KPMG survey shows large companies and SMEs in Canada are looking to M&A as part of growth strategy

Despite the world being in the midst of the COVID-19 pandemic, a KPMG survey shows that the vast majority of CEOs at Canada’s biggest corporations see mergers and acquisitions as part of their growth plans.

Ninety-six per cent of large-company CEOs see making deals as a driver of growth, up from 86 per cent last year according to KPMG’s 2021 CEO Outlook survey. More than 55 per cent said they are likely to make acquisitions in the next three years, more than double what they said last year.

As well, 65 per cent of large-company CEOS said M&A, joint ventures or strategic alliances would be their most important strategies for achieving their organization’s three-year growth objectives.

M&A is also in the plans of small-and-medium size companies in Canada, though close to three-quarters (71 per cent) say they are relying more on organic growth (innovation, R&D, investments, new products, recruitment), according to KPMG’s recent Business Outlook Poll. That compares with 46 per cent of Canadian SMEs who identified M&A as a growth strategy.

Benjie Thomas, managing partner for advisory services at KPMG in Canada, says a number of factors are driving the interest in M&A. These include the number of players interested in making acquisitions, driving competition, and the number of businesses willing to make deals because of the higher valuations their firms can command.

As well, he says, with interest rates still at historic lows, potential buyers are more able to pay for a transaction. “So, not only do you have increased competition, but you also have increased ability to pay higher prices.”

While strategic players will want to grow through M&A, Thomas notes that there is a lot of dry powder available for deals, with private equity, for example, sitting on a lot of cash. That, too, will increase valuations as competition for deals heats up.

Thomas notes that the pandemic has prompted larger corporations to invest in the modernization of their businesses, especially in digital transformation, which has been hastened by COVID-19 and the increasing use of virtual and remote technology.

As a result, he says, that investment in technology “can then be leveraged in acquisitions in which you tend to buy smaller businesses that have not made that sort of investment,” which can create synergistic opportunities.

For SMEs, Thomas says that while they can access capital to make acquisitions, most are focused on organic growth – such as geographical expansion or an extension of products or services being offered.

This growth strategy involves using capital to recruit more talent, for example, “so it really comes down to where are you prepared to put that capital allocation.”

However, Thomas adds that even those who have focussed on organic growth might come to realize that it makes more sense to use M&A as a tool for growing geographically or product extension rather than “reinvent the wheel.”

The KMPG business poll found nearly six in 10 (59 per cent) of SMEs said they want or intend to partner with an innovative start-up (such as a fintech, insurtech or agtech company) to bolster their growth. Another 34 per cent are seeking to be acquired because they can’t afford to make the investments required to succeed in an increasingly digital economy.

Still, while the focus might be on organic growth, the poll found 17 per cent of SMEs said mergers would be critical to achieving their three-year growth objectives, and 29 per cent said acquisitions will be vital to achieving growth objectives over the next three years.

For the Business Outlook Poll, KPMG in Canada polled 505 Canadian small- and medium-sized owners and decision-makers between Aug. 6 and Aug. 15. Of the 505 survey respondents, 35 per cent are family-owned businesses, and 74 per cent are privately held. Just over 30 per cent have revenues over $100 million annually, and 24 per cent have annual revenues between $50-100 million.

As for large companies, KPMG’S 2021 CEO Outlook notes that 21 per cent of Canadian large company CEOs say M&A is the most critical strategy for achieving their growth objectives. While that is down slightly from 24 per cent in 2020, the figure rises to 65 per cent when joint ventures and strategic alliances are considered in addition to deals.

As well, 56 per cent described their M&A appetite as “high,” and are likely to undertake acquisitions that will have a significant impact on their organizations, up from 25 per cent last year. Another 39 per cent said their appetite for M&A is “moderate” and will make acquisitions with average impacts on their organizations. And only one per cent said they are seeking to be acquired and will likely be the target of an acquisition or merger. The remaining four per cent of Canadian respondents said their appetite for M&A is “low,” and they are unlikely to make any acquisitions.

The KPMG CEO Outlook survey asked 1,325 CEOs from among the world’s most influential companies, including 75 from Canada, to provide their three-year outlook on the economic and business landscape, as well as the impact that the ongoing COVID-19 pandemic will have on their organizations’ future. It was conducted between Jun. 29 and Aug. 6. All respondents have annual revenue over US$500 million and a third of the companies surveyed have more than US$10 billion in annual revenue.

The survey looked at 11 key markets (Australia, Canada, China, France, Germany, India, Italy, Japan, Spain, U.K. and U.S.) and 11 industry sectors, including asset management, automotive, consumer and retail, energy, infrastructure, insurance, life sciences, manufacturing, technology, and telecommunications.

Thomas says that a few sectors have been challenged by COVID-19, “so there hasn’t been as much M&A activity there.” However, others, like fintech, financial services, insurance healthcare, “and even areas like consumer products and retail” have seen very active M&A.

In terms of putting together deals, Thomas notes that while firms early in the pandemic struggled a bit with figuring out ways to do things virtually, given travel was so restricted. “Most came up with solutions that have seemed to work,” including socially distanced meetings, electronic signatures, and sending documents electronically.

He says that dealmaking is slowly going back to the way things were done before the pandemic, but there is a good chance that many of the new habits developed over the past 18 months will stay.

“I think a lot of the electronic data exchange will continue to happen, and you may see a drop in the number of meetings taking place face to face,” he says. “But I do believe the real in-depth conversations will continue to happen in person, and people will return to on-site visits and see the actual business itself.

With the increased competition for competition targets, Thomas says that it is crucial to get good advice, especially with purchase prices at high valuations. “You have to be able to uncover any risks,” he says, noting that the impact of COVID-19 must be factored in as well.

M&A insurance, which covers representations and warranties, could be a key part of handling those risks, he says, noting that the use of such insurance has grown in recent years.

 “Having the right legal adviser and financial advisor at the table will be really important as companies think about opportunities and likelihood of success.”