Recent data from PwC indicates that the growth of Canadian mergers and acquisitions in 2021 mirrored a global explosion in M&A deal-making last year. Given new market headwinds that have emerged since 2021, the two PwC reports offer an outlook for what to expect from M&A for the rest of 2022.
According to PwC’s Global M&A Industry Trends study, global M&A broke prior records by a considerable margin. The number of announced deals surpassed 62,000 globally in 2021, up 24 percent from 2020. The value of all publicly disclosed deals reached $5.1 trillion USD, 57 percent higher the total deal value than in 2020.
Canada will soon close out the first half of 2022, and already, the market for initial public offerings (IPOs) appears unrecognizable from that of 2021.
PwC’s Canada-focused M&A report found M&A activity across the country saw similarly explosive growth last year. In 2021, the total value of Canadian private M&A deals exceeded $171 billion CAD, up from $105 billion CAD in 2020. The report also found Canadian M&A deal volume increased by 24 percent over the same period.
Christine Pouliot, deals partner for PwC, told BetaKit that Canada’s robust performance last year was thanks to an abundance of capital, paired with low interest rates and growing interest from public equity firms (PEs) and corporates.
“As for tech companies, M&A [was also] very strong in 2021, particularly in sectors where technologies could solve fundamental issues currently experienced by organizations in these sectors,” Pouliot added. “Some examples would be healthcare, logistics, and plant automation.”
Companies favour M&A as IPO window remains closed
Canada will soon close out the first half of 2022, and already, the market for initial public offerings (IPOs) appears unrecognizable from that of 2021. Many of Canada’s tech darlings, including those that made show-stopping debuts last year, are now posting higher quarterly losses and seeing their stock sink. The result has deflated many other firms’ go-public plans. But PwC has found tech companies are finding alternative ways to fuel growth, M&A not least among them.
PwC’s data found that technology was one of the sectors that saw the highest M&A volumes and values in 2021 in Canada and globally. PwC’s Canadian report referred to 2021 as “the year of the megadeal,” with some of the largest M&A deals including Diligent Corporation’s $1 billion purchase of Vancouver-based Galvanize and Naver’s $754 million acquisition of Toronto-based Wattpad.
This high M&A activity ran parallel to Canada’s record year for IPOs and venture capital rounds. Now that public markets have been dampened by a broader tech stock selloff, many Canadian tech firms are opting to pursue M&A as buyers to sustain growth in anticipation of an eventual IPO.
The CEOs of Clio and Trulioo, Vancouver-based tech firms that reached unicorn status in 2021, both told BetaKit in March that the window for their IPOs had closed, but shared a closer look at how they use M&A to fuel their product roadmaps and growth strategies. Even Q4 Inc., which experienced an underwhelming Toronto Stock Exchange (TSX) debut in October, said it expects M&A to be a key driver of growth in the coming quarters.
“As public markets are going through some turmoil and uncertainly, I do believe tech companies looking into M&A to fuel their growth rather than going public will be a strong trend in 2022,” Pouliot noted. “This trend will add to the competitive tension between the corporates and the PEs to acquire top tech assets and might, in some instances, push the valuation upward for those top assets.”
Is the party over for SPACs?
Special-purpose acquisition companies (SPACs), which are used to take private firms public without going through the traditional IPO process, were certainly all the rage last year. But despite many SPACs launching to great fanfare in 2021, their future appears more dubious in 2022.
Last year, Canadian venture firms like Sagard Holdings (the alternative investment arm of Power Corporation and manager of Portage Ventures) and Lumira Ventures launched their own SPACs. Vancouver-based quantum computing startup D-Wave also hopes to go public via SPAC this year.
Only recently considered a “gold rush,” the SPAC boom has certainly lost steam in recent months, following a string of disappointing returns. The IPOX SPAC Index, which tracks the aftermarket performance of SPACs, fell 9.5 percent in Q1 2022 and has lost more than 22 percent over the past three quarters. As of May, 67 SPACs globally have completed IPOs this year, with 613 SPAC IPOs completed in 2021.
PwC’s global report noted that the robust SPAC IPO market in late 2020 and early 2021, combined with an upturn in SPAC IPOs in late 2021, means that there are almost 500 SPACs still expected to announce a merger and need to close a deal later this year or by early 2023.
Pouliot believes Canada won’t see many IPOs done through SPACs in 2022, noting that several have yet to execute the business plan they sold to their shareholders, and many of them have lost value since completing IPOs.
“However, I am expecting that the existing SPACs will be even more active in trying to put the capital they raised to work through acquisitions or mergers in 2022 and 2023, again supporting a strong M&A market for 2022,” she added.
Private equity’s impact on M&A gaining ground
While the tides may have turned for tech companies in the public markets, one form of investment is not slowing down in 2022: private equity (PE). This year has already several major PE deals completed for Canadian tech companies, indicating that PE investors are keeping a keen eye on the tech sector.
“We should expect to see continued strong PEs’ involvement in the tech sector.”
PwC’s data reveals that the impact of PEs on M&A deals globally is growing. According to its global M&A report, global PE dry powder ended 2021 at $2.3 trillion USD, 14 percent higher than the start of the year.
PEs were similarly active in Canada last year and participated in several significant M&A deals, including Welsh, Carson, Anderson & Stowe’s acquisition of Absorb Software for $630 million; HGGC and Snapdragon Capital Partners’ $300 million investment in Fullscript; and Luminate Capital’s $313 million acquisition of a controlling stake in Axonify.
PwC’s global report notes that traditionally, PE firms have shied away from the more risky, early-stage companies without proven business models. However, the report notes that there is now a growing interest from PE groups in higher-risk companies “as the pace of innovation increases and the cost decreases.”
“That fact states the importance of the tech sector as a key sector with promising rates of return for the next five to 10 years,” Pouliot said. “As such, we should expect to see continued strong PEs’ involvement in the tech sector as they will be looking to deploy that capital.”
M&A will continue to create value in 2022
Since the end of 2021, the M&A landscape has undergone several changes. While the downstream impact on M&A is not yet clear, PwC’s report notes that Canadian M&A activity is likely to remain robust, but not reach the highs of 2021.
In its Canadian report, PwC notes that volume is high on the market, and with many of the larger macro factors at play, buyers are becoming “ultra-selective.” The report adds that for Canadian tech companies, it’s critical to have strong fundamentals in place, as well as a customer-focused approach to show they are a strong investment.
“Interest rates are expected to continue to increase throughout the year, which will increase the burden of debt repayment for acquirers that will have used or use a high level of leverage in their financing structure,” Pouliot said. “All of that in an uncertain economic environment might put pressure on their margins.”
PwC’s Canadian report noted that it’s still unclear how inflation, higher interest rates, and increased risks around the global economy will impact valuations, but said M&A will likely continue to be a “powerful tool to create value” for Canadian firms in 2022.
BetaKit is a PwC industry report media partner. Photo by Matthew Henry from Burst.