availability of capital and increased competitiveness from corporates should provide openings for dealmakers in the year ahead.
The need for speed in business transformation, which is accelerating thanks to technological advances and the evolving economy, will continue to keep dealmaking front and centre. Whether organizations are changing supply chains, adopting new go-to-market approaches or adding capabilities, the market is impatient. The fastest way to transform a business is through M&A, divestiture or other deals.
The fastest way to transform a business is through M&A, divestiture or other deals.
We’ve entered a period of changing economic and financial fundamentals. Interest rates, inflation and wages have all been rising. A number of macro factors, including trade wars and geopolitical conflict, are driving economic uncertainty. But this isn’t an unprecedented environment—it’s a return to conditions we’ve navigated in the past.
Business leaders recognize the challenges. Still, most leaders know they can’t cut their way to growth. And as we saw in the past five years, deals have been a key fuel to business resurgence and economic expansion.
PwC’s 26th Annual Global CEO Survey illustrates the appeal of M&A in challenging times: while 76% of Canadian corporate leaders are pessimistic about global economic growth, 54% aren’t planning to delay deals in 2023 to mitigate potential economic challenges and volatility.
Source: Refinitiv and PwC analysis
“Doing deals in today’s volatile climate takes both imagination and courage. But with the right well-considered business strategy, organizations can transform and position themselves for long-term success.”
What will drive successful deals?
Though capital discipline has never gone out of style, we expect it will be a prime factor in deals in 2023.
While rising interest rates may make debt service more costly, rates are still far from historical highs. Lower valuations will create opportunities for acquirers. Companies with healthy balance sheets and a strong strategic vision can use deals as a path to business transformation and increased shareholder value.
Likewise, a disciplined, strategic approach to divestitures can provide an opportunity to improve overall returns—especially when the cost of capital is higher. Companies should consider shedding non-strategic units and focusing capital on transformation and strategic growth.
Private equity has been active in recent years with acquisitions and is expected to remain active in its capital discipline in looking at exits and recapitalizations. There’s been increased interest among private equity funds in acquiring financial institutions, particularly insurers, as a way to increase returns and assets under management, and we expect that to continue.
Growth alone isn’t a sufficient corporate strategic objective in a quickly changing environment. The right combination of acquisitions and divesting to reinvest can drive return on capital—even in an environment with higher capital cost and inflation.
The right combination of acquisitions and divesting to reinvest can drive return on capital—even in an environment with higher capital cost and inflation.
Economic uncertainty and global politics are generating macro-level uncertainty and will require leaders to be alert and strategic throughout the coming year.
Inflation and the rising cost of capital continue changing deal metrics and influencing financial markets. The possibility of a recession is also shaping expectations. At the same time, the war in Ukraine and its impact on energy costs and food prices continue to have an effect on Europe and the rest of the world. China/United States tensions, along with China’s approach to managing Covid, are reducing opportunities in China and contributing to a reassessment of supply chains. And elections around the world pose the possibility of disruptions.
In the face of all this uncertainty, C-suite leaders will need to protect the downside in their business, including watching spending, looking for opportunities to trim costs and bolstering their supply chains. Companies with strong balance sheets are likely to find uncertainty can serve up attractive deals. Other companies will be able to take advantage of the current environment to build on their core strategy through transformational deals.
In the face of all this uncertainty, C-suite leaders will need to protect the downside in their business.
Even in the midst of uncertainty, the markets are impatient. The most successful deals will be those that allow companies to quickly transform strategic aspects of their business, pushing the business forward quickly. These strategic shifts include opportunities like moving closer to customers, leaving troubled sectors and speeding up digital transformation.
How a company invests in purpose (ESG) and culture (including overall talent strategy as well as the approach to diversity and inclusion) are central to unlocking value from transformational deals. It starts with solid, strategic decision making around whether to do a deal and which deal is the right deal.
C-suite leaders need to have a plan not only to carry out the deal but to make sure it delivers on a transformation promise. Value creation goes well beyond integration, and deals in the coming year will need to have clear value creation plans, with immediate near-term execution, to harness value and drive the required capital returns. This includes detailed integration planning and a strategy for retaining key talent in a newly acquired business unit.
The most successful deals will be those that allow companies to quickly transform strategic aspects of their business.
Canadian M&A industry and market trends
(Swipe table to the left to view all content)
| Industry/market | Where are we right now? |
Top tips for dealmakers |
Next steps |
|---|---|---|---|
Consumer markets |
It’s no surprise inflation has led to more tepid spending and deteriorating consumer sentiment, affecting the consumer markets sector accordingly. |
All signs point to an economic slowdown, but with multiples continuing to normalize and capital still available, now is the time for disciplined acquirers to make their moves. |
Get in touch with Cara Cole, Deals Retail and Consumer Leader, to learn more. |
Energy, utilities and mining |
While the energy, utilities and mining sectors saw deal volumes and values declining in 2022, deal activity remains robust in certain subsectors, including critical and battery minerals and renewable energy. |
Energy transition and supply chain security will continue to drive strong M&A activity in 2023. M&A hot spots include critical minerals and e-mobility investment. We’re also expecting continued partnership announcements with First Nations and more offtake deals. |
Get in touch with Michelle Grant, Deals Energy and Utilities Leader, or Lauren Bermack, Deals Mining Leader to learn more. |
Financial services |
Given the resilience of most financial services businesses, we expect continued appetite from financial investors like private equity and pension funds, as well as continued M&A activity from the larger financial institutions. |
We see a first-mover advantage for those in financial services looking to divest in the short to medium term, since valuations remain strong and there are still high levels of pent-up demand, especially in the wealth management subsector. |
Get in touch with Philip Heywood, Financial Services Deals Leader, to learn more. |
Industrials |
We’re starting to see an expected slowdown in M&A in the industrials space in Canada due to macroeconomic factors, geopolitical changes and global supply chain shifts. |
The main focus for deal activity is product portfolio and industry consolidation, as well as securing supply chains and developing new supply chains of near-shore alternatives. Concerns over the cost of energy are also pushing many to reconsider their energy consumption and invest in low-energy or greener alternatives. |
Get in touch with Michael Kamel, Deals Industrials Leader, to learn more. |
Tech, media and telecommunications |
After a record-breaking 2021, deal volumes across tech, media and telecommunications decreased in 2022. |
Tech valuations will likely recover to pre-pandemic levels and stabilize in the medium term, so tech companies should focus now on customer experience, customer retention and improving efficiency to boost operating margins. |
Get in touch with Shivalika Handa, Deals Technology Leader, or Sachin Jayapalan, Deals Telecommunications Leader, to learn more. |
Private companies |
Within the private company space, energy, utilities, mining and industrials deals have been a consistent favourite, taking the top spot in 2022 and 2021 in terms of deal value, with tech, media and telecommunications slipping behind. Separately, the broader M&A trend of Canadian investors taking a larger share of the market's buy side is becoming increasingly visible in the private company space. |
There’s still quite a bit of capital available, so buyers and sellers should ask how they can benefit. Buyers may find opportunities in struggling subsectors like retail or in the sale of non-core assets from corporates. For owners contemplating selling, sooner may be better than later, as the sale of a business often takes several months and we’re facing many unknowns. |
Get in touch with Christine Pouliot, Deals Private Sector Leader, and Managing Director, Corporate Finance, to learn more. |
Private equity |
We’re continuing to see slowdowns in private equity M&A activity, driven by inflation, geopolitical uncertainty and issues in the credit markets. Larger-scale transactions have been particularly affected. |
Now is the time for sponsors to shift more of their focus to portfolio companies, including doubling down on value creation initiatives, ensuring recession resiliency and looking for bolt-on acquisitions. |
Get in touch with Mike Shea, National Private Equity leader, for more information about the upcoming outlook for Private Equity. |
“While M&A tends to slow during periods of uncertainty, those are often the times when M&A and transformational deals become increasingly compelling. We expect the current market will provide opportunities for strategic M&A plays.”
Key actions for dealmakers to take now
Winning approval to conduct M&A transactions is becoming increasingly difficult. The misgivings of boards, investment committees and other stakeholders have grown in tandem with macroeconomic risks and recession fears.
Given greater investor scrutiny, dealmakers will need to take creative approaches, such as the following, to convince boards, investment committees and other stakeholders about new investment opportunities.
- Build transformation into the narrative
- Accelerate strategic reviews and portfolio optimization
- Use lower valuations as a catalyst
- Prioritize workforce strategy
Build transformation into the narrative
Consider how a deal will be perceived by stakeholders—will it bring new offerings, markets or customers, accelerate digitalization, increase pressure on competitors or benefit the long-term position of the company? Deepening the narrative to highlight game-changing strategic attributes may help push cautious stakeholders over the line.
Accelerate strategic reviews and portfolio optimization
As CEOs reassess their portfolio against their core strategy, they must address the extent to which they should continue to invest in non-core or lower-growth areas. Where such assets are marked for divestiture, they’ll free up cash to reinvest in higher-growth areas—and the to-be-divested assets will provide buying opportunities for others. We expect such strategic reviews may also lead to further spin-offs by large conglomerates aiming to become more agile and optimize capital allocation.
Use lower valuations as a catalyst
Restructuring and distressed M&A may grow and intensify if current economic headwinds extend further into 2023. More cautious venture capital funding has already led to several early-stage companies facing down rounds or—in situations where they’re unable to secure additional financing—looking for a buyer. Combined with a soft IPO market, this will likely create opportunities, particularly for corporates, to invest in or acquire companies with innovative business models and interesting technology, digital assets or other capabilities at a more reasonable valuation than previously would have been possible.
The reset in public company valuations will likely lead to more deals involving public targets. Valuations for private companies are taking longer to adjust, but we expect dealmaking to pick up as sentiment evolves from a sellers’ to a buyers’ market.
Prioritize workforce strategy
Global PwC research has found the workforce is the number one risk to growth. As a result of the workforce’s direct impact on business performance, all deals today must have a well-considered people strategy. How to recruit, motivate and retain staff and what impact employee compensation and benefits will have on the go-forward cost structure—especially given talent shortages and wage inflation pressures—are all areas of due diligence that need careful consideration.
Bottom line
As business leaders look to surmount various challenges, M&A will be a key tool to help reposition their businesses, bolster growth and achieve sustained outcomes. Companies that have strategic discipline and conviction will be able to find and execute good deals that create shareholder value in the current business environment.
Markets will not be patient. C-suite leaders should look for transformational deals that can help their company move ahead and quickly generate value for shareholders. Despite some headwinds, we believe there will be opportunities for savvy dealmakers in 2023 and beyond.
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