Opinion: In this M&A market, the strong eat the weak

Bay Street summer vacation plans are in jeopardy.

Bankers and lawyers are bracing for a second consecutive year of record-breaking mergers and acquisitions, fueled in part by recent tech sell-offs that have dramatically lowered the price of the growth-focused business.

In recent months, merger and acquisition activity has proliferated in sectors such as software, IT services and logistics. The Canadian tech industry’s serial acquirers–companies like Constellation Software Inc. CSU-T–have taken advantage. and CGI Inc. GIB-AT and Descartes Systems Group Inc. DSG-T – their cash reserves for organizing a series of foreign acquisitions.

Waterloo, Ontario-based Descartes made its third acquisition of the year on Monday, acquiring XPS Technologies, a Utah-based shipping software company, for an initial $65 million. (Performance payouts of up to another $10 million are tied to specific revenue targets in the first two years after the acquisition.) “All the numbers in this business went crazy because of the pandemic, and now they’re back to,” Descartes CEO Edward Ryan told the Globe and Mail. .

With interest rates still rising and inflation fears continuing to haunt investors, corporate financiers expect to expect more deals in perceived safe havens as well. This includes sectors such as banking, gold mining, real estate and restaurants.

Richard Petsail, managing director of investment bank Crosbie & Co., said: We expect to see continued strong M&A activity going forward as many strong fundamentals remain, including access to capital and strong demand from both strategic players and financial sponsors. In last week’s report.

Investment bankers point to one major difference between merger and acquisition activity last year, which came at a time when stock markets hit historic highs — and what’s happening now. In the past, growth-focused companies like Shopify Inc. or Nuvei Corp. Its high valuations pay for acquisitions, either swapping shares or selling shares to fund acquisitions.

Now, cash is king. The strongest companies – those with cash in the bank, relatively flexible stock valuations and untapped lines of credit – will choose competitors that face limited access to capital markets.

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Constellation, for example, spent more than $1 billion on acquisitions last quarter, a new record for the value of the business acquired by the Toronto-based tech company, and four times what analysts had expected. However, Constellation still has more than $900 million in cash and no debt. “With the continued decline in software valuations, we believe there is a greater likelihood that Constellation will deploy more capital in large acquisitions,” Paul Tripper, an analyst at RBC Capital Markets, said in a recent report.

Bay Street also predicts that companies that have spent the past two years defending the path of the pandemic will come back on the offensive.

Recipe Unlimited Corp. has grown. RECP-T, the parent company of Keg, Swiss Chalet and 17 other brands, has gone through a series of acquisitions, but dealmaking stalled with the COVID shutdowns in early 2020. Scotiabank analyst George Dummett said in a recent note that the recipe is coming out of Pandemic with one of the strongest balance sheets in the industry, with “wide room” for stock buybacks or mergers and acquisitions, with targets that could include weaker Canadian and US chains.

The private property business is also expected to get hotter with the weather. Mr. Petsaleel said the industry “taken a rest in the first quarter of 2022” but is now aggressively looking for deals, as most fund managers are flocking to cash.

Private equity funds are shopping at the high end of the high-end market. Fund managers target what they see as high-quality companies — those that have increased revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) by 10 percent or more in recent years, according to Crosbie & Co.

These high-growth companies are bought at a 30 percent premium over the average valuation for companies of similar size, well above the historical 15 percent gap. Mr. Petsaleel said the wide premiums “confirm that private equity buyers continue to compete aggressively for top-performing companies”.

Last year set a record for global M&A activity, with $5.9 trillion allocated to more than 63,000 acquisitions, according to Refinitiv, including $349 billion spent on 4,558 Canadian deals. While a slow start to the year means those high-altitude watermarks may not be breached, Bay Street expects acquisitions to continue to rise this summer.

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