After starting the first half of 2022 with robust deal activity that defied shaky economic conditions, acquisitions of Canadian firms are slowing, data provided to The Logic shows. 

The record-high pace of merger and acquisition deal-making set in 2021 continued in the first six months of the year, with 669 transactions from Jan. 1 to June 30, according to the financial-data analytics firm Dealogic. That was just 14 fewer than a year ago.

The activity was driven in part by U.S. buyers, who snapped up more Canadian firms during that period than in the first half of 2021. Activity by Canadian buyers, by contrast, declined year over year from 477 deals to 432 deals for the period.

The active M&A market in Canada contrasted with the plunge in public-market trading and venture capital funding that began at the start of this year, as surging inflation, global supply-chain challenges and Russia’s invasion of Ukraine weighed on economic activity. 

Ryan Farkas, managing director of M&A and capital markets at BDO Canada, said part of the continued momentum in the first half of the year may have come from deals that were initiated before the macroeconomic winds turned. “There’s always a lag,” he said. “Deals that are closing right now might have been a letter of intent, or an agreement might have been reached on terms three or four months ago.” 

Another factor is that M&A and growth equity markets generally tend to be less sensitive than the public markets to economic headwinds, said Alethea Au, a partner of the law firm Stikeman Elliott’s M&A division. “Not to say the private M&A market isn’t also impacted, but the level of uncertainty is less [direct],” said Au. “A technology target in Canada that’s got good fundamentals, is cash-flow positive—they will continue on with their business, unless it’s tied to a global market event.” 

Farkas agreed, saying M&A targets are often more established firms that have been through economic cycles and that typically have smaller risk profiles than a company seeking venture capital, for example. 

But M&A markets aren’t immune to broader economic swings, and since the summer, their resilience has started to wane. From July 1 to Nov. 30, there were 391 acquisitions of Canadian companies, down from 611 for the same period a year earlier and over 40 per cent less than the number of deals that closed in the first six months of 2022. 

Driving the decline in the second half of the year is a retreat by U.S. investors in the Canadian market, data shows. The number of U.S. acquirers dipped from 170 in the first half of the year to 101 between July 1 and Nov. 30, according to Dealogic. Year over year, there were about 28 per cent fewer U.S. acquirers in the Canadian M&A market from July through November of this year.

Au said U.S. firms are typically active buyers of Canadian companies. Part of that is the strength of the U.S. dollar relative to the loonie, she said. Another is the cultural and legal similarities between the countries. “Integration, whether it’s a strategic acquisition or a financial acquisition, it’s not that difficult.”

There’s also less competition for deals in Canada, said Au. “The multiples don’t have to go as high in Canada as they do in the U.S.,” she said. 

Both Au and Farkas said the recent slowdown is in part a response to increased borrowing costs. “Buyers were trying to get stuff done that they agreed to in Q1,” said Farkas. “[By the time] you get into Q3, you’ve had several rate hikes; there’s a lot more data out there on where we might be going,” he said. “The evidence that’s starting to mount is enough that buyers start saying … ‘I have to reprice this. … Otherwise I’m not doing my fiduciary duty.’”

Farkas said that dynamic may be more pronounced with larger transactions, making the overall value of mergers and acquisitions decline faster than the number of deals. “There’s more leverage; more debt is used,” he said. “There’s a correlation between the impact of that on super deals versus really small deals.”

The total number of deals from January through November declined about 18 per cent year over year, from 1,294 to 1,060 deals, and the value of those transactions fell, as well, by about 44 per cent, from US$141 billion to US$78 billion. 

Part of the drop in activity and value came from acquirers taking longer to close deals. “​​The leverage has swung a little bit now towards the buy side,” said Au. “Buyers now have the ability to take a bit more time to evaluate the transaction, do a bit more diligence.” Sellers, meanwhile, may choose to postpone or cancel transactions, understanding they may not get as high of a valuation than they expected in 2021 or early this year, she said. 

Senia Rapisarda, managing director at venture capital fund-of-funds HarbourVest, said the M&A market may actually get a boost next year if the venture capital and IPO markets remain slow. In that case, entrepreneurs may sell their companies if their plans to fundraise or go public fall through. Rapisarda, who invests directly in companies, as well as venture capital funds, said she’s looking for deals that prioritize those M&A exit strategies. 

“When we look at managers, their connectivity to corporates is essential,” she said. “Knowing from Day 1 that they can sell Company A, B and C to the following corporates, and they have stronger relationships with them—it’s really of value.” 

Despite the recent slowdown, Farkas said the pace of deal-making that Canada is seeing now is more of a return to normalcy after an anomalous 2021. Like Rapisarda, he said he thinks M&A activity could stabilize in 2023, as buyers and sellers settle into the down market. 

“There still remains a lot of liquidity out there in capital that has to get deployed,” said Farkas. “At some point, people will also start being opportunistic, because they’ll feel that there’s been some stabilization.” That means buyers may enjoy discounts on deals relative to what they would have paid a year or so ago. 

“There’s a lot of factors that are going to continue to drive activity,” he said, “but it’s under a backdrop of, ‘Every deal has slightly more risk.’”